What does the ANZ-Suncorp deal say about banking competition in Australia?

When ANZ Bank chief executive Shayne Elliott floated the prospect of buying Suncorp’s bank with his board, it didn’t take long to sell the merits of the deal.

As he unveiled the $4.9 billion bid this week, the biggest banking deal in Australia for over a decade, Elliott said there had been an early view from the board that the deal would align with the bank’s strategy.

“There’s nobody sitting around the board table at ANZ, or frankly very many places in the country, saying that this doesn’t make sense for ANZ,” Elliott said. “It makes perfect sense. We’ve always said we wanted to beef up our retail and commercial bank.”

Likewise, most analysts and investors this week gave a cautious thumbs up to its ambitious expansion. If successful, ANZ will leapfrog to the third spot in the competitive home loan market and expand into the fast-growing sunshine state.

But the proposed deal has others rankled. It was met with fierce opposition from a number of regional banks and smaller players, who are asking what it means for competition in Australia’s banking sector and what benefit it will deliver to consumers.

Several years after a wave of fintech firms promised to shake things up and increase competition, the retail “neobanks” have either exited the market or been swallowed up by an established player.

The latest digital bank casualty, Volt, recently announced it will move hundreds of unclaimed accounts to big four lender National Australia Bank, several weeks after it closed due to struggles to raise capital.

And while some argue the ANZ deal won’t have a substantial impact on competition, others are concerned about the signal it sends at a time when the big four banks hold a whopping 75 per cent of the home loan market.

‘It’s reducing competition’

When ANZ announced the proposed deal on Monday, it didn’t escape the wider market that buying Suncorp’s bank would lead to the major lender clawing back lost ground.

ANZ’s share of the home-lending market has been slipping, and the tie-up with Suncorp represented a chance to recoup years of losses.

ANZ chief executive Shayne Elliott says the tie-up will make the major lender more competitive. Credit: Peter Wallis

The deal comes as the sector competes fiercely for market share in mortgage lending, racing to build and acquire the technology needed to get the advantage.

This week, as he defended the deal, ANZ chairman Paul O’Sullivan said technological change was creating new rivals, and banks needed scale to compete.

“As anyone watching will be aware, financial services are going through a huge revolution and change,” he said.

“We’re seeing disruption from a lot of non-traditional players … It’s becoming increasingly a technology arms race, and it’s important to have the ability and the appetite to invest heavily in new technology. And that’s why this deal works so well on so many fronts.”

The proposed buyout represents the biggest bank deal since the global financial crisis, when two major bank takeovers were given the green light in Australia: Westpac’s purchase of St George Bank, and CBA’s acquisition of BankWest. ANZ at that time was also in talks with Suncorp’s board to buy its bank, but the deal fell over when the Rudd government introduced a blanket deposit guarantee scheme.

Now, with a set of starkly different economic conditions, some are asking what the ANZ-Suncorp deal means for competition in the already concentrated banking sector.

Warren Hogan, the chief economist at ANZ from 2005 and 2016, who now is an economic adviser for Judo Bank and managing director at EQ Economics, believes the ANZ-Suncorp deal will just hand more market share to the major banks.

“It’s reducing competition,” he said.

“There is no national financial imperative for this merger to occur, such as we saw during the GFC.”

While new players have entered the banking industry since 2018, after regulations were eased to make way for greater competition, high capital requirements have pushed neobanks to merge with larger players or exit the industry altogether.

Xinja exited the industry at the end of 2020 and became the first Australian bank to return all customer deposits. In early 2021, 86 400 was bought by National Australia Bank, and last month digital bank Volt announced it would shut down and hand money back to customers after it failed to raise the capital it needed to keep growing.

About 400 former Volt customers will soon have their money moved to fee-free NAB transaction accounts, as the neobank works with the regulator to hand back its licence.

There’s still a long way to go in Australia when it comes to disruption from fintech, says Hogan, but that doesn’t mean it’s not still a threat to the banking oligopoly.

“The new competitive environment for banking, both here and overseas, enabled by technology, shifting consumer behaviour, and the attitude of regulators and the government to banking competition policy, has got a long way to run,” he said.

“We’ve had a few hiccups in the Australian market in the last few years. But this is still early days in how technology is reshaping the financial services landscape. And that’s why it’s so important that the government, I think, gets this right.”

Others this week who have opposed the deal include regional banks Bendigo and Adelaide Bank and Queensland-based Heritage Bank, the Financial Services Union, and the Finance Brokers Association, which all said competition would be lessened by the acquisition.

Size matters: Small banks face pressure to consolidate

The deal comes at a time when some bankers argue there are pressures for industry consolidation among the smaller lenders (the Four Pillars policy prevents any mergers between the big four).

Bank of Queensland last year snapped up ME Bank, which was previously owned by industry super funds, and there have been a series of mergers between customer-owned banks.

The former chief executive of Bendigo and Adelaide Bank, Mike Hirst, says the combination of tougher regulation and changing customer expectations has made it more important for banks to have scale.

That’s because being bigger allows a bank to spread the cost of meeting new regulations or upgrading technology, for example, over a larger number of customers.

“Scale is important in being able to cope with the amount of regulation and the pace of change,” Hirst says.

There has long been talk about a so-called “fifth pillar” emerging in banking that could gain this scale and compete more fiercely with the big four.

Some now worry ANZ’s planned buyout kills off such a possibility.

It also emerged this week that the most obvious regional candidate to merge with Suncorp - Bendigo - had made overtures to Suncorp about a tie-up. But sources said Suncorp did not engage with Bendigo, as it favoured ANZ, which was able to offer an all-cash bid.

While Hirst doesn’t directly express a view on whether ANZ’s buyout of Suncorp should get the green light, he says the regulator should think about whether this deal takes away the opportunity to create a larger fifth competitor to the big four.

“These sorts of deals just entrench the existing disadvantage that smaller banks have because they cannot get bigger quickly,” Hirst says.

There is also an argument the economic environment Australia is heading into will favour the might of the big four, due to their access to cheaper funding than rivals.

While all banks’ margins should benefit from rising interest rates, Morningstar analyst Nathan Zaia says big banks have the added advantage of having large pools of low-cost savings and transaction accounts, while they can also tap wholesale markets more cheaply.

“If a smaller bank is facing a lot more pressure on their costs than a larger bank, then it makes it harder for them to discount to win share. So I think some of that competition from the smaller banks might ease,” Zaia says.

‘I don’t think it will change the competitive landscape’

These competition issues are set to be thoroughly scrutinised by the Australian Competition and Consumer Commission (ACCC), led by competition lawyer Gina Cass-Gottlieb, who started in the job this year.

Former competition tsar Allan Fels, ACCC chair from 1995 and 2003, said this week it wouldn’t be a simple decision for the new chair, and the result could give the public the oversimplified view that she’s pro or anti-bank.

Elliott, in briefings earlier on Monday, was confident as he assured investors they would get a “fair hearing” from the watchdog, and that ANZ can put a strong case forward to convince the ACCC the deal will benefit consumers. Others also believe the case is there to get it over the line.

“I don’t think it will change the competitive landscape,” says Jason Beddow, the managing director of Argo Investments, which invests in the four big banks. “I don’t think it materially changes, particularly in the next few years.”

“Suncorp is a simple bank, it’s pretty hard to say from an anti-competition perspective that it would lessen competition ... I can’t see the ACCC stopping it.”

Beddow says the big four have had success and made good returns by lending to home buyers, and after some “misdirections” in wealth and insurance, have now come back to mortgages as their core business.

“I think it’s getting increasingly competitive, as they all got out of other jurisdictions, they are largely domestic banks now. Out of wealth, out of insurance, they are really fighting for core business which is mortgages.”

Dr Shumi Akhtar, an associate professor of finance at the University of Sydney Business School, said while competition in the banking industry in Australia is not as active compared with the international landscape, the merger, if successful, could provide ANZ with a technological edge.

“The fact that Australian banking industry portray more of a bimodal distribution (big and small and not much in the middle), these kinds of takeover activities will sometimes help to reset the banking sector and inject healthy competition with efficient use of resources,” she said.

Regardless of where the ACCC lands on these issues, the deal will take over a year to complete, the parties said this week. As well as the tick from the regulators, it will need approval from federal Treasurer Jim Chalmers, and amendments to Queensland legislation.

“At the end of the day this will play out over 18 months,” Beddow notes. “Eighteen months seems a very long time away.”

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