Bendigo and Adelaide Bank nodded as preferred option for Suncorp, but challenges await

The rejection of ANZ’s bid for Suncorp’s bank could pave the way for Bendigo and Adelaide Bank as a potential preferred option, but investors see several hurdles ahead.

Tribeca Investments Partners fund manager Jun Bei Liu said without the appeal Bendigo would be the logical owner for the Suncorp bank. Picture: Jane Dempster

The competition regulator signalled Bendigo and Adelaide Bank is a preferred option to merge with Suncorp’s banking arm, but investors and analysts say a deal with the Victorian lender would be a difficult affair.

The Australian Competition and Consumer Commission (ACCC) on Friday rejected ANZ’s $4.9bn bid to acquire Suncorp’s banking arm saying the deal would “further entrench” Australia’s banking oligopoly.

It also said the transaction would “remove the potential for a Bendigo and Adelaide Bank deal with Suncorp Bank” which would “likely strengthen and diversify the competitive power of second-tier banks”.

But investors and analysts see hurdles ahead for the Bendigo-headquartered lender if it is to bid for Suncorp’s business. The pair previously held talks in 2022 over a tie-up.

Atlas Funds Management chief investment officer Hugh Dive, who owns shares in both ANZ and Suncorp, said a merger of equals between Suncorp‘s bank and Bendigo would destroy value.

Speaking after the decision, Mr Dive said Bendigo’s $5bn market capitalisation, roughly the same as the price ANZ is prepared to acquire Suncorp bank, meant that deal would be far from appealing to investors.

“I can’t see how Bendigo can afford it,” he said. “For Bendigo to buy this they would have to do a one-for-one or more than one-for-one rights issue which would be massively dilutive – I don’t know how shareholders would support that.” he said.

Bendigo had submitted to the ACCC the deal should be blocked as it represented a threat to competition, noting it had made repeated overtures to Suncorp to buy its bank.

Suncorp, however, has said in its own submission to the competition regulator that a potential tie-up with the Bendigo-headquartered bank is not viable.

Bendigo declined interviews on Friday. In in a statement, chief executive officer Marnie Baker said the decision was “a good outcome for competition, customers and community,” stopping short of stating any intentions to officially bid for the Brisbane-headquartered bank.

“We remain focused on our strategy and our purpose of feeding into the prosperity of our customers and their communities, not off them,” she said. 

For Bendigo to have a real chance at acquiring Suncorp’s banking unit, it needs to show it has the strength to deal with the complexity of a possible deal.

A potential option for Bendigo would be to raise some cash and partially fund its bid with scrip, but that could test the support of some investors.

“As a Suncorp shareholder, would I want to own shares in a combined Suncorp-Bendigo bank? No!” Mr Dive from Atlas, said. That was because the smaller regional banks were structurally disadvantaged with a higher cost of capital that means they struggle to compete with the bigger banks.

For Bendigo to have a real chance at acquiring Suncorp’s banking unit, it needs to show it has the strength to deal with the complexity of a possible deal.

“Through their submissions it’s pretty clear that they are keen on acquiring this, which means they stand ready to deal with the complexities,” says senior banking analyst at Evans and Partners Azib Khan.

“The ACCC’s decision would have Bendigo thinking that it is in with a chance here,” he said.

“For Bendigo to keep its acquisition hopes high, we believe it would need to deliver a financial year 2023 result which … ideally beats consensus,” Mr Khan added. Bendigo is due to report earnings Monday Aug 14.

In its submissions to the regulator, Bendigo maintains that a merger with Suncorp is a commercially realistic proposition, saying it would benefit from doubling its scale as this would immediately improve its ability to attract deposit funding and reduce its cost of capital.

ANZ chief executive Shayne Elliott said he was “naturally disappointed” and disagreed with the ACCC’s decision. The bank will seek a review. Suncorp has said it would appeal at the Competition Tribunal, saying it now expected completion of the deal by mid-2024.

Tribeca Investments Partners fund manager Jun Bei Liu said that “without the appeal” Bendigo would be the “logical owner for the Suncorp bank,” given the ACCC has shown it would favour it.

“Bendigo would probably have to raise some equity to make that happen, but because the appeal process could take 12 months or so, they will need to wait,” she said.

In its announcement, ACCC deputy chair Mick Keogh said there was a “realistic prospect” of a deal with Bendigo after Suncorp had “extensively considered” that option in the past.

“While we are not saying such a merger between Suncorp Bank and Bendigo and Adelaide Bank will definitely occur if the ANZ deal does not proceed, we consider it is sufficiently likely that it is necessary to consider this scenario as part of the ACCC’s assessment,” he said.

Shayne Elliott is ‘naturally disappointed’. Picture: Arsineh Houspian.

Bendigo shares were 0.11 per cent lower on Friday at $9.15, while Suncorp shares fell in the morning before recovering in the afternoon to close 0.6 per cent higher at $14.13 each.

Nonetheless, the fact that Suncorp shares were trading at a “material” discount to regional peers suggested “the market may have already been factoring a higher chance of the acquisition being blocked,” JPMorgan said in a note to clients.

ANZ shareholders showed some relief that the transaction was not approved by the regulator, with shares rising during the day before closing up 0.75 per cent at $25.45.

“Shareholder feedback on the proposed acquisition has been mostly negative, especially due to the long dated nature of synergies – mostly in years 4-6 – and the upfront nature of integration costs – $400m across years 1-3 with another $240m beyond this,” the broker said.

Wilson Asset Management portfolio manager Matthew Haupt, who owns ANZ shares, said he was happy with the decision given the potential for some excess capital to be returned to shareholders once the decision is reviewed.

“We prefer them not to go through with the deal,“ he said. “That’s been our position and we think the quality of the Suncorp book in Queensland has deteriorated since the initial deal was announced,” he said.

ANZ had about $5bn in capital surplus on top of a core tier one capital ratio of 11.5 per cent as of March 31, according to JPMorgan estimates.

Citigroup’s banking analysts said the rejection was not surprising given the ACCC-designated competition expert, Mary Starks, had concluded the deal had a real chance of substantially lessening competition if allowed to proceed.

“If the transaction is abandoned, ANZ avoids a transaction that is increasingly unpopular with investors and gains a material capital surplus,” the banking analysts, led by Brendan Sproules said.

Interestingly, Citi’s insurance analyst team who cover Suncorp led by Nigel Pittaway, said they still expected the deal would go through as it had good chances to be allowed by the Tribunal.

“Although far from certain, we believe the deal could have a much stronger chance of being approved by the Tribunal than the ACCC per se,” he told clients in a separate note.

“The market is likely to see today‘s verdict as a disappointment. Even so, we would view any significant sell off (in Suncorp) as an enhanced buying opportunity, given prospects for margin expansion and the potential for this to merely act as a delay to the sale process.”