Competitive pressure builds for regional banks amid ANZ’s Suncorp tilt

What’s next for consolidation in the banking sector? Investors and analysts delivered mixed views on ANZ’s tilt for Suncorp’s bank.

Deal time. From left to right: Suncorp‘s CEO Steve Johnston and Suncorp chair Christine McLoughlin, ANZ's chairman Paul O'Sullivan and CEO Shayne Elliott. Photograph: Arsineh Houspian

Attention in the banking sector is turning to what remaining regional players may do to stay competitive, as investors and analysts delivered mixed views on ANZ’s $4.9bn tilt for Suncorp’s bank.

ANZ agreed on Monday to snap up Suncorp’s banking operation in a transaction that needs to clear competition hurdles alongside state and federal government approvals. ANZ kicked off a $3.5bn rights issue to help fund the deal and made a string of assurances – including no net job losses in Queensland for at least three years – in an attempt to appease regulators and the state government.

While ANZ’s shares remained in a trading halt for the capital raising, Suncorp’s shares slid 5 per cent to $11.19 on Tuesday. That almost completely unwound a rally of 6.1 per cent the prior day, as investors digested the deal’s finer details.

The domestic bank sector has seen a handful of players taken over or shut in the past three years including Bank of Queensland buying ME and National Australia Bank acquiring Citibank’s retail operations and digital bank 86 400. Bendigo and Adelaide Bank bought digital player Up, while its peer Volt is in the process of handing back its deposit-taking licence.

Regal Funds Management’s Mark Nathan said ANZ’s agreed deal to buy Suncorp’s bank raised the spectre of potential further rationalisation in the sector.

“It does make you wonder whether there’s going to be any further consolidation in the banking space, Bendigo and BoQ would be the obvious ones,” he added.

“But that’s a slightly different situation in that Suncorp was a willing seller and had been looking to simplify their business, I don’t think it would be as easy to strike a deal with BoQ and Bendigo in terms of getting the boards to agree to a deal.”

Bendigo Bank sought due diligence and talks to buy Suncorp’s bank several times in recent months but was met with little engagement. On Tuesday Bendigo’s chief executive Marnie Baker said: “While the bank is focused on its organic growth strategy, it does from time to time also consider acquisitions … Suncorp avoided engagement with us despite repeated approaches, instead announcing a transaction with a big four bank that further entrenches Australia’s banking oligopoly.

“We are firmly of the view that constructive discussions with Suncorp regarding a merger of Suncorp Bank with Bendigo and Adelaide Bank would deliver enhanced competition, provide broader community benefit and deliver attractive outcomes.”

Investors Mutual senior portfolio manager Simon Conn said given banking was a scale game he envisaged Bendigo Bank and BoQ would assess ways to bulk up, but it would be difficult for the latter in the near term.

“Longer term the two of them will need to do something (on the deal front),” he added. “There is pressure on them to bulk up.”

But Mr Conn said given BoQ was pursuing its own technology overhaul and integrating ME it would be “pretty difficult” for the bank to get shareholder support for an acquisition in the near term.

Analysts were divided in their views on ANZ’s acquisition of Suncorp’s bank, with Morgan Stanley’s Richard Wiles labelling the deal value “a full price”.

“The purchase price of $4.9bn is circa 8 per cent of ANZ‘s market cap and equates to a P/NTA (price/net tangible assets) of about 1.3 times,” he said. “The strategic rationale and financial implications of the Suncorp bank acquisition are not compelling, and a range of associated factors create uncertainty for investors.”

Citi analyst Brendan Sproules said the deal represented “fair value” if ANZ integrated the operations successfully. “The integration risk in the deal is surprisingly high, given the need to run Suncorp (bank) independently for three years, before integrating onto the still-in-development ANZ Plus platform,” he said.

Jarden chief economist Carlos Cacho said ANZ was paying a premium to essentially purchase back four years of declining share in the mortgage market. He also cut his earnings-per-share target citing ANZ’s share issuance and benefits from the transaction taking time to materialise.

Regal’s Mr Nathan labelled the deal a win for ANZ and Suncorp.

“They’ve struck the price at a level where I think both parties can claim a win,” he said, noting job market conditions may see ANZ get a natural reduction in its own workforce as it kept Suncorp bank staff numbers steady.

“With unemployment so low you‘ll probably get a reasonable amount of attrition and turnover which would allow you to reposition your workforce in the way that you want.”

On the decline in Suncorp’s shares on Tuesday, Mr Nathan said: “The quality of the (insurance) franchise, while strong, still deserves to trade at a discount to IAG. A lot of that discount was being closed on Monday.”

ANZ on Monday outlined expectations that integration costs from buying Suncorp’s bank would amount to $680m largely over five years, while the company said deal cost synergies were expected to be $260m annually.