Federal treasurer Jim Chalmers recently approved ANZ's acquisition of Suncorp Bank, subject to strict conditions, following a review that included input from regulators, the Queensland government and industry experts.
The conditions include prohibiting regional branch closures for three years, ensuring no net employment losses and requiring ANZ to make efforts to join Bank@Post.
Additionally, there are substantial lending commitments to Queensland renewable energy projects, infrastructure development for the 2032 Olympics and support for Queensland businesses.
“There is a benefit in terms of how much capital ANZ will need to hold against Suncorp once the two balance sheets are eventually integrated,” says John Storey, UBS’s head of Australian bank research.
Storey explains while Suncorp has a risk-weighted density of about 43 per cent, this number for ANZ is 39 per cent.
“ANZ uses an internal ratings approach to calculate its risk-weighted assets. Suncorp operates on a standardised approach to how it calculates risk-weighted assets. Moving Suncorp from a standardised measure of calculating risk-weighted assets to an internal ratings-based approach could release $500 million of capital from ANZ’s $80 billion market cap. We think this could be a positive to the investment case in about three years,” Storey says.
ANZ has acknowledged it’s carrying excess capital, reflected in its recent buy back. Storey says it would be logical to also return future excess capital to shareholders. Although there is potential for it to invest in its commercial banking business or its ANZ Plus digital platform and ANZx transformation program.
One of the main integration risks for the deal is moving Suncorp’s Queensland client base to ANZ Plus.
“There's always a risk around moving clients when it comes to things like KYC and other logistical issues. But the thee-year master servicing agreement means time is on ANZ’s side and Suncorp will effectively run its legacy bank as is during this time,” Storey says, noting Suncorp’s value proposition is very different to ANZ’s.
“Suncorp uses a high-touch, relationship-based model, with higher costs to serve customers. The question is whether ANZ appreciates these nuances and if it's going to be sensitive enough to Suncorp’s client base to retain them through this whole process.”
Although investors are focused on transition risk, Suncorp’s clients are moving to ANZ’s system, as opposed to trying to integrate the systems. This should help address investor concerns. The transaction is also an opportunity for ANZ to increase its market share in domestic mortgages and deposits.
“Strategically, the deal has a lot of benefits. ANZ is gaining market share in a very concentrated banking sector, which is very difficult to do,” says Storey, who expects the deal to be net earnings accretive for ANZ over time.
Nevertheless, under the deal terms there will be no redundancies or branch closures across the country for Suncorp.
“As a result, it may take some time for ANZ to realise cost benefits. But this is a revenue opportunity for ANZ because it will be able to access Suncorp’s client base, which will give ANZ the ability to cross sell more products to Suncorp’s clients.”
This revenue synergy may not be fully represented in the share price.
Morningstar senior equity analyst Nathan Zaia is agnostic about the implications of the Suncorp transaction for ANZ shareholders.
“Even if you get cost savings three to five years down the track, that leaves you at square one in terms of creating value for shareholders. Higher margins and additional cost savings could create some upside. But this is not a transformational acquisition for ANZ. But it does leave Suncorp shareholders with a cleaner investment proposition in the future,” says Zaia.
“There's also every risk ANZ does not extract the cost savings they think they will from this, or there's a cost blow out related to the integration or they lose customers.”
For investors, the next key data point is ANZ’s full year results released in November, which will include two months of Suncorp’s income.
For everyone else, the burning question is what happens to Suncorp Stadium’s branding. Queenslanders may have to come to terms with watching sport at ANZ Stadium down the track.
Looking ahead, Zaia says further consolidation of smaller banks in the sector makes sense.
“There are a lot of smaller banks competing at a much smaller scale and at higher funding costs. It just makes sense to be able to offer products more efficiently and more consolidation down the track could achieve that.”
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