ANZ says the competitive landscape in Australian banking has changed sufficiently for it to buy Suncorp’s bank more than a decade after it first tried.
As the Melbourne-based bank now seeks to convince the federal treasurer, state government and the ACCC of the merits for Queensland and customers, chairman Paul O’Sullivan said new players like Zip and Afterpay have emerged to compete for banking services, opening up the field for more consolidation.
“Overall [ANZ buying Suncorp’s bank] will result in much stronger competition and growth for Queensland consumers,” Mr O’Sullivan told reporters.
ANZ confirmed it will raise $3.5 billion to finance its $4.9 billion purchase of Suncorp’s bank and pledged to keep branches open for three years, as both try to keep governments on side with commitments to Queensland and jobs.
Announcing financial and strategic details for the deal that will deliver it 1.2 million new customers, ANZ also said it had withdrawn from discussions to buy accounting software group MYOB.
Details of the Suncorp deal were revealed in The Australian Financial Review on Monday after Street Talk reported the transaction on Friday. It is the first substantial acquisition by a major bank since Westpac bought St George and CBA bought Bankwest during the global financial crisis.
ANZ chief executive Shayne Elliott described the deal as a “cornerstone” investment that would provide ANZ with more scale, and said Suncorp was a “natural fit” for the bank.
ANZ will initially maintain the Suncorp brand before deciding whether it becomes ANZ.
With the ACCC set to scrutinise the acquisition, ANZ said it would “maintain [Suncorp’s] current branch footprint” in Queensland for at least three years after the deal is completed, while “continuing to invest in Suncorp Bank and in Queensland”.
ANZ said Suncorp would further be helmed by CEO Clive van Horen, who will report to Mr Elliott.
ANZ shares are in a trading halt as the bank conducts a fully underwritten capital raising to haul in $3.5 billion of ordinary equity.
The entitlement offer, which is being led by Macquarie and UBS, will be conducted at $18.90 per new share, a 12.7 per cent discount to ANZ’s closing price of $21.64 on Friday. Around 187 million new shares will be issued, or 6.7 per cent of ANZ’s existing share count.
The rest of the balance of the $4.9 billion deal, that represents a price/earnings multiple of 13.8 times before synergies, will be funded with $1.4 billion from ANZ’s existing reserves.
ANZ said the acquisition would accelerate the growth of its retail and commercial businesses and improve “the geographic balance” in Australia by boosting its position in Queensland.
“With much of the work to simplify and strengthen the bank completed, and our digital transformation well-progressed, we are now in a position to invest in and reshape our Australian business,” Mr Elliott said.
“This will result in a stronger, more balanced bank for customers and shareholders.”
The deal will include $47 billion of home loans, $45 billion in deposits and $11 billion in commercial loans.
Suncorp Bank’s 1.2 million customers will increase ANZ customer base by 20 per cent, while its home loans will increase by 17 per cent, retail deposits will lift by 22 per cent and SME loans will increase by 20 per cent. “They are the equivalent of many, many years of organic system growth,” Mr Elliott told analysts on a conference call.
ANZ will also use Suncorp’s brand for at least five years, with the bigger institution paying a $10 million annual fee for that right. Mr Elliott said ANZ will initially run Suncorp Bank as a separate business and later decide on whether the brand becomes part of ANZ or even a new brand.
That offers a path to a branding issue with the Suncorp name resonating within its Queensland heartland. Suncorp also has experience in “white-labelling” its name with life insurance products underwritten by TAL Dai-ichi.
Both banks on Monday were trying to keep governments on side with commitments to the state and jobs. That is important with the bid also needing clear approval from Treasurer Jim Chalmers.
Queensland’s legislation also binds certain functions of the Suncorp Metway banking entity and its holding company – Suncorp Group currently – to the state. That includes requiring the head office to be located in the state and the managing director to reside there, along with key functions such as treasury operations.
ANZ pledged no net job losses or branch closures for at least three years after the deal is completed, which is expected to take 12 months. Branch numbers though have already been heavily cut by Suncorp.
“This is a growth strategy for ANZ, and we will continue to invest in Suncorp Bank and in Queensland for the benefit of all stakeholders,” Mr Elliott said.
The big four bank also tried tapping into parochialism by offering $15 billion in new lending commitments to support “Queensland renewable projects and green Olympic Games infrastructure”, with the sporting event scheduled for 2032 in the state.
Suncorp said both banks would “engage constructively with the Queensland government” about the legislation binding its banking arm to the state.
A source with knowledge of state government operations on Sunday had said that the government was yet to be approached about what changes the companies would seek.
Mr Elliott said ANZ knows there would “rightly be questions from government and regulators about the competition aspects of this transaction”.
But “as the smallest of the major banks, we believe a stronger ANZ will be able to compete more effectively in Queensland offering better outcomes for customers,” he added.
The sale will leave Suncorp with its much larger insurance arm.
Suncorp pledged on Monday to keep its headquarters in Queensland - although many insurance operations have been run out of Sydney.
ANZ said the estimated annual pre-tax cost synergy was $260 million or 35 per cent of Suncorp Bank’s cost base, which is expected to be “largely realised in years four to six post completion, with full run rate synergies expected to be achieved by the end of year six.”
ANZ said it expected its level 2, CET1 capital ratio to reduce by around 110 basis points, or 34 basis points on a pro forma basis.
Integration costs were estimated at $680 million, with most of this to be incurred over a five-year period.
The deal is expected to complete during the second half of the 2023 calendar year.
‘You’d get a better price on Gumtree’
Documentation out on Monday indicates Suncorp shareholders will not be getting a vote. One investor was unimpressed with the price and thought an auction with other banks would attract greater offers.
“You’d get a better price on Gumtree,” said Charlie Green of Hunter Green Institutional Broking, a Suncorp shareholder.
“While I have been long Suncorp for years, including because of my understanding of its latent value, the proposed ANZ deal … looks like a stinker, at mates rates, with no premium for control.”
But Credit Suisse analysts, in a note to clients, said they thought the offer was “very positive” for Suncorp shareholders with the bid comparing “favourably with current bank peer multiples”.
“We see potential for a large share buyback once the transaction completes,” they said.
Suncorp CEO Steve Johnston argued the deal would allow the business to focus on its insurance arm, whose brands include AAMI and Apia, in Australia and New Zealand.
“[We] are very comfortable that the value that’s realised in this transaction is the best value that we can receive in terms of a cash offer at this point in time,” he told an investor call on Monday morning.
The bank has started growing again after malaise in previous years. “A couple of years ago the balance sheet was contracting. We had low level of confidence amongst our broker partners in terms origination. Probably an inferior digital offering,” Mr Johnston said.
“Over the past 18 months we’ve rebuilt that confidence and got momentum back into the book.”
Its home loan book was up at an annual rate of 12.4 per cent in the past six months and the bank should hit earnings of $368 million for the year, according to pre-audited results released on Monday.
Suncorp also confirmed it was sticking by a target of reducing comparative expenses to reach a cost to income ratio of 50 per cent in this financial year – a target that has previously eluded the company.
Analysts queried: why would Suncorp want to sell the bank now?
Mr Johnston argued that Suncorp routinely set a plan looking at growing the business naturally, which was tested against other options such as mergers and acquisitions.
“This time the particular circumstances meant that we had potential counterparty interest, which meant that we took it a step further,” he said.
But he refused to detail the sale process – Street Talk had revealed Bendigo Bank’s attempts at making an offer were rebuffed. “I don’t propose ... to unpick all the elements of how we’ve got to where we’ve gotten to,” he said.
Suncorp said the estimated net proceeds of the sale would likely be $4.1 billion after allowing for almost $500 related in costs and capital gains tax.
The majority of proceeds would be returned to shareholders through “a pro-rata capital return, a fully franked special dividend and potentially share buybacks”, Suncorp chief financial officer Jeremy Robson said.
ANZ has also released a trading update for the third quarter that showed home loan lending volumes grew by $2 billion, or 3 per cent, in the three-month period.
ANZ said it was “on track to grow in line with the Australian major banks before the end of the financial year”. Its net interest margin over the quarter increased by 3 basis points.
And in a two-line statement to the ASX along with the deal material, ANZ said it had “withdrawn from discussions with Kohlberg Kravis Roberts (KKR) about a potential acquisition of MYOB”.
Last week, ANZ confirmed it was in talks to buy MYOB from private equity firm KKR, in a deal that could be worth as much as $4.5 billion, but the move drew a negative reaction from analysts who questioned its strategic rationale, as well as the hefty price tag.
More on the ANZ-Suncorp deal
- ANZ’s ‘once-in-a-lifetime’ deal comes with complexity. Shayne Elliott says seven years of simplification has set ANZ up for the $4.9 billion acquisition of Suncorp’s bank. But with deal making and growth comes complexity around execution, writes Chanticleer columnist James Thomson.
- Macquarie, UBS launch ANZ Bank’s $3.5b raising. ANZ Banking Group is offering new shares at a 12.7 per cent discount to the last close in an effort to raise $3.5 billion to acquire Suncorp’s bank.
- Shayne Elliott’s banking epiphany. ANZ’s tilt at Suncorp is a way for the Melbourne-based lender to claw back some of the share it has ceded in the crucial home lending market over the past four years, writes columnist Karen Maley.
- ANZ/Suncorp deal will be first test for new ACCC boss. The watchdog has long bemoaned the market power of the big four banks, but proving that an ANZ takeover of Suncorp will substantially lessen competition may prove complex, writes Chanticleer columnist James Thomson.
- ANZ’s $5b tilt at Suncorp puts spotlight on competition. The big four institution has swooped on the insurer’s bank to bolster larger player’s languishing home loan division if the deal passes political hurdles.
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