ANZ Acquires Suncorp Bank

In this article we’re going to take a look at ANZ’s $4.9 billion acquisition of Suncorp’s banking business, a major Australian bank with around 2.5% market share.

TLDR

• Company Overview: Low risk banking model, with known returns.

• Deal Strategy: Build The Moat through scale.

• Deal Execution: Reasonable price, all paid in cash, supported by an equity raise.

Company Overview

The Business Model

Suncorp Group can be split into two separate business lines: Insurance and Banking. These divisions generated $510 million and $660 million, respectively, in the first six months of FY24. For the purpose of this article, we will focus on the Banking division, as that is what is being acquired.

Suncorp Bank’s business model, put simply, is to collect capital from depositors and then loan that capital to borrowers at a slightly higher rate. Should the bank require more capital than they have from depositors, they either borrow from other banks or from the RBA, depending on the type of financing required. The interest rate spread, the difference between the rate they offer to depositors and the rate they charge borrowers, is how they make money.

Around 80% - 85% of the loans issued by Suncorp are used for housing, with the remainder made up of personal and business loans. Housing loans are historically low risk, as the bank will foreclose on the house if the individual defaults on their loan.

It is a low-risk business model with relatively predictable returns.

The Competitive Landscape

The Australian banking industry is dominated by the big four banks, who account for a combined 75% of the market (before the ANZ & Suncorp merger).

This caused issues for the deal because the ACCC had concerns that it would “substantially lessen competition,” and they initially blocked the deal.

ANZ argued the acquisition would create a combined bank that is “better equipped to respond to competitive pressures to the benefit of Australian consumers” and deliver “significant public benefits, particularly in Queensland.”

“Read: the general public would be better off with ANZ and Suncorp combined than separate.” More on this in the Deal Strategy section.

Earlier this year, the ACCC’s decision to block the deal was overturned. The reason being that the deal “would not lead to any substantive changes in the market structure.”

Deal Strategy: Build The Moat

There are the usual benefits that come with scale, such as spreading their fixed costs, such as IT infrastructure, regulatory compliance, and branch network expenses, over a larger customer base, reducing the cost per customer.

However, banks also benefit from a flywheel effect that begins with reduced fixed costs per customer.

First, to fully understand the flywheel effect, it is generally cheaper for banks to pay interest to depositors than the RBA or other banks.

So, with the reduced fixed cost base per customer, ANZ can then utilize the greater profitability to invest in an improved customer experience, increased operational efficiency, better risk management tools, and increased marketing.

All of this attracts more customers and customer deposits, which not only lowers the fixed cost per customer even further but also increases the interest rate spread, as the bank is utilizing those additional customer deposits rather than borrowing from the RBA or other banks.

And the cycle continues - refer below.

This is what ANZ was referring to in their argument that “the general public would be better off with ANZ and Suncorp combined than separate.” As a bank becomes larger, it becomes more difficult to compete against it, and this deal increases competition among the big four as the gap between them narrows.

Deal Execution

The deal was completed last week, entirely in cash, with a partial payment through an equity raising of $3.5 billion. The deal was completed at 1.3x net tangible assets, which is within the reasonable range of 1.0x to 1.5x.

The deal is for the banking side of Suncorp, with Suncorp Group continuing to manage the insurance business line. ANZ was initially set to pay a $10 million annual brand license fee; however, Suncorp has since waived this fee. Both firms will contribute to the integration costs.

The deal is expected to provide a 5% increase in ANZ’s profit forecast from fiscal 2025, which is not a significant increase considering the acquisition price and integration costs.

While my view is that the deal does not move the needle in terms of bank size, which is part of the reason why the ACCC’s original block on the deal was overturned, it does improve competition among the big four due to the flywheel effect.