ANZ Group and Suncorp: Deal nearly done
Our view of the potential acquisition of Suncorp’s banking arm by ANZ.
Originally announced in July 2022, ANZ Group’s (ASX: ANZ) acquisition of Suncorp Bank is almost over the line. The Australian Competition Tribunal granted approval and overturned the Australian Competition and Consumer Commission’s earlier rejection. Federal Treasurer approval and changes to Queensland state law are required, but the competition regulator was the biggest obstacle, in our view.
It is a reasonably good deal for both parties. The acquisition adds scale to areas where ANZ Bank trails major bank peers, with home loan balances to increase by 18%, customer deposits by 14%, and business lending by 9%—likely more in small business lending. Consolidating systems and processes has the potential to lower the cost base, and we expect some funding cost savings over time given ANZ Group’s better credit rating.
ANZ Group shares slipped on the announcement and traded at an 11% discount to our $31 fair value estimate. We think integration risks and cost synergies not expected for around five years, leave the market lukewarm on the acquisition. But we think the integration risks are worth taking given ANZ Bank could end up with a larger and more profitable home lending business in five years.
For Suncorp (ASX: SUN), it is a good price, with the acquisition multiple of 1.3 times tangible assets much higher than other small banks trade on. It is also a clean exit of a subscale bank where regulatory and technology spending is rising.
Suncorp shares jumped 6%, trading at a premium to our $13.50 fair value estimate. In addition to the good price, there is likely enthusiasm for capital returns and earnings growth prospects for the pure-play general insurance business. We don’t think the bank has been a material distraction or resulted in underinvestment in the insurance business.
ANZ Group has the funding in place with equity raised in 2022. We don’t expect the deal to have a material impact on our fair value estimates and we will update our forecasts to reflect the acquisition proceeding soon.