ANZ has now completed its acquisition of Suncorp Bank for $4.9B.

Suncorp Bank acquisition

On 31 July ANZ announced it had completed the strategically important acquisition of Suncorp Bank for $4.9 billion. The acquisition was first announced to the market in July 2022 with an expected completion date in the second half of calendar year 2023. The delay was primarily the result of the Australian Competition and Consumer Commission’s (ACCC) decision not to grant authorisation of ANZ to acquire Suncorp Bank. The ACCC contended that the acquisition of Suncorp Bank would lessen competition in relation to home loans, retail deposits, SME banking and agribusiness banking in Queensland.  Subsequently the Australian Competition Tribunal overturned this decision and authorised the acquisition on 20 February 2024.

The acquisition terms provide for no changes to the total number of Suncorp Bank Queensland branches and no job losses in Queensland for Suncorp Bank for at least 3 years post completion.  ANZ has licenced the Suncorp Bank brand for 5-7 years. ANZ has estimated merger synergies at $260 million per year, representing 35 percent of Suncorp Bank’s June 2022 cost base. However, under the acquisition terms the majority of synergies are unlikely to be realised until years 4 to 6 post completion with the full run rate of synergies expected to be achieved by the end of year 6. The reason for preservation of Queensland branches and jobs is that the Queensland government required these terms before it would amend the Metway Merger Act which was put in place in 1996 when Suncorp was created from the merger of Metway Bank and Queensland Industry Development Corporation. The original intent of the parochial legislation was to protect Queensland jobs.

ANZ stands to gain operational scale and geographic diversity to its retail and commercial businesses in Queensland.  ANZ has also stated its intention to provide lending support for Olympic Games infrastructure and for Queensland’s renewable energy projects. The Suncorp Bank acquisition delivers ANZ a $47 billion increase in Australia’s mortgage book and $45 billion more in retail deposits as well as an additional $11 billion in commercial loans. At the time of the acquisition announcement, ANZ stated that the $4.9 billion acquisition was on a price earnings multiple of 13.8 times, or 9.3 times post full run-rate synergies or 1.3 times price to net tangible assets.

APRA to apply additional capital overlay

The Australian Prudential Regulation Authority requires ANZ to hold a capital buffer of $750 million in response to heightened concerns about the bank’s non-financial risk management practices. APRA has held longstanding concerns with ANZ’s non-financial risk management, and initially imposed a $500 million operational risk capital add-on to the bank in 2019 to reflect deficiencies in its risk governance. This amount was increased by $250 million in August this year as APRA is yet to observe significant improvements in ANZ’s non-financial risk management.

APRA’s most recent concerns relate to ANZ’s Markets business where ANZ has admitted that it misreported bond trading data to the Australian Office of Financial Management (AOFM) in 2022-23. APRA has raised prudential concerns that ANZ has yet to adequately address deficiencies in controls, risk culture, governance and accountability.

APRA requires ANZ to appoint an independent party to review the root causes of recent issues and risk governance in the Markets business and develop a remediation plan to address findings from the independent review.

Looking ahead

There are two noteworthy points in assessing ANZ’s future prospects.

Firstly, ANZ is financially strong with a high regulatory Common Equity Tier 1 capital ratio of 13.5 percent, which is well above its operating target range of 11 – 11.5 percent. APRA’s requirements are simply that the bank must hold more regulatory capital until ANZ has delivered required remediation to APRA’s satisfaction. This will occur; however, timing is uncertain. Carrying additional regulatory capital adds to balance sheet strength but is a drag on earnings per share growth while it is in place. Once the regulatory capital is released it can be more efficiently applied to asset growth and used as risk capital to grow ANZ’s earnings per share more quickly because it can be applied to higher risk-weighted assets like commercial loans. More risk-weighted assets have the effect of reducing the capital adequacy ratio to a more capital-efficient level that is in line with other prudentially managed banks, while at the same time generating higher earnings.

Secondly, Queensland is Australia’s fastest growing domestic economy over the past two decades and ANZ will capture its market share of this growth. Furthermore, ultimately ANZ will extract the operational synergies and financial uplift from the Suncorp Bank merger, although it will have to wait for 3 years before these benefits hit the bottom line.

ANZ is the smallest of the 4 major banks by market capitalisation and arguably may have the highest growth potential given its excess capital position and identifiable growth prospects now that it has absorbed Suncorp Bank with clear cost synergies yet to come. These circumstances indicate that shareholders taking a medium-term outlook of ANZ’s earnings upside potential should do well in the period ahead.