Everything you need to know about the ANZ/Suncorp Bank decision (2024)

So, if ANZ is not allowed to buy it, Suncorp will have to find an alternative buyer, or decide to keep operating the bank over the longer term. That could result in reducing investment, by cutting back branches and staff numbers in Queensland. But more cuts may not be feasible, given it has already gutted branches by almost two-thirds, to about 60, over the past decade. But further simplification seems inevitable.

Then there’s overseeing the conglomerate. One former Suncorp insider says a perpetual juggle is finding board members, some with insurance experience, some who know banking, and some who are generalists. Then there is the issue of how much capital will need to be set aside to support the bank.

High hurdles

Enlivening a new deal is easier said than done. Bendigo and Adelaide Bank was considered the most likely alternative buyer by the ACCC, but there are high hurdles. For one, Suncorp isn’t interested in taking a scrip deal. More challenging could be integrating a bank like Bendigo, which would be far more complex than ANZ, given it uses a broader range of technology systems that won’t easily plug together.

An alternative deal will also have political barriers, given Queensland has clearly stated any other buyer will have to provide at least the same level of sweeteners to the state as ANZ has. This would include a three-year moratorium on branch and ATM cuts or job losses, as well as technology investment in Brisbane. It remains to be seen if Bendigo, or any other regional bank, will be able to do provide these.

More broadly, a decision to back the ACCC will create problems for regional banks, which are all under pressure to sustain margins amid fierce competition. Many are subscale. There will be no saviour for Bank of Queensland, certainly not among the other major banks, which would be unlikely to ever target a regional bank again.

For Shayne Elliott and Steven Johnston, ANZ and Suncorp’s respective chief executives, a rejection would be a big disappointment. All the wasted time and management focus is a sunk cost, but some will see their legacies as tainted, as they spend their final time in charge of their companies re-planning for organic growth.

For ANZ, it will be back to the drawing board on how to recover lost market share. ANZ pursued Suncorp because it needs scale, which can reduce the cost of capital and provide more customers to spread investment across. With Suncorp’s 1.5 million customers no longer an option, ANZ will take a lot longer to grow under its own brand.

Silver lining

Still, some reckon ANZ will pursue growth in Queensland with or without Suncorp Bank. Martin Barrett, who left Bundaberg-headquartered Auswide Bank in December and has worked at major banks, suggests ANZ “could provide billions to the Queensland economy in lending today” and “doesn’t need Suncorp”.

For ANZ shareholders, however, there will be a silver lining in the form of a blockbuster share buyback or special dividend, after it raised $3.5 billion of capital in 2022 to fund the acquisition. “If the deal is blocked, we believe ANZ would have capacity for buybacks of more than $5 billion,” Morgan Stanley’s Richard Wiles told his clients in January.

For the ACCC, a win at the tribunal will be a validation of its extensive use of “counterfactual” analysis to block M&A deals – despite the uncertainties of the crystal ball gazing process that involves analysis of hypothetical alternative deals.

It will also provide judicial backing for its analysis that the major banks are part of a powerful oligopoly, which the ACCC put at the centre of its economic thinking when it knocked back the takeover and sought more regulation of mortgage and deposit markets.

Some of the biggest losers if a decision against the deal is made will be the investment bankers at Barrenjoey and Flagstaff Partners, who are paid only if a deal is successful.

The green light

A green light for ANZ to buy Suncorp Bank could trigger more consolidation of regional banks. Bendigo and Adelaide Bank, along with Bank of Queensland, AMP Bank or even Judo Bank, could become targets, if other major lenders consider that they, too, should bolster market share in specific areas or geographies via acquisitions.

Still, the ACCC will take each deal as it comes, and may not see a rejection of its analysis for this transaction as creating open season on further consolidation.

For Suncorp, a decision in its favour will be a godsend: it will be able to focus on insurance, removing a stone in its shoe. The bank’s distraction is real. It chews up board time, and costs a lot, including IT upgrades – which blew out last decade – on what is in reality a big building society focused on home loans. A single-focus will likely improve operation of the insurance business.

Of course, the downside is Suncorp investors will lose a stable set of earnings; with the bank gone, it won’t be able to offset the wild fluctuations in the insurance arm. That’s not theoretical: the bank in the six months to December 2021 generated $200 million in profit, while Suncorp’s Australian insurance arm generated $114 million and the New Zealand division $81 million. In theory, Suncorp dividends could become more volatile.

Margins in the insurance were supported over the past six months, even if the weather was wetter than the El Niño initially predicted. But longer term, it’s bleaker. The Australian Prudential Regulation Authority said this month the industry had made losses on home insurance in the past five years.

For Queensland Treasurer Cameron Dick, the deal will be a headline winner, given promises from Suncorp and ANZ about keeping jobs and potential lending in the state. (That might add a dub of shine in an election year, although youth crime and cost of living pressures will overshadow any bank pledges.)

ANZ has talked up a financing “commitment” in Queensland of almost $35 billion in 10 years if the deal goes through. Among the offerings: Suncorp is planning a 120-staff regional hub in Townsville, and ANZ a 700-staff tech hub. (Buried in the fine print of disclosures to the ACCC, though, were longer-term plans for “rationalisation of the branch network”, and potentially “labour rationalisation” in a takeover.)

For ANZ, the benefits of scale are large – but so are the integration risks. Suncorp Bank will provide it with the extra customers to leapfrog National Australia Bank as the third-largest home loan lender in the country. Suncorp’s branches will provide an on-the-ground presence in fast-growing Queensland, alongside digital services being developed in Melbourne and India.

But would Suncorp customers just leave once ANZ takes over, bleeding the big bank of the very lifeline it hoped to acquire? Opinions are divided. Some Suncorp bank customers say they don’t want ANZ running their accounts.

If it gets a win at the tribunal, ANZ’s work is not yet complete. It will need to make its case to Jim Chalmers, a Queenslander, whose final approval is needed. The Treasurer hasn’t yet indicated which way he will go. But it seems unlikely he would decide to block it if the tribunal approves it.

Legacy for CEOs

While ANZ will be celebrating a victory, its investors’ focus will inevitably turn to integration risks. Analysts are likely to focus on the need for more investment than expected, or challenges bringing systems together. Bank mergers show IT consolidation is hard: Westpac has still not fully integrated St George, 15 years after buying it during the global financial crisis.

Success will leave a legacy for both companies’ CEOs, who are getting closer to the end of long tenures. Elliott could stand down from the helm ANZ this year, with the deal as a crowning glory; on the Suncorp side, there are also questions how long Johnston will hang around for, given he’s now in his fifth year in the top job and, aside from his immediate predecessor, Suncorp chief executives have all only held the CEO reins for six years or so.

Hunter Green analyst Mark Tomlins, who is assuming the deal gets approved, says the underlying performance of Suncorp’s overall insurance business is solid and improving, but even if it frees itself from the bank, headwinds will persist. These include the threat of Suncorp and other insurers being “behind the curve and constantly playing catch-up pricing [for] increasing climate risks,” he says.

Then also the risk of politicians or regulators cracking down on industry. Parliamentary committee hearings this month showed political pressure about under-insurance, rocketing pricing and insurers botching claims. Johnston this month admitted to being “embarrassed” about the treatment of a couple living in a caravan a year after flooding. This pressure will continue regardless of whether it owns a bank.

For the ACCC, if the tribunal overturns its analysis, its framing of the big four banks as an oligopoly – also the foundation of its separate analyses of mortgage and deposits markets – will be thrown into chaos.

Depending on how the decision is explained, it could trigger a rethinking of the regulator’s approach towards financial services’ “coordinated effects” and, potentially, in concentrated industries.

There will be other reactions. An overturning of the ACCC will trigger a big pay day for investment banking advisers. Other major banks will be forced to react by lifting competitive intensity in Queensland.

Presuming no one appeals (which can only be done if the tribunal makes an error of law), Tuesday’s decision will bring a torrid, drawn-out process to a conclusion.

The review has lasted 582 days, given the deal was first revealed by The Australian Financial Review’s Street Talk column in July 2022. Whichever way the decision goes, among the biggest winners will, as usual, be the lawyers.