The Australian Competition and Consumer Commission (ACCC) made its decision on 4 August 2023 to reject ANZ's $4.9 billion offer to acquire Suncorp's banking business.
The acquisition plan was initially proposed in July 2022, but the subsequent approval process was lengthened due to multiple prudent considerations by regulators. Suncorp aims to fully transform its insurance business through the transaction, so the acquisition was initially supported by the Queensland Government.
However, during the approval process, Bendigo and Bank Adelaide challenged the acquisition plan, which ultimately failed to pass.
By 20 February 2024, the Supreme Court had formally approved the ANZ takeover, which completely removed regulators' concerns that the acquisition could cause damage to the competitive environment in the banking sector. To ensure the acquisition went smoothly, ANZ has made a number of commitments, which have since been endorsed by the Treasurer and the Queensland Government and formalised into legally binding agreements.
'Cutting Constant Intimacy'
This acquisition reminds me of Bank of America's acquisition of Merrill Lynch in 2008 and two industry-shaking regional banking transactions in Australia in the same year – Westpac's acquisition of St. George's Bank and Commonwealth Bank's acquisition of Bank of Western Australia. These two transactions were a once-in-a-century financial event at the time.
Historically, the relationship between Suncorp and ANZ is also remarkable. In the wake of the 2008 financial crisis, Suncorp was at great risk and needed to find a suitable acquirer to stabilize the situation. At the time, Steven Johnston, 43, had a great responsibility as the head of corporate affairs and adviser to the CEO.
However, at this very moment, Westpac, which had just completed the acquisition of St George, chose to withdraw from the competition. Although Commonwealth Bank has expressed interest in acquiring Suncorp, it has been left sidelined by regulators requiring it to buy WA Bank to prevent it from failing. The National Australia Bank has criticised Suncorp but has not made substantial progress.
At this critical juncture, ANZ stepped forward and proposed an acquisition interest to Suncorp. Surprisingly, however, in just a few days, the federal government, led by Kevin Rudd, provided solid guarantees for bank funds and deposits, allowing Suncorp to weather the storm. Eventually, the high-profile acquisition came to naught.
Suncorp
First of all, I am convinced that Steven Johnston (CEO of Suncorp) made a very wise decision. He has clearly been keenly aware of the potential for asset-side earnings in the insurance industry in a prolonged high-interest rate environment.
Let's take asset returns as an example, let's take a closer look. In the past low interest rate environment, the annual asset return (as shown in the chart) remained in the range of 2% to 4%, and these returns mainly came from the asset allocation of loss insurance such as car insurance and home insurance, and its asset return was usually quite stable.
If we take the annualized return of 3% as an example, then the initial investment of 10,000 yuan will increase to 24,272 yuan after 30 years of accumulation. However, in today's high-interest rate environment, if the annualized return reaches 6%, the same $10,000 will surge to $57,435 in 30 years.
This significant difference undoubtedly highlights the huge impact of the high interest rate environment on asset appreciation. Some may question that interest rates cannot remain at 6% all the time, but similarly, the era of low interest rates has not been consistently at 3%. This view is worth pondering.
Of particular interest is the Life Insurance segment of the New Zealand insurance industry, as shown in the diagram. Against the backdrop of a significant decline in General Insurance's profits, Life Insurance has shown significant growth, which is closely related to its unique balance sheet structure. (If there is any discrepancy between the actual situation of Life Insurance in New Zealand and the analysis below, please understand and correct it.) ）
Life Insurance policies issued during periods of low interest rates in the past may only generate a return of 3% to 4% per annum for the policyholder. However, in a high-interest rate environment in FY23, even the most secure bank deposits can deliver yields of as much as 6% to 7%. This significant increase in the value of assets contrasts sharply with the relatively stable situation on the liability side, which in turn has contributed to a significant increase in profits.
So with the chart below, Suncorp's insurance business revenue increased by 333.9% in FY23, completely crushing its banking business income.
ANZ
According to a 2023 report released by the Australian Prudential Regulation Authority (APRA), ANZ has a 13.5% share of the mortgage market, while Suncorp has only 2.4%. In the household deposits market, ANZ Bank has an 11.7% share, compared to Suncorp's 2.4%.
Based on these figures, once the acquisition is completed, ANZ's share of the mortgage market will increase significantly to 15.9%, surpassing NAB's 15% market share and jumping from the bottom of the big four.
While this may seem limited in terms of total market share, for ANZ it represents a significant 20% increase in customer deposits and loans. The acquisition will not only enable ANZ to quickly regain some of its lost market share, but will also help it scale up and take advantage of economies of scale to reduce its cost of capital.
In terms of overall size, ANZ is only half the size of CBA, while Westpac is about 75% larger than ANZ. Nonetheless, upon completion of the acquisition, ANZ will maintain its position as a smaller bank relative to Commonwealth Bank and Westpac.
Next, let's take a look at the key terms of the acquisition agreement. In the next three years, the acquirer has made a solemn commitment not to close any of the target company's branches and its ATM branches, and to ensure that the number of bank jobs will not be cut.
Following the approval of the acquisition, Treasury Secretary Chalmers also made an important request to suspend the closure of regional banks nationwide. This move clearly communicates the firm stance that we do not want to lose jobs as a result of acquisitions.
The author predicts that in the next three years, and possibly even earlier, ANZ may undergo personnel optimisation (i.e. layoffs). From the perspective of the four major elements of the composition of productive forces, the continuous growth of labor costs and capitalists' returns will undoubtedly pose a certain pressure and erosion to the interests of land capitalists and the profitability of enterprises as a whole.
epilogue
The acquisition of ANZ has received regulatory approval and the acquisition of Suncorp is expected to close by the end of July 2024. However, the next key challenge is how ANZ can use the acquisition to further consolidate its market share and improve margins, which is undoubtedly a big question ahead.
At the moment, the performance of ANZ's share price has not yet shown pessimism about the acquisition.
In addition, the success of ANZ's acquisition is likely to be a catalyst for broader consolidation of regional banks, which in turn will include smaller banks such as Bendigo & Adelaide Bank and Bank of Queensland in potential acquisitions.