What does the ANZ-Suncorp agreement say about banking competition in Australia?

When ANZ Bank chief executive Shayne Elliott floated the prospect of buying Suncorp bank with its board of directors, it didn’t take long to sell off the benefits of the deal.

When he announced this week’s $4.9 billion bid, Australia’s biggest banking deal in more than a decade, Elliott said there was an initial view from the board that the deal would align with the bank’s strategy.

“Nobody sitting around the board table at ANZ, or quite frankly very many places in the country, is saying that this doesn’t make sense to ANZ,” Elliott said. “That makes sense. We’ve always said that we want to strengthen our retail and commercial banks.”

Likewise, most analysts and investors this week gave the thumbs up for its ambitious expansion. If successful, ANZ will jump to third place in the competitive home loan market and develop into a fast-growing country.

But the proposed deal offended others. It was met with fierce opposition from a number of regional banks and smaller players, who asked what competition meant in Australia’s banking sector and what benefits it would bring to consumers.

A few years after a wave of fintech companies promised to shake things up and increase competition, retail “neobanks” have either left the market or been swallowed up by established players.

The latest digital bank victim, Volt, recently announced it would move hundreds of unclaimed accounts to four major lenders National Australia Bank, weeks after it closed due to difficulties raising capital.

And while some argue that the ANZ deal won’t have a major impact on competition, others are concerned about the signal it sends at a time when the big four banks control 75 percent of the home loan market.

‘It reduces competition’

When ANZ announced the proposed deal on Monday, it didn’t escape the broader market that buying bank Suncorp would cause major lenders to claw back at losing ground.

ANZ’s share in the home loan market has been slipping, and the partnership with Suncorp is an opportunity to recoup years of losses.

ANZ chief executive Shayne Elliott said the tie-up would make major lenders more competitive. Credit:Peter Wallis

The deal comes as the sector competes fiercely for market share in mortgage lending, racing to build and acquire the technology it needs to make a profit.

This week, as he defended the deal, ANZ chairman Paul O’Sullivan said technological change created new rivals, and banks needed scale to compete.

“As anyone will realize, financial services are undergoing a revolution and major change,” he said.

“We’re seeing the disruption of a lot of non-traditional players… It’s becoming an increasingly technological arms race, and it’s important to have the ability and desire to invest heavily in new technology. And that’s why this deal is working so well on so many fronts.”

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The proposed purchase is the bank’s biggest deal since the global financial crisis, when two major bank takeovers were given the green light in Australia: the purchase of St George Bank by Westpac, and the acquisition of BankWest by CBA. ANZ was also in talks with Suncorp’s board to buy its bank, but the deal fell through when the Rudd government introduced a deposit guarantee scheme.

Now, with a very different set of economic conditions, some are asking what the ANZ-Suncorp deal means for competition in an already concentrated banking sector.

Warren Hogan, chief economist at ANZ from 2005 and 2016, who is now an economic adviser to Judo Bank and managing director at EQ Economics, believes that the ANZ-Suncorp deal will only give more market share to the big banks.

“It reduces competition,” he said.

“There is no national financial imperative for this merger to occur, as we saw during the GFC.”

While new players have been entering the banking industry since 2018, after regulations were relaxed to pave the way for greater competition, high capital requirements have prompted neobanks to join larger players or exit the industry altogether.

Xinja exited the industry in late 2020 and became the first Australian bank to return all customer deposits. In early 2021, the 86400 was purchased by National Australia Bank, and last month digital bank Volt announced it would close and refund customers after failing to raise the capital needed to continue growing.

Around 400 former Volt customers will soon move their money into NAB’s transaction accounts free of charge, as neobank is working with regulators to restore its licenses.

There is still a long way to go in Australia when it comes to disruption from fintech, says Hogan, but that doesn’t mean it’s not a threat to banking oligopolies.

“The new competitive environment for banking, both at home and abroad, driven by technology, shifts in consumer behavior, and the attitude of regulators and the government towards banking competition policy, still has a long way to go,” he said.

“We have had some problems in the Australian market in recent years. But this is just the beginning of how technology is reshaping the financial services landscape. And that’s why it’s so important that the government, I think, does this right.”

Others this week opposing the deal include regional banks Bendigo and Adelaide Bank and Queensland-based Heritage Bank, the Financial Services Union and the Financial Brokers Association, all of whom said competition would be reduced by the acquisition.

Key measure: Small banks face pressure to consolidate

The deal comes at a time when some bankers argue there is pressure for industry consolidation among smaller lenders (the Four Pillars policy prevents mergers between the big four).

Bank of Queensland last year took over ME Bank, previously owned by the industry super fund, and there has been a series of mergers between customer-owned banks.

The former chief executive of Bendigo and Adelaide Bank, Mike Hirst, said the combination of tighter regulations and changing customer expectations had made it more important for banks to scale.

That’s because getting bigger allows banks to spread costs to meet new regulations or improve technology, for example, to more customers.

“Scale is important to be able to cope with the amount of regulation and speed of change,” Hirst said.

There has long been talk of a so-called “fifth pillar” emerging in banking that could gain this scale and compete more fiercely with the top four.

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Some are now concerned that ANZ’s planned purchase eliminates such a possibility.

It also emerged this week that the most obvious regional candidate to join Suncorp – Bendigo – had made an offer to Suncorp about a tie-up. But sources say Suncorp is not involved with Bendigo, favoring ANZ, which can offer a cash offer.

While Hirst did not directly express a view on whether ANZ’s purchase of Suncorp should get the go-ahead, he said regulators should think about whether this deal removes the opportunity to create a fifth competitor that is bigger than the top four.

“A deal like this only amplifies the existing disadvantage that small banks have because they can’t get bigger quickly,” Hirst said.

There is also an argument that the economic environment Australia is currently facing will favor the big four powers, due to their access to cheaper funding than its rivals.

While all margin banks should benefit from rising interest rates, Morningstar analyst Nathan Zaia said large banks have the added advantage of having large pools of low-cost savings and transaction accounts, while they can also take advantage of the wholesale market more cheaply.

“If smaller banks face more pressure on their fees than larger banks, then it will be more difficult for them to discount to win shares. So I think some of the competition from those smaller banks will probably be reduced,” said Zaia.

‘I don’t think it will change the competitive landscape’

The competition issue is set to be thoroughly researched by the Australian Competition and Consumer Commission (ACCC), led by competition attorney Gina Cass-Gottlieb, who started work this year.

Former competition czar Allan Fels, chairman of the ACCC from 1995 and 2003, said this week that it was not an easy decision for the new chairman, and the result could give the public an oversimplified view that he is pro or anti-bank.

Elliott, in a briefing earlier on Monday, was confident because he assured investors they would get a “fair hearing” from watchdogs, and that ANZ could make a strong case to convince the ACCC that the deal would benefit consumers. Others also believe the case is there to solve it.

“I don’t think it will change the competitive landscape,” said Jason Beddow, managing director of Argo Investments, which invests in four major banks. “I don’t think it changes materially, especially in the next few years.”

“Suncorp is a modest bank, it’s pretty hard to say from an anti-competitive perspective that will reduce competition… I can’t see the ACCC stopping it.”

Beddow said the top four have been successful and made good returns on lending to homebuyers, and after several “misdirections” in wealth and insurance, are now returning to mortgages as their core business.

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“I think it’s getting more competitive, because they’re all coming out of other jurisdictions, they’re mostly domestic banks now. From wealth, from insurance, they are really fighting for the core business which is mortgages.”

Dr Shumi Akhtar, a professor of finance at the University of Sydney Business School, said although competition in the banking industry in Australia was not as active as compared to the international landscape, a merger, if successful, could give ANZ a technological edge.

“The fact that the Australian banking industry is more of a bimodal distribution (large and small and not much in the middle), this kind of takeover activity will sometimes help to reorganize the banking sector and inject healthy competition with efficient use of resources,” he said.

Regardless of where the ACCC addresses the issue, the deal will take more than a year to complete, the parties said this week. In addition to a check mark from regulators, it will require approval from Federal Treasurer Jim Chalmers, and an amendment to Queensland law.

“Ultimately this will last for 18 months,” notes Beddow. “Eighteen months seems a very long time.”

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