Both Suncorp and ANZ declined to provide their submissions to The Australian Financial Review. However, they will be published by the ACCC as soon as this week. The documents were due last Friday but the ACCC granted a few extra days’ extension.
Suncorp will also focus on the public benefits enabled by selling its bank to ANZ, including being able to dedicate its full focus and investment to addressing the complex challenges of climate change and insurance affordability as a pure play insurance company, according to sources.
One of the key takeaways from the bank earnings season was competition for deposits and mortgages pressuring net interest margins, an issue Suncorp and ANZ will again emphasise, and which has escalated since their earlier submissions were filed late last year.
Ratings debate
As Suncorp has previously explained to the commission, Suncorp Bank today commands an A+ rating from Standard & Poor’s because it benefits from being part of the Suncorp Group, which includes the insurer. If it were a standalone bank, Suncorp would be rated an inferior BBB+.
Bendigo and Adelaide Bank also has a BBB+ rating. The higher a credit rating, the easier it is for a bank to attract wholesale investors at a lower cost of funding.
Bendigo, which might be keen to merge with Suncorp if the ANZ deal is blocked, told the ACCC in its submission in March that combining two BBB+ banks could provide a lift to the credit rating, reducing funding costs.
“Bendigo considers it likely that a merger with Suncorp Bank would likely result in a credit rating uplift through the increased scale and revenue base it would gain through acquiring Suncorp Bank,” it said on March 3.
But Suncorp wants the ACCC to consider the possibility there is no such rating upgrade, and that putting together two BBB+ banks will simply result in the same credit rating for a balance sheet twice the size: about $120 billion. This could put pressure on fundraising programs given the market’s limited capacity for non-A rated institutions.
Hit to competitiveness
As Suncorp CEO Steven Johnston explained in his witness statement of November 25, both Bendigo and Bank of Queensland have BBB+ ratings with S&P.
“Both these companies rely more heavily on funding from customer deposits. At a BBB+ credit rating, I believe Suncorp Bank’s access to wholesale deposits and ability to source funding from global markets would be significantly diminished and would negatively impact Suncorp Bank’s competitiveness,” Mr Johnston said.
The latest series of bond deals shows the funding cost disadvantage for regional banks, compared to the majors.
National Australia Bank (rated AA- by S&P) raised $2.35 billion on May 4, priced at a 78 basis points spread over the bank bill swap rate for three years; $2.85 billion was priced at 100 basis points over BBSW for five years.
Funding is more expensive for Suncorp, which has also raised wholesale debt this month. Suncorp (rated A-) raised $1 billion on May 10 priced at 105 basis points over BBSW for three years. It was even more for Bendigo, rated BBB+ by S&P. It raised $750 million on May 8, priced at 125 basis points over BBSW for three years.
We are very firmly of the view that a lot of submissions were based on material that was very dated.
— Shayne Elliott, ANZ CEO
Suncorp’s final submission may also reiterate that regional banks earn a lower return on equity for the same to low-risk mortgage customers than major banks, due to the higher risk weightings applied under APRA capital rules.
ANZ is preparing to argue that banking is intensely competitive, shown by net interest margins contracting over many years.
ANZ CEO Shayne Elliott told the Financial Review after delivering interim results earlier this month, where he talked down profit and talked up competition intensity, that the bank remained confident it could convince the regulator the merger was in the interests of Suncorp customers and Queensland (which still needs to change legislation to allow the deal).
“I would expect that ACCC, if a big bank wants to buy a small bank, there would obviously be a whole range of things they should be concerned about,” Mr Elliott said. “We are very firmly of the view that a lot of submissions were based on material that was very dated. We are confident we will be a more effective competitor.”
APRA and Treasurer Jim Chalmers also have to approve the deal. If the ACCC knocks it back in July, the parties are likely to appeal to the Australian Competition Tribunal.