Faruqui: value in Suncorp acquisition

These benefits are typical of precedent in-market bank mergers and largely relate to consolidation of systems and operations. Beyond cost benefits, we also see potential capital benefits from transitioning Suncorp Bank to advanced internal ratings-based treatment.

In terms of timing on these benefits, given our intention is to run Suncorp Bank as a largely standalone ADI within the ANZ Group to capitalise on its recent strong operational performance, we expect to largely realise this second category of benefits four to six years post completion.

To deliver these benefits, we expect one-off integration costs of around $A680 million pre-tax with most of this to be incurred over a five-year period.

We believe this cost estimate to be appropriately conservative given some support functions may be able to be delivered through leveraging ANZ’s existing support functions and infrastructure and therefore integration costs may be lower than anticipated.

Funding the acquisition

We announced a $A3.5 billion capital raising to fund the acquisition with the balance of the purchase price funded from ANZ’s existing capital.

Our pro-forma 30 June 2022 Level 1 Common Equity Tier 1 (CET1) ratio, when adjusted for both the announced capital raising and the acquisition of Suncorp Bank, increases by 28 basis points while Level 2 reduces by 34 basis points. After accounting for both the capital raising and acquisition, our June 2022 pro-forma capital position remains above the Australian Prudential Regulatory Authority’s (APRA) unquestionably strong benchmark at 10.7 per cent at both Level 1 and Level 2. This is also net of the recent first half dividend payment as is usual for the third quarter, with this having reduced CET1 ratios by around 40 basis points at Level 2.

Finally, it is worth noting ANZ is not required to hold capital against Suncorp Bank until completion which we expect will occur in the second half of 2023, demonstrating our commitment to the transaction.

A pleasing quarter

We have completed a pleasing third quarter where all our businesses performed well. Revenue was up 5 per cent compared with the average of the first and second quarters; and up 6 per cent on a constant currency basis. We saw strong volume and margin momentum across all our major businesses.

As noted in our first-half results, we have added operational capacity and processing resilience in our Australian home loan business. This helped drive a $A2 billion increase in lending volumes in the third quarter and pleasingly we saw a particularly strong June.

From the beginning of April this year, we separated out our Commercial business to a standalone division. This division is already benefiting from an increased focus with lending up 3 per cent in the quarter (11 per cent on an annualised basis).

In New Zealand, we delivered disciplined growth across our core products. The Institutional business maintained its focus on delivering sustainable, high quality and well diversified customer lending growth. Markets revenue was up 7 per cent this quarter at $A435 million however we note that conditions remain volatile and challenging.

As mentioned, margins improved across all our businesses this quarter, contributing to a 3 basis point increase in our total group margin. Underlying margins increased 6 basis points to 164 basis points, largely driven by the impact of rising rates which were partly offset by intense price competition in both Australia and New Zealand home lending portfolios. With interest rates projected to increase further in coming months, this is expected to be supportive for margins in the fourth quarter.

Costs across the group remain tightly managed with ‘run-the-bank’ costs expected to be broadly flat for the second half despite inflationary pressures. We continue to invest in the business at record levels with investment expense expected to be slightly higher in the second half as we finalise our compliance with BS11 in New Zealand.

In regard to provisioning, the continued low level of individual provisions led to a $A14 million credit provision charge for the third quarter while the collective provision (CP) balance was flat (before foreign exchange impacts). Portfolio credit quality improvements in the CP balance were offset by a modest increase in overlays to accommodate the uncertain economic outlook.

We are conscious of risks to the domestic and global economic outlook from factors such as higher inflation and interest rates over the quarter and in line with that have maintained a CP balance at 30 June 2022 of $A3.78 billion, some $A403 million higher than pre-COVID levels at 30 September 2019.

On capital, the group’s Level 2 CET1 ratio of 11.1 per cent includes the impact of the interim dividend this quarter as well as broad-based lending growth across the portfolio and the impact of interest rate risk in the banking book risk weighted assets (IRRBB RWA). Much of IRRBB RWA does, all else being equal, unwind over time.

Farhan Faruqui is Chief Financial Officer at ANZ