Lukewarm Reception For ANZ-Suncorp Bank Deal

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Following Suncorp Group’s sale of its banking arm to ANZ Bank, brokers weigh the strategic merit for both parties.

-ANZ Bank intends to acquire Suncorp Group’s banking arm
-Some brokers now expect higher multiples for Suncorp post-divestment
-Suncorp management will be able to fully focus on insurance
-Deal synergies for ANZ Bank many years out
-Separately, ANZ Bank reveals improving margins

By Mark Woodruff

ANZ Bank ((ANZ)) has announced an agreement to acquire the banking arm of Suncorp Group ((SUN)) for -$4.9bn, to be partly funded by a $3.5bn equity raise. Management at Suncorp said it will look to return the majority of proceeds to shareholders, largely via a pro-rata capital return.

While several brokers leave forecasts unchanged pending regulatory approval, there are contrasting views on the merit of the transaction for both parties.

Based on listed peer multiples, both Credit Suisse and UBS assess a positive outcome for Suncorp Group shareholders. After reflecting upon higher multiples for Insurance Australia Group ((IAG)), UBS feels valuation multiples for Suncorp should rise if the transaction completes.

Outperform-rated Credit Suisse lifts its 12-month target for Suncorp to $14.09 from $11.78 after allowing for the sale in its forecasts, even after applying a -5% valuation discount for regulatory approval risk.

Jarden (Overweight) raises its target to $13.10 from $12.40 and agrees with UBS on scope for the historical price gap with Insurance Australia Group to narrow. The gap is not expected to fully close, given the latter’s superior personal lines franchise and margins.

Presenting an opposing view, Ord Minnett downgrades its rating for Suncorp to Hold from Buy and lowers its target to $13.25 from $14.00. The sale price is thought to be “not great” and raises questions about the value of the bank should the deal not complete.

Apart from significant transaction costs, Ord Minnett also bemoans the loss of branding synergies between the Bank and Insurance divisions, while raising concerns around a more volatile earnings stream going forward.

Underweight-rated Morgan Stanley agrees on increased earnings volatility and feels Suncorp will now become the most catastrophe-exposed insurer on the ASX, given an earnings skew towards Queensland. Reduced medium-term growth options are also expected for the group, and the broker’s target price remains at $10.25.

Turning to the impact on the acquirer, ANZ Bank, Ord Minnett sees the strategic rationale for the deal and notes a better earnings balance, geographical mix and greater franking capacity. While the Accumulate rating is maintained, the transaction is thought unlikely to help close the present valuation gap with banking peers.

Morgan Stanley estimates the bank is paying a full price and feels the acquisition is neither compelling from a strategic viewpoint nor for its impact upon earnings.

Morgan Stanley also questions the bank's capital management strategy over time, highlighting ANZ Bank completed a $1.5bn buy-back at $27.71 earlier this year and is now raising $3.5bn via a rights issue at $18.90. The broker’s price target falls to $23.10 from $24.30. 

Separately, ANZ Bank issued a third quarter trading update which was generally better than brokers expected. Operational trends exceeded Macquarie’s expectation, underpinned by robust net interest margins (NIM), and UBS suggests there’s room for further NIM upside surprises.

The FNArena database drops back to six broker ratings for ANZ Bank while Macquarie is under research restriction. There are four Buy (or equivalent) ratings and two Hold ratings, while the average target price of $27.18 suggests 25.6% upside to the latest share price.

There are four Buy (or equivalent) ratings for Suncorp Group, along with one Hold and one Underweight rating, while the $13.17 average target suggests 17.5% upside to the prevailing share price.

Delayed synergies for ANZ

Jarden only sees long-dated synergy benefits for ANZ from the transaction, with only limited benefits up until FY27. The broker, not one of the seven updated daily in the FNArena database, downgrades its FY23 EPS forecast by -5%, driven largely by the removal of expected buybacks and a higher share count.

The higher share count results from the fully underwritten 1 for 15 pro rata accelerated renounceable entitlement offer to raise $3.5bn of ordinary equity. The broker cuts its target price to $23.00 from $24.50 and retains its Underweight rating, given the limited medium-term acquisition benefit and continued near-term headwinds.

Goldman Sachs, also not one of the seven, notes the timing of the synergies is longer versus previous transactions, which have tended to come through over a three-year period. This is attributed to system migration and the full integration and consolidation of platforms. The broker lowers its rating to $27.44 from $29.84 target and the Neutral rating is unchanged.

The outlook for Suncorp

With an exit from banking, both Morgans and Citi see an improved Suncorp performance due to a greater management focus on insurance.

While Citi lowers its target price to $13.00 from $13.65 after factoring-in the transaction, the broker still forecasts expanding margins, continues to see reasonable value and retains its Buy rating.

It’s thought the sale is strategically sound and marks the end of a somewhat chequered past for the bank within the group.

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What makes the announced deal a stand-out is that, post-announcement, the consensus price target for both parties has reduced, without every analyst adjusting its modeling given the sale still needs to clear a number of hurdles.

The consensus price target for ANZ Bank has fallen to $27.18 from $27.20 prior to the announcement, and for Suncorp the target has fallen to $13.16 from $13.53.

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