Morningstar believes ANZ's proposed acquisition is a good deal for Suncorp's shareholders but the benefits for ANZ hinge on the bank’s success in delivering cost savings and delivering a competitive product.

The $4.9 billion deal is a 14% premium to Morningstar's $4.3 billion fair value for Suncorp Bank and prices in upside from high rates and cost savings. While Suncorp's (ASX: SUN) mortgage book will support ANZ's (ASX: ANZ) push to reclaim market share in the all-important home loan market, Morningstar banking analyst Nathan Zaia says it is too soon to tell if the deal will juice returns for Australia's second-largest business lender.

“With uncertainty around the cash rate outlook (impacting NIM), bad debts, and wage inflation – locking in the upside today takes away execution and economic risk for Suncorp shareholders,” says Morningstar banking analyst Nathan Zaia.

“[The deal] definitely grows ANZ's market share in the retail space, adding mortgages and customer deposits, but the offering needs to remain competitive, or ANZ could simply see its market share drift lower again” he says.

The deal comes as ANZ’s share of the lucrative mortgage market slips following white-hot competition during the pandemic. Over the past three years, ANZ’s share of home loan lending among the big four has fallen to 13.2% from 15.5%.

ANZ announced the $4.9 billion acquisition on Monday before markets opened. Chief executive officer Shayne Elliott framed the deal as part of the bank’s efforts to streamline and digitally transform. He also said it would balance ANZ’s loan book across different states.

“With much of the work to simplify and strengthen the bank completed, and our digital transformation well-progressed, we are now in a position to invest in and reshape our Australian business. This will result in a stronger more balanced bank for customers and shareholders,” said Elliott in a statement to the ASX.

ANZ plans to run Suncorp as a separate business for at least three years following deal completion. Suncorp Bank chief executive Clive Van Horen will stay on in his current role.
Suncorp shares jumped on the news and closed 6.3% higher in sign investors were positive about the takeover. ANZ shares are on a trading halt and expected to resume on 21 July.

The deal will be funded by a $3.5 billion equity raise and existing capital. The bank will issue 187 million new shares at $18.90 per share, a 12.7% discount to Friday’s close.

Existing shareholders will be offered one new share for every 15 they currently own and have until 15 August to take up the offer. Shareholders can also sell their entitlement.

If successful, the deal will be the biggest banking buy out in over a decade. The Australian Competition & Consumer Commission will need to sign off on the deal and has in the past raised concerns about competition in Australia’s banking sector.

The price tag raises eyebrows among some investors, who are concerned ANZ will struggle to squeeze enough cost savings from the deal to justify the premium.

“We are, from an ANZ perspective, a bit cautious of the actual price they are paying for Suncorp,” says Joseph Koh, a portfolio manager with Schroders’ Australian equity long short fund.

“Even after quite hefty transaction cost bill, Suncorp shareholders will be getting a great deal, that’s why the share price is up 6%. And if that’s the case, its probably not so good a deal for ANZ,” he adds.

ANZ is targeting $260 million in pre-tax cost synergies.

Koh isn’t sure the bank will get what it wants for the $4.9 billion price tag: a more balanced loan book and greater exposure to Queensland and New South Wales.

“[ANZ is] saying they’ve got more exposure to Victoria, and Suncorp will help them get exposure to Queensland and New South Wales. I’m not sure why you have to have a balanced lending book. CBA is skewed to New South Wales and that hasn’t been a bad thing for CBA,” says Koh.

The bank also announced on Monday it had withdrawn from discussions to buy business software company MYOB.