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ANZ (ASX:ANZ) share price on watch with Suncorp deal, trading update

The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is on watch after the bank announced its acquisition and gave a trading update.

ANZ acquisition

The big four ASX bank is going to buy the banking division of Suncorp Group Ltd (ASX: SUN) to accelerate the growth of its retail and commercial businesses, while also improving the geographic balance of its lending across Australia.

ANZ is going to buy Suncorp Bank for a purchase price of $4.9 billion. This price equates to around 14x Suncorp Bank’s profit. But it’s 9.3x after including the expected cost synergies of around $260 million (before tax), which is around a third of Suncorp Bank’s FY22 reported cost base.

This is deal expected to add low-single-digits to ANZ’s earnings per share (EPS) when including the synergies and capital raising.

The bank said that this acquisition includes $47 billion home loans with “strong risk profile”, $45 billion of “high-quality” deposits and $11 billion of commercial loans.

Suncorp Bank will continue to be led by CEO Clive van Horen, who will report to the ANZ CEO and join ANZ’s executive committee.

ANZ also disclosed that there would no changes to the total number of Suncorp Bank branches in Queensland for at least three years from completion.

The big four ASX bank will allocate $15 billion of new lending as part of its existing renewable lending commitments to support Queensland renewable projects and green Olympic Games infrastructure as well as $10 billion of new lending for energy projects.

In an attempt to answer any early questions about competition, ANZ said that it’s the smallest of the major banks and that it will be able to compete more effectively in Queensland, offering better outcomes for customers.

Capital raising

ANZ is looking to raise around $3.5 billion in a capital rising. This will be done with a 1 for 15 pro rata accelerated renounceable entitlement offer at a price of $18.90. That’s a 12.7% discount to the last closing ANZ share price.

In other words, shareholders can buy 1 new ANZ share for every 15 they already own. This will be roughly 6.7% of ANZ’s existing shares on issue.

Ending of MYOB interest

ANZ announced that it has withdrawn from discussions with KRR about acquiring KKR.

Trading update

The big four ASX bank also gave investors a trading update.

It said that strong lending and margin momentum was evident across all of its major businesses, with revenue rising 5%. The level of deposits were flat.

ANZ also boasted that adding operational capacity and processing resilience in its Australian home loan division has helped deliver “consistently faster turnaround times across all channels”. It noted it’s now in line with major peers.

Lending volumes grew by $2 billion (or 3% annualised) in its third quarter, with “particularly strong growth” in June. It’s delivering growth, while also trying to maintain margin performance and credit quality.

The group net interest margin (NIM) rose by 3 basis points (0.03%) in the quarter, while the ‘underlying’ NIM went up 6 basis points (0.06%). This was largely driven by rising interest rates, partly offset by “intense price competition”.

Margins are expected to rise further in the fourth quarter with further interest rate rises.

Costs are being tightly managed, with ‘run the bank’ costs expected to be broadly flat in the second half despite inflation pressures.

Summary thoughts

I think the trading update by ANZ was pretty positive. Rising revenue, higher profitability and quicker loan processing times are good news for the longer-term.

The acquisition is interesting. I think it’s a bit strange for the bank to do share buy-backs at a much higher ANZ share price, and then do a capital raising at a much lower price (and at a sizeable discount to the current price). Scale could help ANZ, but it won’t seemingly add much to profit. I think today’s announcements make ANZ a bit more appealing, but I’m not looking to add it into my own portfolio.

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