By Byron Kaye and Sameer Manekar
(Reuters) -Australia and New Zealand Banking Group is buying the banking arm of insurer Suncorp Group for A$4.9 billion ($3.33 billion), as the smallest of Australia's major lenders seeks to revive growth at home after falling behind rivals.
The deal announced on Monday will boost ANZ's retail presence in a fast-growing domestic region and increase its assets in mortgages, the most lucrative business for Australian banks, by nearly a fifth, helping it to overtake National Australia Bank (OTC:NABZY) Ltd for third spot in the business.
ANZ had previously expanded rapidly in Asia, which it has been unwinding over the past few years. It lags Commonwealth Bank of Australia (OTC:CMWAY), Westpac Banking (NYSE:WBK) Corp and NAB by market value and some other metrics.
"It's not offshore, it's not away from their core capabilities, in terms of acquisitions this is not a bad one," said Hugh Dive, chief investment officer at Atlas (NYSE:ATCO) Funds Management, which owns shares of ANZ and Suncorp.
ANZ aims to raise A$3.5 billion by issuing new stock to pay for the deal, in Australia's biggest equity capital raising of this year.
The buyout, which is subject to regulatory approval, will boost ANZ's mortgage book by A$47 billion to A$307 billion. It shows how important mortgages are to Australia's banks even as rising interest rates and cost-of-living pressures throttle house prices, with many economists forecasting a recession within a year.
ANZ missed most benefits of a COVID-19 driven real estate boom that saw home values leap by a quarter in the year to early 2022 due to delays in processing applications, analysts have said.
The lender said separately it had dropped talks to buy accounting software maker MYOB from private equity firm KKR & Co (NYSE:KKR). ANZ had disclosed the talks a week ago.
"(ANZ's) acquisition appetite is troubling, given growing recessionary risks and ANZ's poor operational performance to date," Jefferies analyst Brian Johnson said in a client note.
"The ANZ core franchise is already struggling, and adding more complexity during a period when MQG is driving up deposit costs looks ill-disciplined," he added, referring to mortgage challenger Macquarie Group (OTC:MQBKY) Ltd.
Shares of ANZ were untraded as the bank readies its new stock issue. The new shares were being sold at A$18.90 each, a 12.7% discount to ANZ's closing price of $A21.64 on Friday, according to its filings.
Shares of Suncorp, which has been trying to offload an asset deemed non-core, rose 5.7%, against a broader market gain of 0.6%. The company will return most of the sale proceeds to shareholders.
ANTITRUST REVIEW
The deal would represent a geographic expansion by Melbourne-headquartered ANZ into Queensland state, where Suncorp is based and has most of its business. ANZ sees itself as under-represented in Queensland and would keep the target's headcount and branding in the state for at least a few years, ANZ said.
ANZ would also commit to funding a host of energy and infrastructure projects in Queensland, including some tied to the 2032 Olympic Games in its capital Brisbane.
The deal would create a "simpler, stronger platform for growth" that "does advance our strategic ambitions", ANZ CEO Shayne Elliott said.
The purchase price amounted to 13.8 times past earnings for Suncorp's banking unit, ANZ said, below the price-earnings ratio of Suncorp's overall business but in the range of Australia's major banks.
Suncorp Chairman Christine McLoughlin said the agreed price "fairly values the bank" and reflects the "progress made on delivering our strategic objectives".
The deal presents the biggest task so far for new antitrust regulator Gina Cass-Gottlieb who started as chair of the Australian Competition and Consumer Commission (ACCC) in March. In a statement, the ACCC said its review of the deal would include the role of regional banks and competition with the majors.
"We will consider Suncorp's role as an effective competitor and challenger to the major banks in Queensland and in other states," an ACCC spokesperson said.
ANZ's Elliott said on a call with journalists that the bank hoped its status as the smallest of the major banks would help secure approval. "We look forward to making the case but we'll work through that over the coming months," he said.
($1 = 1.4734 Australian dollars)