General thoughts

We are very pleased with a tie up between the two.

As we’ve said in previous notes (including our interview in the AFR on the topic) banking is a scale game. SUN simply lacks the scale to achieve the required efficiencies in loan underwriting, and after years of a 2% ceiling on market share, in a highly competitive industry, have accepted that capital is better allocated (in this case unlocked) elsewhere, areas in which they have a meaningful competitive advantage.

For ANZ, much the same logic applies. ANZ is dwarfed by CBA, and, whilst they are paying a premium to NTA, are still buying additional banking exposure after a material de-rate in bank stock prices. In other words, they are paying less relative to a counterfactual where asset prices remained elevated.

Said thrice; better to make an offer after the entire equity market, and banking stocks in particular, have drawn down by 20%, than to do it prior.

ANZ trading update

A pleasing update, given our expectation that higher interest rates would lead to higher net interest margins. Bank “rates beta” might not be as high as it once was, and is likely in general inferior to that of the insurance sector, but it is nonetheless meaningful as the back book (partially) reprices.

With the RBA set to continue hiking, in the near term, there should be plenty of NIM support, without the rising bad and doubtful debt charges.

We highlight “in the near term” because over the longer run, we are quite convinced housing and household leverage is Australia’s Achilles heel.

The regulator

Attention will turn to the regulator. In an industry where competition has seen NIMs decline, loans expand & valuations collapse is not one in which a transaction of this size imperils anything.

So, in our view, it would be difficult for the regulator to prove a substantive lessening. Not impossible, obviously, but difficult.

It would however, if rejected, leave a weird dynamic in which a company can be potentially stuck with an ROE < WACC outcome in perpetuity, unable to actually exit the industry, which would be the opposite of efficient.

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