As I’m writing this article, I have one eye on the ANZ share price. I’ve watched it drop more than 3 per cent. What is the trigger?

The Australian Competition Tribunal (ACT) has awarded ANZ a legal victory, and the major bank is now able to make good on its proposed acquisition of Queensland-based bank, Suncorp Bank, which is owned by the Suncorp Group. The latter wants to get out of banking and concentrate on its insurance business.

Clearly, some shareholders think the transaction is not good for their stock investment, probably because often the promised benefits of mergers become illusory as the messy job of integrating banking systems proves more difficult than foreshadowed.

To fund the acquisition, ANZ undertook a capital raising. I personally contributed funds, thinking the merger would probably work out okay.

After having paid in money, however, I had an uncomfortable conversation with a successful Queensland mortgage broker. He convinced me that the acquisition would not be good for ANZ.

His argument was that a proportion of Suncorp’s mortgage book was originated by brokers and, in his view, if ANZ took over, a high proportion would refinance and disappear. Some would do so because they are parochial and want only to bank with a Queensland bank. Speculation, of course, but an interesting perspective.

He posed the question to me: Does ANZ management know what they are buying? Incidentally, Suncorp’s share price is trading 6 per cent higher (at the time of writing).

Putting aside the commercial merits of the deal, the transaction was initially opposed by the ACCC on the grounds that it would be bad for competition. After its final decision was made in August 2023, ANZ and Suncorp appealed to the Competition Tribunal.

There is a lot of concern in Australia about the level of banking competition, and just about everyone (myself included) has horror stories about account mishaps, poor service, and some straight rip-offs, like exorbitant credit card interest rates.

Many of the problems with the banking sector were painstakingly revealed by the Royal Commission into banking and financial services which reported their findings in late 2018.

We can also catch a glimpse of competition problems through indirect metrics, such as the predilection of banks to go all in on trendy social issues, like the Voice to Parliament. Businesses that involve themselves in contentious political issues clearly don’t fear losing customers, a sign they may have market power.

Having said all this, the case against the acquisition appears pretty weak, and it is my view that the ACT was justified in rejecting the ACCC’s position and allowing the transaction to proceed.

Three factors are worth discussing. Firstly, the level of concentration of the banking market and, specifically, the mortgage lending market does not appear to be high.

The ACCC’s merger guidelines identify a statistical tool called the Herfindahl-Hirschman Index (HHI) as a means of assessing market concentration.

The HHI process involves estimating the individual market share of each company in a particular market. Then, you take each number and square it. Finally, you sum all of these squared numbers to come up with a single estimate of concentration.

Possible numbers fall within the range of zero to 10,000, with the higher figure representing a pure single monopoly (i.e. 100 per cent market share, squared, equals 10,000).

The ACCC’s merger guidelines stipulate that any HHI score above 2,000 is cause for competition concerns.

Applying this test to the mortgage market in Australia and using APRA market share statistics as of December last year, the mortgage market scores an HHI of 1,553 – well short of the 2,000 concern threshold.

Then, if you conduct the same analysis with a combined ANZ/Suncorp Bank entity, the HHI comes out at 1,619 – a bit higher, yet still well below 2,000. The difference between the two numbers (65) is called the delta. A delta below 100 is seen as acceptable from a competition perspective.

A second relevant factor is the pervasive involvement of mortgage brokers in driving competition in mortgage lending in Australia. Around 55 per cent of loans are originated through this channel. And there are strong incentives for mortgage brokers to pressure banks to keep rates as low as possible.

Mortgage brokers are businesses that seek and profit from developing long-term relationships with customers. As such, credibility and word-of-mouth are critical to success.

With so much interest rate advertising around, gossip around the backyard barbecue, and competition amongst brokers themselves, it is relatively easy for home borrowers to figure out if they are on a good deal or not.

This puts pressure on brokers to deliver high customer value. If they don’t, they risk the customer refinancing and sending any associated trail commission to someone else. The data shows refinancing levels in Australia are consistent with a competitive market.

Thirdly, in opposing the ANZ/Suncorp acquisition, the ACCC also seemed to underweight the importance of Macquarie Bank as a competitive threat to the major banks.

Over the last two years, bank margins have actually declined. This is astonishing, because in the same timeframe, the RBA has increased the cash rate by more than 4 percentage points. Rising cash rates are typically a margin boon for major banks, but Macquarie has spoiled the party with very competitive deposit and mortgage rates, causing major banks to lose profitability.

All these factors combine to suggest that the ANZ acquisition of Suncorp is probably not going to hurt competition at all.

As for investors like me, I’d have preferred if the ACCC had been successful in stopping the transaction.

That would have prevented my eyes from just observing a 3 per cent decline in the ANZ share price.

---

Nick Hossack is a public policy consultant. He is former policy director at the Australian Bankers’ Association and former adviser to Prime Minister John Howard. He owns ANZ shares.

Get 10 issues for just $10

Subscribe to The Spectator Australia today for the next 10 magazine issues, plus full online access, for just $10.

SUBSCRIBE 10 issues for $10 REGISTER 3 articles a month

Already a subscriber? Log in