ANZ/Suncorp: mortgage expansion bet comes at market peak  

Last month the Reserve Bank of Australia added to the country’s seasonal chill by raising interest rates by half a percentage point, the most in 22 years. That has not deterred Australia and New Zealand Banking Group from taking over insurer Suncorp’s banking arm. The deal would broaden the Australian lender’s exposure to the region’s rapidly growing mortgage market. Though a lucrative business, the timing of the deal is risky.

The A$4.9bn ($3.3bn) in cash ANZ will pay for the business would value Suncorp’s banking unit at 14 times trailing earnings, in line with industry multiples for the region’s banking peers including Westpac. ANZ will raise funds for the deal by issuing new stock at A$18.90 each, a 13 per cent discount to Friday’s undisturbed closing price.

For Suncorp this move makes sense. It enables the insurer to offload a non-core asset at a reasonable price. The insurer has already reaped profits from a booming local property market and the resulting surge in mortgages. Home values rose by a record 24 per cent last year. Suncorp shares rose 5 per cent on Monday following the announcement. ANZ will add to its home loans business which grew in the half year to March, not including repayments.

But for ANZ, the timing is risky. It is absorbing around A$45bn of mortgages from the takeover just as the RBA begins raising rates. As of June, the bank already held A$280bn of net housing loans. Mortgages made up 38 per cent of the bank’s assets at the half year. Analysts worry that home prices in Australia could fall around a tenth in the rest of this year, followed by another similar drop in 2023.

ANZ cannot afford any bad news in housing markets. Its pre-provision operating profit, return on equity and common equity tier one capital ratio have all fallen in the half year to March. Its share price is down nearly a quarter this year reflecting this weakness and what lies ahead. Suncorp may well emerge the winner from this deal.