Should owners of CBA shares be worried about ANZ’s mega deal?

A middle-aged woman sits in contemplation over a tablet device considering information about ASX shares and deep in thought.

A middle-aged woman sits in contemplation over a tablet device considering information about ASX shares and deep in thought.

Owners of Commonwealth Bank of Australia (ASX: CBA) shares may want to consider how the banking landscape may be affected by Australia and New Zealand Banking Group Ltd (ASX: ANZ)’s plan to buy the banking division of Suncorp Group Ltd (ASX: SUN).

For readers that didn’t see it, ANZ is proposing to pay $4.9 billion for Suncorp’s banking operations so that it can become larger and gain more exposure to the Queensland economy.

It’s raised some questions about what this may mean for competition in the banking sector. But ANZ  thinks the deal could strengthen competition because it will be better placed to challenge other large players more effectively. So is this bad news for CBA shares?

What ANZ said

The ANZ CEO Shayne Elliot said with the announcement:

We know there will rightly be questions from government and regulators about the competition aspects of this transaction. As the smallest of the major banks, we believe a stronger ANZ will be able to compete more effectively in Queensland offering better outcomes for customers.

The Australian Financial Review reported that Elliot said:

This is a big step forward, but I don’t think moving from 13% to 15% market share somehow gives us some dominant position or some pricing power that we didn’t have before.

It’s a modest uplift, and we get to be a better competitor, with the really big players in the market who are people like CBA. Just as Suncorp probably feels dwarfed by ANZ, we feel dwarfed by CBA.

Despite the huge addition of $47 billion of home loans and $11 billion of commercial loans, it would still leave ANZ as the fourth largest business lender. However, it would rise above NAB to become the third largest bank in terms of mortgages and retail deposits. Yet it will still be comfortably below CBA’s share of the market.

ANZ is particularly attracted to the customers that will be coming with the deal.

Competition can hurt margins

Prior to the Reserve Bank of Australia (RBA) increasing interest rates, CBA was warning that price competition was hurting its net interest income.

For example, in the FY22 third quarter update, net interest income was 2% lower due to a lower net interest margin (NIM). It was influenced by “home loan margin compression from higher swap rates, portfolio mix effects and price competition.”

Other banks have also been complaining of the effects of competition on their margins.

The RBA’s rate hikes are expected to help bank profit margins. CBA has been passing on the full rate rises to borrowers, so competition doesn’t seem to have been much of a factor there.

Where is the CBA share price headed next?

Brokers are mixed on what could happen for CBA.

UBS is ‘neutral’ on the biggest bank, with a price target of $105. That implies a possible rise of around 10% over the next year.

But Morgan Stanley has an ‘underweight’ rating on the bank, which is much like a ‘sell’. The price target is $79, implying a drop of around 16%. It’s concerned about the bank’s higher bad debts.

The post Should owners of CBA shares be worried about ANZ’s mega deal? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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