Implications of ACCC rejection of ANZ Suncorp merger authorisation

The Australian Competition and Consumer Commission (ACCC) has refused to authorise the proposed acquisition of Suncorp Bank by ANZ Banking Group Limited (ANZ).

ANZ is one of Australia's "Big Four" major banks, while Suncorp Bank is part of the Suncorp Group (which is a listed provider of insurance products in Australia and New Zealand). Both parties offer retail and business banking products and services in Australia including home loans, deposit products (including transaction accounts and savings accounts), business banking, agribusiness products, commercial credit cards, and risk management products.

The ACCC was not satisfied that the acquisition would not have the effect or likely effect of substantially lessening competition, nor that the acquisition would be likely to result in a net public benefit. The ACCC may authorise a merger if either of these tests are satisfied.

The ACCC has published a summary of its reasons for determination, pending the resolution of confidentiality claims over the full reasons.

ANZ has already confirmed that it will seek to appeal the decision to the Australian Competition Tribunal.

Background to the merger: Australia's retail banking sector

According to the ACCC's summary reasons, the retail banking sector in Australia is highly concentrated, with the Big Four institutions holding over 70% of banking system assets. The ACCC has previously expressed concerns, about competition in the banking sector. These include the ACCC's 2017-18 Residential Mortgage Products Price Inquiry, where the ACCC found "a lack of vigorous price competition between… the big four banks in particular", as well as the Productivity Commission's Australian Financial System Inquiry in 2018, which concluded that "the larger financial institutions, particularly but not only in banking, have the ability to exercise market power over their competitors and consumers".

In the ANZ/Suncorp matter, the ACCC concluded that there are high barriers to entry and expansion of sufficient scale to competitively constrain the incumbents, "particularly the major banks". It observed that:

"The concentrated nature of the banking industry, with the major banks maintaining significant market shares and high profits over a considerable time, has largely remained unchallenged by new entrants and smaller players. In competitive markets, the credible threat of entry and/or expansion plays an important role in constraining the price, adding a discipline to improve services and influencing investment decisions of incumbents. In the Australian banking sector, few challengers have entered, grown sustainably, and competed effectively."

The proposed acquisition

ANZ submitted to the ACCC that the rationale for the acquisition included that it would provide immediate growth to ANZ, increasing ANZ’s presence in Australian retail and commercial banking by adding scale and geographic diversity, particularly in Queensland. That increase in scale was said to enable ANZ to "more efficiently make investments into digital capabilities and navigate ongoing regulatory change".

The ACCC assessed the effects of the acquisition in the context of separate markets for home loans, retail deposits (including transactions accounts, savings accounts and term deposits), small to medium (SME) banking, and agribusiness banking products.

Interestingly, the summary reasons note that the ACCC's assessment would remain unchanged even if the competition analysis was undertaken in segments of broader product or geographic markets".

The ACCC was not persuaded by the parties' submission that competition would not be substantially impacted in the home loans, SME and agribusiness markets. It also dismissed the parties' contention that the merger would not result in a net public detriment, thereby denying authorisation on both the competition and net public benefit tests for authorisation.

In relation to retail deposits, the ACCC found that although there was likely to be "some reduction" in competition, it did not rise to the level of a "substantial" lessening of competition (as required by the competition test for authorisation).

The counterfactual: An alternative suitor?

The merger authorisation test requires a counterfactual comparison of the future state of competition, and the net public benefits, with the merger and without it (the counterfactual).

The ACCC's inquiry focussed on two counterfactual scenarios for Suncorp Bank: a continuation of the status quo, or an alternative merger between Suncorp Bank and another mid-tier banking institution –namely, Bendigo and Adelaide Bank (Bendigo Bank).

Despite the merger parties' contention that a hypothetical merger of Suncorp and Bendigo Bank should be discounted as unviable based on integration and technology challenges, low synergies, and issues with credit ratings and funding, the ACCC accepted Bendigo Bank's evidence as to such a merger being a "realistic counterfactual".

It found that a counterfactual merger between Suncorp and Bendigo Bank would likely create a larger second-tier bank that would be "better placed to grow its market share through increased competition and trigger a stronger competitive response from the major banks".

Theories of harm

The ACCC considered two main theories of harm in its assessment of the proposed merger:

• Coordinated effects in the national market for home loans, compared to a counterfactual alternative Suncorp/Bendigo merger. The ACCC considered that the acquisition would prevent the creation of a "significant competitor" in the form of a merged Suncorp/Bendigo which would "likely pose a stronger competitive constraint on the major banks" and help to limit coordination in the market.
  
  The ACCC concluded that the merger would "close the gap" in the market share for home loans between ANZ and the other Big Four banks, because the merger would result in ANZ becoming the third-largest bank in Australia by acquiring an additional 1.2 million customers. As to the counterfactual, the ACCC considered that a combined Suncorp/Bendigo would strengthen and diversify the "competitive fringe of challenger banks", such that it would reduce the ability and incentive of the Big Four banks to coordinate their conduct.

• Horizontal unilateral effects in the local/regional markets for agribusiness banking and SME banking, compared to both the status quo and counterfactual merger scenario. The ACCC accepted that the removal of Suncorp as a competitor to ANZ would have a real chance of resulting in a substantial lessening of competition.
  
  Insofar as the home loan and retail deposit markets are concerned, although barriers to entry and expansion were found by the ACCC to be high, the ACCC ultimately accepted that constraint from the other Big Four banks, as well as Macquarie Bank, would continue to constrain a merged ANZ/Suncorp such that any lessening of competition was unlikely to be "substantial".

In relation to public benefits, the ACCC agreed with the parties' contention that the merger would likely result in a number of benefits, including the ability for Suncorp Group to more efficiently focus on its standalone insurance operations; the benefits of a stronger ANZ (including synergies and cost savings, and prudential benefits); and increased contributions to the Commonwealth and Queensland Governments via the Major Bank Levy and other economic value.

However, the ACCC pointed to the likely competitive detriments of the merger, as well as more general harms to the Australian retail banking industry by removing "the best and most meaningful opportunity for another second-tier bank [ie. Bendigo Bank] to bolster its ability to effectively challenge the major banks". Weighing the public benefits and detriments, the ACCC was not satisfied in all the circumstances that the transaction would not likely result in a net public benefit.

Where to from here?

ANZ has confirmed that it will apply to the Australian Competition Tribunal for a review of the ACCC determination. However, that review would be a limited merits review, applying the same statutory test, based only on the material before the ACCC, other than "new information, documents or evidence…not in existence at the time the ACCC made the determination". As the recent review by the Tribunal of the proposed Telstra/TPG spectrum arrangements illustrates, parties seeking review of a merger authorisation now face a high bar to introduce further material on review beyond that which was before the ACCC.