Banking Review

Australia’s brave new world of banking

With the bid for BankWest now secured by the Commonwealth Bank, all eyes turn toward Suncorp. While not the heroic finale that Suncorp was aspiring to, being bought by Australia’s largest bank would enable the brand to bunker down and do what it does best – service the Queensland market.

The past few years has seen both BankWest and Suncorp attempt to expand their horizons into markets outside their core strengths. This was the only strategy open to both institutions as they held a market majority in their home states of Western Australia and Queensland.

While Suncorp had ties to NSW with its GIO insurance brand, making inroads into the southern states proved difficult when up against the majors and St George, which held a dominant regional position in that state. Suncorp approached the NSW market with better than average interest offerings for its online deposit accounts to obtain market traction.

However expansion with branches and a standalone deposit product proved difficult. The Suncorp product, while offering great features and winning awards, still required physical signatures. This hindered growth when compared to the success of the ING DIRECT product that negated the need for physical signatures by being a linked to an existing account with another institution. ING DIRECT reaped the rewards of around $18 billion in deposits to the envy of all other banks in the country.

Suncorp had recently announced its ambition to expand into the Western Australian market with plans to open 14 branches in the next two years. This was to follow on from the growth Suncorp had experienced in the establishment of its Property Finance services in WA in the past 8 years.

BankWest also used its online high interest savings account to try to break into the east coast markets. Banking offers targeting small business were also used to entice customers away from the majors and Suncorp in the Queensland market. Some traction was gained, but not enough to make a serious impact on established players in the market.

Now Australia will be left with the four majors, perhaps operating their newly acquired banks as ‘challenger brands’ in the niche markets. CBA has stated that it will operate BankWest as a subsidiary, avoiding an integration nightmare at a time when no bank can afford to take its eye off the ball.

Suncorp is also currently consumed by an integration following the Promina purchase that was completed last year. Anyone who has worked through an integration project, let alone one of this magnitude, understands the complexities of such an undertaking.

Integrations of this scale can have two, opposite impacts on an organisation. Sometimes the organisation becomes vulnerable to take over as it becomes absorbed by internal issues surrounding the integration. Other times the complexities of such projects ensure that companies are left alone to sort it out, with potential suitors wary of taking on a company in a state of change.

Suncorp had appeared to be weathering the market despite its massive integration. Now, with the Suncorp banking business on the market, it looks likely that CBA will make its second purchase and avoid taking on the side of the business working through its integration.

CBA is set to reap the rewards of consolidating its business dominance in the market by taking ownership of two strong regional players for a bargain price. The CEO of CBA, Ralph Norris insists that competition in the Australia market will remain. Norris has also stated that the BankWest strategy to expand into eastern states will not form part of the ongoing plan for the company. How banking competition will really play out in this new landscape remains unknown.

The question remains as to whether Suncorp’s insurance business will survive as a standalone business. Last financial year Suncorp insurance profits before tax fell to $307 million, significantly down on the previous year’s $835 million. The impact of severe weather events in Australia and New Zealand coupled with a changing investment market were the drives of the change in fortune.

IAG (Insurance Australia Group) suffered a similar result posting a $448 million profit before tax compared to $767 million the previous year. However QBE Insurance shone in the harsh climate with 2008 half year results reaching $920 million up 7 per cent compared to $860 million in 2007.

Speculation that QBE will buy Suncorp Insurance has been floating around the market since profits were announced. It is a now a market for cashed-up opportunists. Is QBE one of them?