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Challenges for Heartland bank down track

The proposed merger between Pyne Gould's Marac, the NZAX-listed Canterbury Building Society and Southern Cross Building Society looks to be a no-brainer decision for their respective investors but there will be further challenges after the merger.

Tuesday, November 23rd 2010, 6:16AM

by Jenny Ruth

Certainly, the independent report by Northington Partners and Cameron Partners says the merits of the merger "appear compelling."

Longer-term, a key issue for the merged group, currently called Building Society Holdings (BSH) and colloquially referred to as the proposed "heartland bank," will be ongoing funding.

All three have traditionally been heavily dependent on retail funding and investor confidence has been severely dented following the collapse of about 50 non bank deposit takers (NBDTs).

Since the three are covered by the extended government guarantee scheme through to December 31, 2011, it isn't an immediate issue.

Depositors of CBS currently reinvest at the rate of 88.7%, Southern Cross' at about 86.8% and Marac's is in the low 70%s.

Marac is currently offering both government guaranteed deposits and non-guaranteed deposits.

Marac chief executive Jeff Greenslade, who will become BSH chief executive, says about 20% of new money coming in is into non-guaranteed deposits. "We're very comfortable with that level," Greenslade says.

Key factors in keeping retail funds flowing in will be obtaining an investment-grade credit rating from Standard & Poor's, followed by gaining a banking licence, which is likely to take at least a year, and therefore past the guarantee's expiry.

Currently, Marac and CBS have "BB+" ratings, one notch down from investment grade, while Southern Cross has a "BB" rating.

Hedged about with a number of provisos, including successful execution of the merger and no new credit concerns emerging, S&P has said BSH "has the potential" to gain a "BBB-" rating and has put Marac on "CreditWatch Positive" as a result.

Crucially, one of those conditions is BSH being "able to retain the support of its depositors, debenture investors and providers of wholesale funding."

Arguably, retaining such support is dependent on the investment grade rating, although BSH has already ticked one of these boxes, having negotiated a $200 million standby facility with BNZ and Westpac, $100 million maturing March 31, 2012 and the other $100 million a year later.

That suggests the banks are expecting an upgraded rating.

Aiding that aim, the merger will increase Marac's size by about a third, putting total assets at about $2.2 billion, and will create a much more diverse group, marrying Marac's strengths in the small-to-medium business finance and motor vehicle finance markets with the building societies' strength in the residential mortgage market. It will also create a much more geographically diverse group, both on the lending and depositor fronts.

"We're taking nothing for granted, but we were encouraged by" the S&P announcement, Greenslade says.

Compare rates for the three organisations here


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