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Heartland bank proposal highlights NBDT challenges

The proposed “heartland bank” highlights the challenges the remaining non-bank deposit takers (NBDT) face following the collapse of more than 50 of them since 2006.

Wednesday, November 24th 2010, 9:39PM

by Jenny Ruth

The independent report by Northington Partners and Cameron Partners on the planned merger between the Pyne Gould-owned Marac, the NZAX-listed Canterbury Building Society and the Southern Cross Building Society illustrates what a tiny foothold NBDTs have.

Out of about $497 billion financial system assets as at May this year, registered banks accounted for about $377 billion, or 79%, their report says. NBDTs accounted for about 3.4% with the remaining finance companies accounting for about $9.9 billion (that included the now collapsed South Canterbury Finance and Allied National Finance which had combined assets of $2.3 billion) and building societies and PSIS accounting for about $4 billion.

Of the about 40 survivors, the largest two are the ANZ Bank-owned UDC and PSIS which account for 17% and 12% respectively of the NBDT sector. Marac is third with 11% and, when merged with the two building societies, will become the largest NBDT player with 19% (while the merged entity intends to apply for a banking licence, that is likely to take at least another year).

Which means all the remaining players are positive minnows.

Since the NBDT sector has traditionally relied heavily on retail funding and retail investor confidence has been badly hurt by all the failures, a key issue for the survivors is how to fund themselves in future.

The three merger partners are among the seven still covered by the government guarantee - the others are PGG Wrightson Finance, Fisher & Paykel Finance, Equitable Mortgages and Wairarapa Building Society - through to December 31, 2011.

The report says the challenges for NBDTs "are likely to be heightened" once that guarantee expires and new stringent prudential requirements will also make life difficult.

"We expect there to be further adjustment and consolidation in the NBDT sector through the exit of a number of weaker players," it says.

While the report concludes the proposed merger is in the best interests of all three parties, its comments about the medium-term prospects of the two building societies if the merger fails underline the poor prospects of most of the rest of the NBDT sector.

If the merger fails, for CBS and Southern Cross "other significant initiatives are likely to be required in order for each entity to deliver shareholders commercially reasonable rates of return. We believe such initiatives would be challenging to execute and would not be without material risk."

« Challenges for Heartland bank down trackHeartland bank to be a niche player »

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