Funding and liquidity key issues for Heartland

Funding and liquidity remain key issues for Heartland Building Society and, on the face of it, its maturity profile looks awful with its acquisition of PGG Wrightson Finance only making the picture look even worse.

Wednesday, June 22nd 2011, 7:00AM

by Jenny Ruth

Without Wrightson Finance, Heartland has nearly $350 million of deposits maturing within a month; adding Wrightson Finance increases that to almost $450 million, according to a presentation Heartland filed with NZX last week.

The prospectus dated April 29 relating to the distribution of Pyne Gould Corporation's holding in Heartland to its shareholders shows a shortfall between its available cash and loan maturities well exceeded by its maturing liabilities through to more than 12 months.

For example, on-demand deposits and other borrowings of $214.8 million were nearly twice available cash. Deposits and other borrowings maturing within six months of $884.5 million were $180 million more than cash and loan maturities. Its deposits and other borrowings maturing in between six and 12 months of $591 million are covered by just $320.3 million in maturing loans and other financial assets.

This situation largely reflects Heartland's origins in the merger earlier this year between Marac Finance, CBS Canterbury and Southern Cross Building Society. Traditionally, building societies rely heavily on their short-term deposits.

"While it (the one-month maturities in the presentation) sticks out like the proverbial in terms of its size, they're our stickiest deposits," says group treasurer Craig Stephens.

"Over half our depositors have been with us for five years or more."

Heartland is currently sitting on about $300 million in cash and just over $280 million in committed but undrawn bank facilities which is enough to cover all maturities out to 90 days compared with the 30 days on which banks traditionally operate, Stephens says.

Chief executive Jeff Greenslade says it's a reality of the New Zealand market that all financial services providers borrow short and lend long but says Heartland doesn't lend nearly as long as the banks do because it doesn't provide mortgage finance.

"Most of our lending is short term - plant and equipment, seasonal capital, rural, car loans in the consumer area, working capital for SMEs (small-to-medium enterprises)," Greenslade says.

"All that is less than three years and probably less than two years.

While, like everyone else, we don't run a perfectly matched book, our mis-match is smaller than most," he says.

Nevertheless, "rest assured, it's front-of-mind for us."

Heartland's reinvestment rate is currently running at more than 80% and Wrightson Finance's has averaged 78% since September 2007. Greenslade says if Wrightson's debenture holders vote in favour of Heartland buying it, they will be swapping from a "BB" rated company to an investment grade "BBB-" rated company.

"If they vote in favour, it's by no means a certainty they will be loyal depositors, but it's certainly a favourable sign they're prepared to give us a go," he says.

Stephen says after the votes on the merger which created Heartland, the company saw its reinvestment rate improve.

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