Building society Heartland New Zealand, which expects to hear from the Reserve Bank next month on whether it can call itself a bank, has had its Standard & Poor's (S&P) investment grade credit rating with a stable outlook affirmed.
The sharemarket listed Heartland announced in August that its formal bank application process with the Reserve Bank was underway and said it expected a decision sometime in November this year. This follows Heartland NZ CEO Jeff Greenslade telling interest.co.nz in a Double Shot interview in late 2010 that Heartland would only formally apply for bank registration when it was confident its application would succeed.
S&P has Heartland at BBB-, its lowest investment grade rating. An investment grade credit rating is seen as a key prerequisite for gaining bank registration. See S&P's full note on Heartland here.
The credit rating agency has assessed Heartland's capital and earnings as "very strong." From a regulatory capital perspective, S&P says Heartland maintains capital ratios well in excess of the regulatory minimums, with a non-bank deposit taker institution ratio of 10.4% and a Basel II Tier 1 ratio of 14.5%, respectively.
"This should also position Heartland well for Basel III capital requirements should Heartland become a bank," says S&P.
It does, however, assess Heartland's funding position as "below average" and its liquidity position as "adequate."
"In our assessment of 'below average' for funding, we recognise the vulnerability of Heartland's retail funding base (which accounts for about 80% of its funding) to competitive pressures from major banks (who are reliant on offshore wholesale funding) should they compete more aggressively for domestic retail deposits. In addition, our funding assessment also recognises that Heartland will not have access to central bank funding unless it is granted a banking license," says S&P.
"Post the expiry of the Crown Guarantee in December 2011, reinvestment rates have also continued to be in the 80% range. Heartland's loan-to-deposit ratio is 128%, which is higher than the weighted average for other locally owned New Zealand banks but lower than the subsidiaries of the Australian major banks. Heartland's reliance on short-term wholesale funding is only 13% of the funding base, and we are of the opinion that this is not out of kilter with that of the peer group."
Heartland was created through the merger of Marac Finance - which was spun out of Pyne Gould Corporation - the Southern Cross Building Society and CBS Canterbury in January 2011.