Heartland Bank's proposed corporate restructure, announced on Wednesday, is primarily about allowing its Australian reverse mortgage business to continue growing with the help of secured funding.
Heartland Chief Financial Officer David Mackrell told interest.co.nz the primary reason for the restructure is to remove growth constraints resulting from Reserve Bank regulations.
And that will provide us greater flexibility to grow both our business in Australia, and potentially opportunities in New Zealand," Mackrell says.
"One of the key aspects is our business in Australia, primarily our reverse mortgage business, is a business that's growing very strongly. It's a business that we fund through a secured facility in Australia. As it grows that securitisation level overall starts to get to a level which we can see in the medium [term] future, will start to come up against the constraints that the Reserve Bank places on us in terms of secured funding," says Mackrell.
"The other piece to it is to open up the potential for an ASX listing. One of the things that constrains us from that at the moment is that our holding company is the bank and has the word 'bank' in it which is appropriate. But if we tried to have an exempt listing in Australia, a dual listing on the ASX, that is problematic because that would require the Australian Prudential Regulation Authority's [APRA's] approval. And as we're not a bank in Australia, that would be a problem."
"So it [the restructure] opens up that opportunity as well," Mackrell says.
The restructure proposes Heartland Bank Ltd becoming a wholly owned subsidiary of a new NZX listed parent company, called Heartland Group Holdings Ltd, which will seek a foreign exempt listing on the ASX.
Heartland has been experiencing strong growth in the reverse mortgage market. It entered the reverse mortgage market on both sides of the Tasman in 2014 after buying Sentinel in New Zealand and the Australian Seniors Finance business for NZ$87 million from the Quadrant Private Equity controlled Seniors Money International. Heartland had more than NZ$1 billion worth of reverse mortgages, with $430 million in NZ and $598 million in Australia, as of December 31.
Heartland Seniors Finance accounted for 69.9% of total Australian reverse mortgage market growth in the 12 months to December 31, growing its market share to 17.7% at December 31 from 14.1% a year earlier. As reported by interest.co.nz earlier this year, Heartland is the biggest originator of new reverse mortgages in Australia where it operates free of APRA oversight. Heartland Seniors Finance is a finance company that's licensed by the Australian Securities and Investments Commission (ASIC).
Heartland has an Australian bank facility provided by ASB's parent Commonwealth Bank of Australia (CBA). According to Heartland's interim report, as of December 31 last year, A$495 million of the A$600 million facility was drawn. The CBA bank facility is secured over the shares in Australian Seniors Finance Pty Limited and the assets of the Australian Seniors Finance group. The CBA loan facility matures on September 30, 2019.
Asked whether Heartland was looking to renew the CBA facility beyond 2019, Mackrell says the bank plans for these events and makes sure it's "ahead of the game in that regard."
Mackrell says the Reserve Bank imposed limit on secured funding isn't public information and has "some commercial sensitivity." However, it's likely to be disclosed within the information issued to shareholders prior to September's annual meeting, where they'll vote on the restructuring proposal. Mackrell says Heartland currently has about 18% of its funding from secured funding.
As of December 31, Heartland had $4.3 billion of total assets and $124.236 million of securitised finance receivables. It had $115.059 million of securitised borrowings. The bank had $3.63 billion worth of borrowings of which $2.7 billion were deposits.
Separately Mackrell says Heartland also has constraints around how much business it can have outside New Zealand, which is allowed to be one-third of the bank's business. Whilst Heartland's still "miles away" from that being a constraint, Mackrell says the rule might one day be problematic.
After the restructure Heartland will remain a New Zealand registered bank, with the key regulator of its Australian reverse mortgage business remaining ASIC.
Mackrell says there are no tax benefits for Heartland in the restructure. The restructure would give greater flexibility for future growth opportunities, especially in Australia, potentially through the likes of unsecured personal loans via peer-to-peer lender Harmoney which operates in Australia, and lending to small and medium sized businesses.
"This [restructure] should be seen as a positive," Mackrell says. "We see opportunities to grow and what we're doing is restructuring ourselves to ensure that we are able to have the flexibility to take advantage of those, and to access - if required - a deeper capital market in Australia."
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