CBS's Inch sees challenges for SBS Bank in taking mutual model nationwide

The creation of a “Heartland Bank” should take a major step forward next month with the three parties involved in the merger talks preparing to sign a merger implementation agreement during August.

Meanwhile Bryan Inch, the CEO of the Canterbury Building Society (CBS), argues the rival national "Community Bank” plans of SBS Bank will face bigger challenges than the proposed Heartland Bank in raising capital and rolling out its community reinvestment model nationwide.

Pyne Gould Corporation (PGC), the Canterbury Building Society (CBS) and the Southern Cross Building Society (SCBS) revealed plans on June 1 to merge PGC’s finance company Marac with the two building societies, enabling them to create greater scale and tap a bigger retail deposit funding base as they seek an investment grade credit rating and bank licence from the Reserve Bank.

Inch told interest.co.nz the three aim to sign an agreement of commitment for merger implementation during August, which would be a more formal and binding deal than the heads of agreement arrangement they are currently working under.

“We are hoping mid-August to get to the next stage which is more of a commitment and then (CBS) obviously has to go through a shareholder vote, which will probably be late September or October,” Inch said ahead of CBS’s annual general meeting at the Ashburton Events Centre this evening.

The merger plans envisage a NZX-listed Heartland Bank headquartered in Christchurch that would aim to double its NZ$2.2 billion asset base within five years through growing family, small business and agricultural lending. The proposal calls for CBS and SCBS to be amalgamated and then acquire Marac. PGC would be the cornerstone shareholder. The group would have 360 staff and 70 customer outlets.

James Mitchell, formerly ASB's chief executive of relationship banking and general manager of BankDirect, was recently appointed Heartland Bank project manager. He reports to project director and PGC managing director Jeff Greenslade. There’s also a provisional project board in place to oversee the merger evaluation process. It includes PGC chairman Bruce Irvine, Greenslade, CBS chairman Gary Leech and SCBS chairman Geoff Ricketts.

Inch said reports from the due diligence process were coming into the CBS board. Nothing had been turned up at this stage to put CBS off.

“We certainly see it as our best opportunity in the market at the moment,” said Inch. “(It’s) full steam ahead.”

Since the Heartland Bank proposal emerged SBS Bank has revealed merger talks with the Hastings Building Society as it moves to create a national Community Bank built around a mutual business model.

Inch acknowledged the Heartland and Community Bank proposals were both based around a community focus and local decision making. However, a fundamental difference was the Heartland Bank desire for a sharemarket listing and the Community Bank’s mutual ownership structure.

“In an expanding, opportunist market, the ability to raise additional capital to take advantage of those opportunities is much stronger in a listed entity market than it is in a mutual member market,” Inch said.

Although a mutual model had its place, the challenge for SBS, which has had a banking licence since 2008, was to see whether it could expand the member owned business model out of Southland.

“Because the member model obviously works where you are reinvesting back into your community. (But) it’s a lot harder to reinvest back into the whole community throughout the country and get that buy in,” said Inch.

“They [SBS] have done it extremely well in Southland and their challenge is to see if they can expand that nationally.”

SBS Bank's CEO Ross Smith recently told interest.co.nz in a Double Shot Interview the plans to create a national Community Bank stem from a view the country needs more New Zealand owned banks and a desire to fill the space that used to be occupied by regional trust banks. Aside from the Hastings Building Society, Smith said other mutually owned building societies such as the Nelson and Wairarapa building socieites and even co-operative PSIS were also potential merger partners.

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