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SBS retail deposits, profits fall ahead of HBS takeover vote

SBS retail deposits, profits fall ahead of HBS takeover vote

SBS Bank, awaiting the result of a vote by Hastings Building Society (HBS) members on a takeover by SBS this afternoon, recorded a fall in retail deposits during the June quarter with profitability also dropping.

(Update adds detail on SBS's redeemable shares).

SBS’s June quarter General Disclosure Statement shows total deposits from customers of NZ$216.8 million. That’s down 5.7% from NZ$230 million at March 31. SBS says, however, this is largely volatile wholesale money. It says the bulk of its term deposit money is sourced through redeemable shares, given that as a building society SBS's investors are its shareholders.

When redeemable shares are taken into account, SBS's total term deposits fell to NZ$2.18 billion at June 30 from NZ$2.20 billion at March 31, a drop of 0.7%.

Competition heats up

Competition among the banks for retail deposit money has stepped up due to the Reserve Bank’s introduction of the core funding ratio (CFR) on April 1. The CFR sets out that banks must source at least 65% of their funding from retail deposits and bonds with durations of at least one year. The central bank wants to increase the CFR to 75% by mid-2012 to offset New Zealand banks’ previous reliance on international wholesale, or 'hot' money, markets.

Meanwhile, SBS’s unaudited net profit for the three months to June fell to NZ$1.6 million from NZ$3.6 million in the same period of last year. However, this came as income tax jumped to NZ$3.7 million from NZ$1.9 million after SBS booked a one-off hit of NZ$2.2 million to cover tax changes relating to the removal of depreciation on buildings with a life of 50 years of more.

SBS’s gross loans were down to NZ$2.46 billion at June 30 from NZ$2.48 billion at March 31.

Staying out of the extended Crown guarantee

SBS said given the Reserve Bank has said banks don’t need to partake in the extended Crown retail deposit guarantee scheme, SBS doesn’t intend to. It’s the fourth bank to rule itself out of the extended scheme, which kicks in on October 12 when the initial guarantee scheme expires, running to December 31, 2011. So far Kiwibank, ANZ and BNZ have also said they won’t apply for the extended guarantee scheme.

Separately, HBS chairman Frank Spencer yesterday told he was confident the building society would secure the necessary support from members for its proposed merger with SBS. HBS’s about 3,900 members meet at 2.30pm this afternoon with 75% support for the deal required.

“We’re pretty sure that we’re going to get there,” Spencer said. “It won’t be unanimous but I think we’ll have pretty strong support.”

HBS had total assets of NZ$184.79 million at March 31, equivalent to about 10% of SBS Bank's NZ$2.58 billion at June 30. The deal calls for HBS to merge its assets into SBS. Pending Reserve Bank approval, an HBS representative would be appointed to SBS’s board but would face re-election at next year’s annual meeting. HBS members will become SBS members.

SBS, which gained a banking licence in October 2008 with the intention of becoming a national banking player, sees the HBS deal as its first step towards creating a national community bank targeting the space that used to be occupied by regional trust banks.

Pressure from 'deposit war'

Spencer said with new Reserve Bank rules for non-bank deposit takers due for introduction in December and the increased targeting of retail deposit money by the major banks, costs were rising and times getting tougher for small financial institutions.

“The reality is in the non-bank deposit sector the regulatory requirement is just an increasing cost on a small organisation,” said Spencer.

“Secondly, the (Reserve Bank enforced) changes in capital adequacy ratios and domestic deposit requirements are such that the deposit war will undoubtedly affect us in the next 18 months or so because we just don’t have the ability that the big boys have to play in that area.”

HBS had cash and deposits of NZ$41.2 million at March 31.

The merger agreement sets out that all staff and management in HBS’s Hastings and Napier offices will be retained with the HBS brand also remaining. There’s also a guarantee for community contributions to rise from about NZ$60,000 last year to at least NZ$100,000 per annum over the next five years.

And to help secure support for the deal HBS is offering deposit holders at the date of merger implementation, which is targeted for October 1, the carrot of an extra 0.5% in interest if they reinvest for at least another six months. Depositors who extend their terms, from say three months to six months, will also be offered the extra 0.5%, Spencer said. See document sent to HBS members by their board here.

Greater scale and strength

Spencer said the main reason for the deal was to provide greater strength to HBS. It currently has a BB, speculative, or "junk", credit rating. SBS has an investment grade BBB rating.

“That’s the big bonus for us if we can say to our depositors 'well, you’re now investment grade and you’re part of a registered bank',” said Spencer.

“Then a lot of those current concerns are well and truly met.”

He hoped the deal would also secure, for future generations, the ability to enjoy a local community and people focused financial institution. Although the ultimate plan was for the enlarged SBS Bank to find additional merger partners, as far as Spencer was aware there was nothing currently on the table. Any further partners were likely to be fellow building societies.

“The fundamental thing is mutual ownership is our key plank and will be guarded jealously so I think that really limits the field,” Spencer said.

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Soooo let me see if i understand this.

SBS are busily preening themselves about being a bank with a whopping good credit rating of BBB (which actually is not that whopping good). So much so that they reckon they will still attract depositors.

They are offering 5.15% for 6 months, and 5.35% for a year.

Meanwhile CBS and Marac have just opted to jump into the extended guarantee till December 2011. We have all just seen in glorious technocolour how this works today. Yes investors do get PAID OUT in the event of mishap. Both institution have BB+ ratings (not that whopping good either, and somewhat worse than BBB) but with the backing of the GG that becomes somewhat immaterial till dec 2011.

Marac are offering GG debentures for 6 months @ 5.5% and 6.25% for 1 year.

CBS are offering GG term deposits @ 5.15% for 6 months and 5.4% for a year.

Now the big banks seem to be turning their back on the extended GG (they will come running in due course); however one of them, Kiwibank has in effect a 'perpetual' GG through its government owned parent - its also rated a rather heftier AA-.

For 5 month terms they offer 5.15%, for 1 year 5.2%

Given the above can someone explain to me how SBS thinks it has the remotest chance @ current offered rates in attracting depositors money (up to 1 year)?

Why would you invest with them given the above? Who do they think they are kidding?


Actually Bobby I think you need to read the extended GG terms again:

This from the Q+A section (section 2.2):

The current scheme expires on 12 October 2010. For any institution participating in the extension scheme for the period from 12 October 2010 to 31 December 2011:

  • depositors have no right to be paid interest after the date of the default event; and


'no right to be paid interest AFTER the date of default event'.


Clearly the implication is that you will be paid interest UP TO the date of default - not as you claimed (that you would receive no interest, just the principle). Unless of course you can quote me otherwise?