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Proposed 'Heartland Bank' will only apply for a banking licence when it's confident of succeeding

Proposed 'Heartland Bank' will only apply for a banking licence when it's confident of succeeding

By Gareth Vaughan

The proposed ‘Heartland Bank’ will only apply to the Reserve Bank for a banking licence when it’s confident of succeeding and despite the merger partners' desire to become a bank, they still aim to offer investment opportunities with higher interest rates that aren't typically on offer from lower risk banks.

Jeff Greenslade, CEO of Marac Finance, Pyne Gould Corporation (PGC) and managing director designate of the entity to be established through the merger of Marac, CBS Canterbury and the Southern Cross Building Society (SCBS), told in a Double Shot interview that his team is talking to the Reserve Bank as much as it can ahead of plans to launch a bank licence application next July.

They’re also talking to Standard & Poor’s regularly as they strive to secure an investment grade credit rating for the potential new financial services provider provisionally known as Building Society Holdings Limited.

“We look at peers in both Australia and New Zealand in terms of what the qualitative and quantitative measures that go into being a bank are like,” Greenslade said.

“So we know what we’ve got to do, we’re working very hard to achieve those things. So we have a level of confidence that we will get there, we wouldn’t be doing it if we didn’t have that confidence.”

The merger plans, announced in early June, call for Marac to merge with the two building societies to create greater scale and tap a bigger retail deposit funding base, seek an investment grade credit rating and bank licence. The plans envisage a NZX-listed "Heartland Bank" that would aim to double its NZ$2.2 billion asset base within five years through growing lending to families, small business and the rural sector.

The merger partners will seek backing for the merger from seven groups - covering shareholders, members, debentureholders, bondholders and depositors from the three, plus PGC shareholders, this week.

No quorum for SCBS depositors' meeting

The first votes, for SCBS shareholders and depositors, were held in Auckland today. Shareholders voted 98.8% in favour of the merger. However, there was no quorum for the depositors' meeting, meaning it will be reheld on December 7.

Mark Bellas, SCBS's executive responsible for finance and strategy and chief operating officer designate of the 'Heartland Bank'. told SCBS needed 50% of the deposits by value to reach the "very tough" quorum hurdle. They ended up with proxies representing about 20% of deposits by value, or about NZ$60 million, well short of the NZ$170 million needed. About 80 of the 19,000 depositors attended the meeting with about 2,000 proxies sent in by post.

Bellas said votes from today's adjourned meeting will carry through to December 7, provided depositors' don't withdraw their proxies. The quorum for the second meeting was just a "handful" of depositors and SCBS would send out another letter to depositors informing them of the December 7 meeting.

He said failure to reach the quorum requirement had been expected and he suggested Marac and CBS could have similar experiences. However, this scenario had been built into the merger timetable and wouldn't affect the expected merger date of January 7, 2011.

Speaking on Friday, Greenslade said there were contingency plans in place in case the merger wasn't approved, but he couldn't disclose them.

As for the holy grail of obtaining a banking licence, Greenslade said it would take as long as it takes.

"Sooner is better, but all good things are worth waiting for," he said.

Unclear process

The Reserve Bank only says the length of time it takes to process bank licence applications will vary, and the time taken with any specific application will depend on the complexity of the application. It also notes that unsuccessful applicants can reapply.

Greenslade said the Heartland partners would be prepared to reapply if necessary.

"(But) our strategy is to apply when we have a high level of confidence that we will be successful."

Cameron Partners and Northington Partners' independent report on the merger proposal suggests it could take up to two years to obtain a banking licence and there is a risk ultimately that it takes even longer, although "it is likely" one will ultimately be granted.

The three merger partners are all covered by the extended Crown retail deposit guarantee scheme, for which the merged entity is also expected to gain approval. However, this expires on December 31, 2011, before Building Society Holdings is likely to have secured a banking licence. That means the merged group could be operating without a Crown guarantee or a banking licence.

Greenslade acknowledged this was "quite possible" and the group was working to address that scenario. A key part of this was getting an investment grade credit rating.

"So to put it another way, if we are investment grade rated and not a bank, I still think that’s a better position to be in," said Greenslade.

"Being BBB- is a very high level of risk standard for New Zealand so we think there is viability for us if we are BBB- and then we can go on to become a bank afterwards."

"I think what we’re doing is the right things in terms of making sure that we are prepared for life after the Crown guarantee."

The focus for obtaining a banking licence was on getting an investment grade credit rating, the "critical precondition" to making an application, and working internally to bring compliance systems and reporting up to bank standard.

"Our aim is to get an application started in July," Greenslade said. "How long it takes thereafter is really a matter for the Reserve Bank."

Investment grade potential

Standard & Poor's has said the merged entity has the potential to obtain an investment grade credit rating, The credit rating agency rates Marac BB+, its highest non-investment grade rating, and has the rating on CreditWatch Positive. It also rates CBS BB+ and SCBS BB. The lowest investment grade rating is BBB-, which is one notch above BB+.

Meanwhile, Greenslade said he was surprised at the amount of feedback he was getting from "all quarters" about the proposed Heartland Bank competing with the big banks. The proposed Heartland Bank will hold less than 1% of New Zealand's financial systems assets, with the market dominated by the Australian owned quartet of ANZ, ASB, BNZ and Westpac.

"I find it rather flattering that people consider us to be a serious competitor of the major banks," said Greenslade, a former managing director of corporate and commercial banking at ANZ National Bank..

"I find that surprising and flattering because we want to be bank-like in terms of compliance and risk and those sorts of things, (but) we don’t want to be like the major banks in terms of what they’re doing in the marketplace."

"We’re going to provide a different sort of service, more intimate, community based service around the lifecycle of middle New Zealand," said Greenslade.

This would be more like a building society or trust bank than major bank model.

He also said that, despite the aim of becoming a lower risk bank, the new entity still saw opportunities to issue "higher yielding" investment opportunities for depositors. This could include "tier two equity."

"We hope to offer investors a range of opportunities over time."

Marac's advertised non-Crown guaranteed term deposits range from 5.50% interest for 30 days up to 8% for four to five years. See all term deposit rates here.

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It is not surprising that the Southern Cross Building Society shareholders voted so convincingly for the merger - SCBS is a total dog - it lost $12M in 2009 and $5M in 2010 on a $400M book.

It will also not be surprising to see on Wednesday that the CBS shareholders will vote against the merger as it is such a bad deal for CBS - they are being offered a 13% shareholding after dilution by SCBS compared to the 14% that SCBS will receive. This is a bad joke and based on a very average valuation by Northington partners which is based on net tangible assets.

The CBS directors hva e not represented CBS very well at all and should have demanded a shareholding in excess of 20% to cover it's real value to the merger. Without CBS the merged entity has absolutely no chance of a banking license - SCBS certainly would not meet RBNZ conditions and PGC/Marac's recent poor performance when it wrote off over $150M will make the RBNZ nervous.

CBS should also have commisssioned an independent report for its own shareholders - not relied on PGC/Maracs inspired valuation.

The people of Ashburton are very savvy investors and won't vote for the merger and certainly won't deposit with the merged entity so that a large chuck of their money is lent in Auckland and the upper North Island.


I thought it was more like a $85M writeoff?  $150M sounds much more impressive though - can you provide me a link?


PGC had an overall $54m loss but Marac wrote off $150M in property loans which resulted in PGC raising $237M of new capital. Refer to link.  

The PGC capital raising in 2009 absolutley decimated the existing shareholders, most of whom were loyal and long standing shareholders. Their shareholdings were severely diluted.

Not a great record for PGC/Marac and not a great attraction for CBS and SCBS investors and depositors who are voting this week.


Couldn't open link, but went to website - Looks like loans had a face value of $175M and were written down by $85M.  Are you sure your not confusing the face value with the write off value?


Went to the Marac stockholders meeting this morning. No quorum. Counting proxies and the about 40 investors who turned up, they had 29.3% of deposits by value, or about NZ$260.5 million, when they needed a minimum of 50.1%. The meeting has been rescheduled for December 8 in Auckland again. Proxies carry over and the quorum will be basically whoever turns up. 

Marac did, however, get backing from PIE fund unitholders with 99.4% of votes cast in favour of the merger.


C'mon shorts, you know Southern Dude doesn't allow facts to come in the way of an opportunity to have a go at anything that he deems to be anti (South) Canterbury

I actually hope the Ashburton investors he refers to are a little more savvy than his friends in Timaru where and know a good thing when they see it?


FYI, there's more on Marac's property development past, and the merged entity's plans in that market, here -…


Looks as if we are talking about different loans.  I thought you were talking about the ones that had already gone.  Would hope those were the worst of the worst so would not expect the remaining $150M to be as bad.  Looks likes they are going to shunt those loans anyways so CBS shareholders won't have to worry about them.  They can just sit back and enjoy the higher earning rates on maracs assets and increased margins.


Until the next time Marac loses another $150m - although I suppose George Kerr will front up again for a big fee and park them somewhere.

And Bemused I am not proecting Canterbury - just not happy that dog Auckalnd based companeis like Marac and Southern Cross Building Society are using the sound CBS business to shore up their proposed merger. CBS has been around over 120 years and has been through many business cycles - Marac was only formed in about 1989 and in twenty years ended up a disaster. Southern Cross was a sound conservative company until the coup by the Auckland mafia a few years ago when they got more aggressive and screwed SCBS.

So I am just stating the facts - CBS is well managed and has come through the credit crisis reasonably positioned. The other two merger partners are complete dogs.


Doesn't sound like they will have any property left on the books if they transfer the $150M so will only be left with business and car loans - which don't seem to be as risky as property lending, but still attract high interest rates. 

Still not sure what makes you think they have lost $150M.  It seems pretty clear from the link provided by Gareth that that figure is the face value of the  remaining property loans. 

It also looks from their website like Marac in one form or another has been in business for 50 years+. 


Marac has not been in existence 50 years Shorts - it was another finance company that Marac bought that was started in 1952.

The genuine Marac was formed in about 1964 and sold to NZI Bank in 1988. Marac was merged into NZI Bank and then Michael reid purchased the name " marac " off NZI Bank for $25000 and restarted a new finance comapny under the Marac brand. They made some additional purchases in the mid 1990's one of them was Allied Finance ( not sure if that was the correct one ) and that company was established in 1952.

You are correct that they don't now have a property portfolio but that does not eliminate their track record and whether their recent purchases are sound investments - time will tell.