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Heartland faces obstacles to achieve bank status

Heartland New Zealand still faces many obstacles before it can gain a banking licence, says accounting firm KPMG.

Thursday, 19 May 2011

"It is too early to determine the likely success of (the Heartland group) stated intention to seek a banking licence," KPMG says in its latest annual survey of financial institutions.

"The new entity faces many barriers to entry and must first integrate its businesses, establish a track record and then meet credit agency and Reserve Bank of New Zealand requirements, whatever the latter might be at the time of registration," KPMG says.

Heartland was formed early this year from the$2.2 billion merger of Marac, Canterbury Building Society and Southern Cross Building Society, currently named Building Society Holdings.

KPMG says the regulatory hurdles to becoming a bank are increasing with the Reserve Bank pre-empting international moves to tighten funding and lending requirements. This has resulted in funding costs for both registered banks and non-bank lending institutions increasing over the last 15 months, it says.

Despite the hurdles, "for the largest non-banks there is an incentive to seek bank registration, given the more favourable capital adequacy regime enjoyed by the banks and the cost of funds advantage."

KPMG says it expects to see further consolidation among finance companies.

Still, in the new regulatory environment, for many smaller finance companies "a better outcome has been to manage down their balance sheet so that total assets are less than $20 million and accordingly they can opt out of many of the requirements, including the requirement for a credit rating."

KPMG's latest survey includes only 16 finance companies, down from 31 in its previous survey, partly because it has raised its threshhold for inclusion in its survey from total assets of $50 million to $100 million and partly because of continued receiverships.

Among the 16 companies surveyed, profitability jumped more than 200% despite total assets falling 5.1%, with all 16 companies reporting profits - seven of them reported losses the previous year.

A key factor in improving profitability was a 198 basis point increase in their average net interest margin to 5.71%, the highest level since 2000. However, only 12 of the 16 increased their interest margin with Equitable Mortgages, now in receivership, and NZF Money reporting decreased margins.

KPMG says currently the premium offered investors by the "AA" rated banks compared with "BB" rated finance companies appears to be between 150 and 300 basis points. It expects to see even greater differentiation developing.

"The future may see a "BB+" rated instrument demanding a return of 300 to 500 basis points but a "BB-" rated instrument would require an additional 150 to 200 basis points to reflect the additional risk."

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