Editorial: Bank proposal

17:00, Jun 02 2010

The proposal to merge three finance organisations to create a new locally owned bank is a timely one.

For the finance institutions themselves, it is an opportunity, driven by necessity, to turn themselves into stronger, more robust entities, particularly after the turmoil of the last three years or so.

For investors, looking to diversify their investments away from the great Kiwi stand-by, domestic real estate, it could provide a worthwhile and productive place to put their money.

And for borrowers, particularly small-business owners who have complained of being cold-shouldered by unsympathetic banks during the financial crisis, it could provide a friendlier, more knowledgeable lender to local business.

The proposal still has many hurdles to cross before it becomes reality, but on the face of it it has the potential to provide a welcome fillip to the local economy.

The three entities involved – Pyne Gould Corporation's finance arm Marac Finance, the Canterbury Building Society and the Southern Cross Building Society – are established names in finance.


They have not been unscathed by the upheavals of the financial crisis, but they have survived it with credit ratings still at very respectable levels for non-bank institutions.

Two have BB+ ratings and the other a BB rating, which is at the high end for entities that are not banks.

Those ratings were unchanged by the announcement of the merger proposal, but as the leading ratings agency, Standard and Poors, indicated, they could benefit from the bigger, more diversified institution.

For all of them, the step towards becoming a bank is a logical one which all three reached individually. The business model followed by finance companies up until recently has been shown by the crisis to be inadequate.

The merged operation, however, including the strong depositor base of the two building societies, would be much more sustainable.

Separately, the organisations are too small to become banks, but as a merged entity they would have assets, on a present assessment, of $2.2 billion, which would get them over the threshhold. The aim is to build the concern to more than twice that size, which would give it a considerable presence in New Zealand finance.

That can only be good news for the new bank's intended market.

The market the institutions say they hope to reach consists of families, small businesses and the agriculture sector in New Zealand's "heartland".

Since the financial crisis hit, the criteria for lending to families for mortgages has tightened and there has been anecdotal evidence that farm lending has become more constrained, but the segment of the economy that appears to have found it hardest to raise money is the small and medium-sized business sector.

As this is the sector that generates the largest part of New Zealand's employment, difficulties with finance there soon show up in the wider economy.

Last year stories from business operators abounded of how it was practically impossible to win a hearing from the foreign-owned banks to requests for the finance necessary to keep them going.

All banks are going to be subject to broadly the same financial conditions, of course, but a bank based in Christchurch, with its ear to the ground here, so to speak, could be expected to be more sensitive to local concerns and aware of economic nuances that a more remote institution may miss.

To some degree the new bank would compete with the state-owned Kiwibank. More competition in banking, though, can hardly be a bad thing. Kiwibank already has some advantages not available to other banks and care must be taken to make sure it does not get more.

The merger at present consists only of a memorandum of understanding between the three institutions and is far from being a done deal. Each of them has to do due diligence on the others' books.

It also still has to gain the approval of investors and depositors and also of the regulatory authorities. Success would by no means be guaranteed, but the proposal is an enterprising one and deserves every encouragement.

The Press