Heartland says bank status key to profitability

NZPA

Thursday 14th July 2011 3 Comments

The Heartland Building Society says that the profitability of the Heartland Group may be hurt if it is not approved to operate as a bank.

It said yesterday that the registration process under the Reserve Bank Act was of "indeterminate length" and that "there is no certainty that Heartland will be able to meet all relevant criteria ... and become a registered bank".

"In the event Heartland is unable to obtain bank registration, or there is a significant delay in obtaining such registration, or there is a significant delay in obtaining such registration, the profitability of the Heartland Group may be adversely affected."

The Reserve Bank was considering its capital in relation to size and nature of the business, its loan concentration and risk exposures, liquidity and separation of the business from other interests of the owner, Heartland said in an investment statement.

It registered a prospectus yesterday for a proposed transfer of PGG Wrightson Finance (PWF) debt securities, which it said would all become debt securities issued by Heartland's subsidiary, Heartland Building Society (HBS).

It said the maximum amount of deposits being issued was $2 billion. It had net loans and advances of $1.795 billion, retail deposits of $1.677 billion, total liabilities of $1.891 billion and equity of 292 million.

PWF debt security holders would vote on the debt on August 8.

Heartland began business as a financial services provider in January after Marac became a wholly owned subsidiary of Heartland. Properties originally mortgaged to Marac to secure loans are now owned by VPS Properties and VPS Parnell -- both wholly-owned subsidiaries of Heartland, which provided money for them to buy the buildings.

Heartland noted that risks such as deposits not being recovered in full by its customers, or depositors being asked to pay more money "are not the only ones faced by the Heartland Group".

There might be additional risk factors that the group currently considered immaterial but which might later become key risk factors for Heartland specifically

A continued or prolonged deterioration in market conditions might result in reduced demand for funding or a reduced ability of borrowers to service loans and could make it more difficult for the Heartland Group to realise assets held as security.

The Heartland Group could be affected by national or international market risks including disasters such as earthquakes, wars, terrorism, a recession, or a downturn in a financial market or one of its players. These could include further finance company failures, which might reduce the Heartland Group’s ability to source funds.

Competition in the finance sector could mean the Heartland Group was not able to maintain existing levels of new customers or investors and retain existing customers or investors.

Further failures or insolvencies of finance companies would be outside of the control of the Heartland Group but could impact the confidence of investors.

"This could make it more difficult for the Heartland Group to obtain funding," it said.

Until December 31, Heartland has a guarantee under the government's Crown retail deposit guarantee scheme.

It has a BBB- (Outlook Stable) rating from Standard & Poor’s.

Comments from our readers

On 14 July 2011 at 6:51 pm Xtoff said:

Please don't say HBS have just worked this out. Even as a shareholder i have to say that HBS profitability if licence approval is delayrd or not forthcoming at all, is not justification for RBNZ to hasten their considerations.

On 14 July 2011 at 8:04 pm Journeyman said:

Good honest appraisal but does not state the term of deposits compared to the average term of the loan book. Have they borrowed short and lent long? What is a fair return for the risk of lending to Heartland? Consider onlending is at around 15% or better if establishement fees are factored, mainly due to the risk issues of heartlands borrowers and security type, so why would a lender to Heartland accept 4.25 to 5.5% for ones money, given the obvious risk. It's not like they are producing super profits and returns to shareholders.

On 15 July 2011 at 10:15 am Mike said:

These are all existing factors that have been around since the creation of Heartland and even for Marac. The idea behind the heartland was to reduce these risks via an increase in size and diversity. So not quite sure why they are saying now all depends on a banking licence. Quite stange really.