Southern Cross ratings affirmed ahead of bank merger

Wednesday 22nd December 2010

The proposed "heartland" bank has already benefited Southern Cross Building Society (SCBS), which retained its ratings and stable outlook from Standard & Poor's today because the merged company would provide stability.

SCBS, Canterbury Building Society and Pyne Gould Corp's Marac Finance are planning to create the only locally controlled bank listed on the stock exchange early next year.

The new bank had the potential to be rated BBB- by S&P - the lowest investment grade - provided the financial impact of the Christchurch earthquake did not hurt the group's credit position, among other factors.

That was higher than SCBS's BB long-term and B short-term ratings affirmed today.

"The rating affirmation reflects our view of the stabilising effect that the proposed merger with Marac Finance Ltd and Canterbury Building Society would have on SCBS's credit standing once a larger and more diversified financial institution is created," said S&P credit analyst Peter Sikora.

"The merger will help ameliorate our concerns around SCBS's current high level of single-name exposures and its concentrated business profile."

SCBS's ratings would be withdrawn once the merger was completed. Creditors stood to benefit from the potentially better credit profile of the newly merged group, Sikora said.

Without a merger, SCBS's ratings could be lowered as it had not managed to reweight the loan portfolio towards residential lending and its credit quality could weaken.

A large capital injection would be needed to cover credit, market and operational risks before any ratings upgrade was considered.

"That said, the planned merger has already progressed well down its path of regulatory and statutory impositions and the unsuccessful consummation of the merger appears to be unlikely," he said.

NZPA

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