Opinion: How a national community focused bank could be born if TSB, SBS and PSIS got into bed together

By Gareth Vaughan

A year ago the financial services sector was abuzz with what investment bankers call M&A (merger and acquisition activity) among New Zealand owned entities.

On June 1, 2010 the Pyne Gould Corporation driven plans for a Heartland Bank were revealed through PGC's Marac Finance, CBS Canterbury and the Southern Cross Building Society announcing that they wanted to merge. Then a month later, on July 1, SBS Bank revealed plans to takeover the Hastings Building Society (HBS) in what was touted as its first step towards creating a national community bank.

At a time of rising funding costs and flat or shrinking lending growth with increased competition from the big four Australian owned banks for retail depositors' cash, two merger groups, both with a distinctive business ethos of its own, emerged. The heartlanders have since completed their tie-up and listed on the sharemarket giving them an obvious mechanism through which they can raise additional capital. SBS, in contrast, wants to take a mutual ownership structure, with a community reinvestment model, nationwide.  

The Heartland group, now a building society known as Heartland NZ, appears to have come together well. It is set to buy PGG Wrightson Finance's good rural loans, but faces challenges in weaning itself off the extended Crown retail deposit guarantee scheme by December 31 and obtaining bank registration from the Reserve Bank, which it's yet to apply for. 

Where does SBS go from here?

SBS, meanwhile, has absorbed the HBS but has no further deal in the pipeline with CEO Ross Smith telling me last week SBS wasn't currently in talks with anyone. So what's next for the wannabe national community bank? Asked about the possibility of ultimately joining forces with TSB, Smith certainly didn't dismiss the idea outright That said his counterpart at TSB, Kevin Murphy, has described his bank as "fiercely independent" and wanting to remain so.

Nonetheless, to me, a marriage between SBS and TSB would be an obvious key step towards creating a national community focused banking group. Both are fundamentally sound but small banks popular with their customers. TSB is owned by the TSB Community Trust and SBS, a mutual, touts itself as New Zealand's biggest building society where borrowers, savers and investors are legal owners or members.

Both, as small New Zealand owned entities up against the big four Aussie owned banks - ANZ, ASB, BNZ and Westpac - and the taxpayer backed Kiwibank, are facing increased competition for retail funding. TSB is launching its first commercial paper programme, worth NZ$100 million, this week following in the footsteps of TSB's recent initial foray into the wholesale funding market.

Core funding ratio makes it harder for the locals

These moves come as the Reserve Bank's core funding ratio (CFR) steps up a gear. Introduced on April 1 last year, the CFR sets out that banks must secure at least 70% of their funding from retail deposits or wholesale  sources such as bonds with durations of at least one year. The  central bank just lifted the CFR to 70% from 65% on July 1 and will increase it again, to 75%, on July 1 next year. And potentially, it could go even higher as Basel III global banking reforms are introduced over the next few years.

Although meeting the CFR isn't an issue for TSB or SBS, the big four are being forced to reduce their reliance on offshore, short-term funding, During 2010 the big four plus Kiwibank sourced 34% of their funding from overseas. This means heightened competition for retail money, which Murphy blamed for his bank's 22% drop in March year profit as TSB's net interest margins fell to a record low, is here to stay.

It also means more scale - getting bigger - on top of retaining their good reputations, will help the locals compete with their bigger Aussie owned and taxpayer backed rivals. And the best way to achieve this scale is merge with like minded entities.

This won't, however, be easy. Many of us kiwis remain fiercely parochial where our provinces are concerned and TSB has its home and heritage in Taranaki and SBS its in Southland. But a merger, with the respective communities/shareholders receiving a percentage of the merged entity based on what they bring to the table - as of March 31 TSB had total assets of NZ$4.8 billion and SBS NZ$2.8 billion - makes sound financial sense. Both banks had gross loans of NZ$2.6 billion at March 31, TSB's March year annual profit was NZ$39.8 million and SBS's NZ$14.25 million.

PSIS would be an obvious next step

Should TSB and SBS pull off a marriage, the next move could be absorbing PSIS, the former public service investment society. A co-operative, PSIS works on the principle that returns to members are based on the more you do the more you benefit, with members therefore earning the right to participate in the profits by doing their banking through PSIS.

CEO Girol Karacaoglu recently told me this co-operative status was non-negotiable for PSIS in any merger talks, meaning that given there are no other co-operatives among the country's financial services providers, a merger is effectively off the table. But PSIS, which like Heartland NZ plans to apply for banking registration, ultimately lacks scale and faces similar challenges to TSB and SBS as it strives to convince its members to do more of their banking through PSIS.

So if PSIS's CEO can be convinced that becoming part of a bigger, mutual or community focused entity wouldn't be the end of the world, or TSB and SBS decide to become co-operatives, a TSB-SBS-PSIS menage a trois would start to provide some scale. Combined, the three had total assets of NZ$9.05 billion at March 31, still well behind Kiwibank's NZ$13.8 billion and way down on the NZ$57.7 billion of Westpac - the smallest of the big four - but starting to look quite chunky. The three's combined loan book would be worth nearly NZ$6.4 billion.

And they have complimentary geographical focuses with SBS's in the South Island, TSB's the mid-lower North Island and PSIS in Wellington.

And ultimately, what about a foursome?

Down the line perhaps a fourth pillar can join the kiwi threesome. How about throwing in the the New Zealand Association of Credit Unions (NZACU)? Such a move could help get the SBS-TSB-PSIS triumvirate a greater Auckland presence.

And  like SBS, TSB and PSIS, the 21 NZACU members are different from the big banks whose modus operandi is to produce profits for an overseas shareholder. Credit unions are fully owned by, and exist solely for, their member-customers of which the NZACU has about 177,000 with NZ$490 million in savings accounts and NZ$625 million in assets. See more on the NZACU here.

 Credit unions' common bond and advantageous tax status would come into play. Members of a credit union must, for example, all work for the same company or live in the same region and income derived by credit unions, except that derived from a business carried on beyond the circle of membership, is tax exempt.

Such a four way combination may sound far fetched but would create a significant new, New Zealand owned bank with enough scale to hopefully prosper in the uncertain modern world.  Just don't ask me what its name should be.

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