Heartland is at centre of bank's aims

Farmers are part of the heartland that a proposed new New Zealand bank is looking to target. Photo / Simon Baker

An ill wind doesn't necessarily blow everyone no good. Ambitions for New Zealand's newest bank are likely to be helped by commercial opportunities likely to flow from the rebuilding of Canterbury after the earthquake.

The proposed bank is also likely to benefit from the $1.6billion of deposit money up for grabs from repayments to investors in failed company South Canterbury Finance.

Opportunities won't be confined to Canterbury as the new bank will be open for deposits, aiming to pay higher rates than those paid by mainstream banks but at "acceptable" levels of risk. If all goes to plan it will also be open to shareholder investors through a stock exchange listing.

Jeff Greenslade, chief executive of Pyne Gould Corp (PGC), one of the driving forces behind the proposal for the yet-to-be-named bank that intends to be based in Christchurch, is confident it will receive at least some of the money refunded to South Canterbury investors by the Government's deposit guarantee scheme.

The three organisations proposing to merge in January to form the new entity are PGC's finance company Marac, Canterbury Building Society and Auckland-based Southern Cross Building Society.

Assuming the merger goes through on January 1 the aim is to apply to the Reserve Bank by the middle of next year for a banking licence and to launch the new bank shortly after. Greenslade expects the rebuilding of Canterbury to "have a stimulatory impact". The streets and roads around Christchurch provide graphic examples of just the sort of "heartland" business Greenslade says the proposed new bank will be chasing - financing plant and equipment.

A typical borrower could be the owner of a cash-generating asset like a truck. Farmers are also on the target list.

"We are keen to move into the rural sector, especially livestock finance. The good news for the consumer is they can get an acceptable [level of] risk that pays a better return."

Property developers are not on the list of prospective clients and nor are standard residential mortgages or property investors unless the lending is part of a package for a business client.

There will be commercial mortgage lending but it will focus on the types of business the bank will target, such as the owner of a truck fleet who wants to buy premises he or she might be renting.

Greenslade believes after the credit crisis, businesses want to spread their borrowings across several lenders. He sees space for additional providers of seasonal finance such as buying sheep and cattle for fattening.

"Where we would really like to be is at the short end of borrowers' requirements; working capital and seasonal capital."

The aim will be to offer high-margin lending products on ventures and assets that generate good cash flows. "Property development doesn't generate cash flow. We don't like non-cash-earning investments."

The "heartland" and "Kiwi" labels that have been used to describe the would-be bank's strategy may have given the impression that it is a Kiwibank or TSB Bank look-alike.

Both banks have successfully promoted their New Zealand ownership but they are deeply involved in the residential property markets.

Greenslade concedes a stock market listing opens the way for outside shareholders. But "New Zealand control or focus" is the important issue.

Local ownership has been a positive story for Kiwibank and the TSB but the thousands who lost money through finance companies that often traded on their local ownership has proved New Zealand-owned does not guarantee security.

The international credit crisis proved big is not necessarily best when it comes to security. But in New Zealand's post-credit crunch environment, size still matters.

Comfortingly, perhaps, each of the partners is established in its existing market.

The new entity will apply for a banking licence under regulations that have been strengthened since the credit crisis.

When the would-be partners said they had agreed formally to work towards a merger, credit rating agency Standard & Poor's lifted Marac's rating to "creditwatch positive" and said if the merger went ahead Marac's creditors and merger partners were likely to benefit from a "larger and more diversified financial institution". Peter Townsend, chief executive of the Canterbury Employers' Chamber of Commerce, says there is a perception there is a gap in the market after the collapse of South Canterbury Finance although the mainstream banks have been "very good" in supporting businesses since the earthquake.

David Tripe, director of the Centre of Banking Studies at Massey University, says the proposal for the new bank does not strike him as an "inherently bad thing. There will certainly be some gaps in the market with the disappearance of the finance company sector."

The challenge will be to make sure the new bank does not dive into the sort of excesses that weakened many finance companies fatally. He also cautions it cannot be assumed demand for borrowing is outstripping the supply of credit. Businesses don't necessarily feel confident about their prospects.

"One of the reasons lending growth has slowed is not so much that mean and nasty banks are refusing to lend. It's because no one wants to borrow from mean and nasty banks."

Richard McClelland, national manager of Canstar Cannex, which monitors savings and borrowing products, says while the main problem for any challenger is the cost of funding, there is "always room for differentiation in financial services".

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NZ owned still a priority, but concerns remain

Investing with a New Zealand-owned organisation is a priority for Margaret Button, president of the Timaru branch of Grey Power, despite the senior citizens' organisation being hit by the collapse of South Canterbury Finance.

Grey Power Timaru had $20,000 invested with South Canterbury and Button says the collapse came as a shock. She was "very pleased" it was covered by the Government's deposit guarantee scheme. When her organisation re-invests it will "need to be in New Zealand".

Gray Eatwell, a spokesman for the campaigning organisation Eufa (Exposing Unacceptable Financial Activities), also sees advantages in New Zealand-based banks, but he is less convinced that New Zealanders are ready to deposit funds with a new bank.

He acknowledges there have been changes to regulations but he believes that if regulatory institutions had been enforcing existing rules properly, the crisis may not have arisen. He wants to see a Royal Commission of inquiry into the collapse of finance companies.

John Bolton, who runs his own mortgage advice business Squirrel, thinks the new bank may have to work hard to attract new deposits.

He does not expect the new bank to have a high credit rating but "there are always niches and opportunities" and the bank could do well if it does not try to grow too quickly, which could result in it taking on too much risk.