S&P rates Marac after bank signing

Marac will be raised a notch after the merger. Photo / Dean Purcell

Standard & Poor's has placed its BB+/B ratings on Marac Finance on creditwatch positive after Marac signed a merger implementation agreement with CBS Canterbury and Southern Cross Building Society.

If the merger was successfully executed and underlying assumptions were met, the ratings could be taken off creditwatch positive and raised one notch with a stable outlook, S&P said.

For that to happen sufficient evidence would be needed covering a range of aspects of the merger process. That would include the effective execution of merger plans and appropriate management of integration risks and related costs.

The financial profile of the merged group would also need to develop as expected and lead to a progressive improvement in operating performance, S&P said.

Under the proposed merger, Marac's owner Pyne Gould Corporation will own 71 per cent of the merged entity and CBS and Southern Cross will each own 14.5 per cent.

If the merger was successful, Marac's creditors and merger partners were likely to benefit from a larger and more diversified financial institution with about $2.2 billion in total assets and about $285 million in capital, S&P said.

"In our view, a higher rating on Marac would be based on Marac forming a core part of the proposed merged group. The proposed group's credit profile would reflect its enlarged and improved business and financial profile," S&P credit analyst Derryl D'silva said.

S&P believed the group would benefit from increased scale, diversification, and geographic reach across New Zealand.

Other potential benefits included a stronger funding profile stemming from the merged group's anticipated better access to retail and wholesale funding, a larger capital base with greater financial flexibility on the back of a plan to list on the stock exchange, and improved earnings diversity, D'silva said.

But the group could face challenges around the integration of branches, staff, IT systems, operational and management structures, customers, creditors, and possible cultural differences.

S&P also viewed the proposed merger structure as relatively complex, requiring a number of approvals to proceed, all of which needed to be managed appropriately.

Ratings on CBS and Southern Cross would be withdrawn once the merger was completed, with the creditors of both building societies to benefit from the potentially better credit profile of the newly merged group.

- NZPA