Consolidation the next step in New Zealand

It seems the pressure that has been building in recent years for consolidation of New Zealand's highly fragmented finance sector, outside of the big banks, is starting to have an effect.
 
There has been the steady collapse of many of New Zealand's small finance companies that now appears to be spreading to its larger ones, such as South Canterbury Finance. No doubt, in the minds of New Zealand's retail investors, size is now being firmly equated with stability and security.
 
Related to the travails of this sector is the New Zealand government's mandate to the Reserve Bank of New Zealand to take regulatory control over all non-bank deposit takers, in addition to the banks. This will culminate with the Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 coming into force from December 2010.
 
The raft of legislative changes and regulatory requirements that will have to be observed will substantially increase capital requirements and operating costs and thereby drive the search for economies of scale. And then, of course, the process starts to feed on itself as consolidated entities increase the competitive pressure on the remaining unconsolidated entities.
 
In this respect, we have the search for additional capital for Kiwibank to allow for its growth and at the start of June there was the news that Pyne Gould Corp., Southern Cross Building Society and Canterbury Building Society plan to merge to create a NZ$2.2 billion listed bank.

One month later, the first consolidation in the banking sector since the global financial crisis has been announced with SBS Bank saying it is planning a merger with HBS, a much smaller building society in the Hawke's Bay region, to create a NZ$2.8 billion bank.

"The merger will allow us to take a further step toward being a fully national, mutually-owned community bank," said SBS chief executive Ross Smith. The two groups are each owned by their respective depositor-members.
 
SBS Bank (formerly known as Southland Building Society) claims it may be the only building society in the world to have achieved bank registration while maintaining its structure of being owned by its members. SBS is based in the Southland region of the South Island, and became a bank in October
2008.

The bank's tier one capital stood at 10.34 per cent as of March 31. SBS has managed to maintain its profits even in recent years with net surplus at the end of March year at NZ$15 million, up from NZ$12 million the year before.

For HBS, with assets of just NZ$185 million, the merger is clearly a move to ensure it can survive in the tough regulatory environment. "Times remain tough in the financial sector and the challenges of increasing regulation in a competitive environment are real for a small organisation such as HBS," chairman Frank Spencer said.

The SBS-HBS merger will take effect on October 1, if approved. This is well ahead of the planned timetable for the other merger, which would see the merged entity become operational from early next year with abanking licence expected to be granted around mid-year.

Fitch subsequently affirmed its 'BBB/F2' long- and short-term issuer default ratings on SBS Bank, with a stable outlook, and placed its 'BB/B' ratings on HBS on Rating Watch Positive. Fitch expects the proposed merger to deliver a larger and more diversified financial
institution.
 
There was also the news last week that New Zealand councils want to set up their own bank.