Few cost savings for Heartland Bank 01 November 2010 3:44PM Sophia Rodrigues An independent report has concluded that the proposed business case for the merger of three New Zealand entities to form a banking and financial services group is robust and the merits are compelling compared with the standalone outlook for each one.MARAC Finance, CBS Canterbury and Southern Cross Building Society have a merger agreement to form Building Society Holdings. One of its units Combined Building Society will then apply for a banking licence. Meetings to vote for the merger will be held from November 22.Cameron Partners and Northington Partners co-authored the report.The report says that one of the key drivers for the merger in the medium-term is likely to be cost of funding but notes it is difficult to accurately assess the quantum of potential funding cost savings due various reasons including uncertainty over the timeframe for re-rating and bank registration.However, based on limited information, it believe an overall reduction of 50 to 150 basis points could be achieved by Combined Building Society if it gets a rating upgrade and a bank licence. This would result in a savings of NZ$8.4 million to NZ$25.1 million.The merged entity could achieve a lower cost to income ratio in the medium term, assuming it can achieve reasonable growth in its loan receivables, the report says. However, the ratio is unlikely to match MARAC's expense ratio of 35 to 40 per cent given the need to progressively invest in additional operating infrastructure for the bank.Among the risks associated with the merger, the report notes there is a meaningful risk that obtaining banking licence may take longer than expected. Integration of systems, processes and operations will be challenging though the complexity will be reduced because of the relatively small scale of Southern Cross and CBS Canterbury. The merging partners have allowed up to two years to fully integrate their branding and business operations.Meanwhile, in an information document, the merging entities said the capital ratio of the merged parties, calculated in accordance with the regulations for non-bank deposit takers, was around 9.24 per cent as of June 2010 compared with the minimum requirement of 8 per cent.Also, the combined shareholders equity as a percentage of total assets was around 13 per cent compared to the average of listed, BBB rated peers in Australasia with around 5.44 per cent. Citing specific risks to the merger, it said the merger will not proceed unless the Combined Building Society is granted a Crown guarantee. It may be noted that the three merging entities are individually covered under the extended government guarantee that expires in December 2011 but must apply separately to get a combined guarantee.