As finance companies and building societies emerge from the financial crisis, access to capital remains the key to survival.
However, the problem of the high cost of offshore lending has been compounded by global markets undermined by volatility during the past two weeks.
The Heartland merger would see the Canterbury Building Society, Southern Cross Building Society and Pine Gould Corp subsidiary Marac join forces.
The group are targeting personal and family financing, including mortgages and vehicle and leisure finance; commercial marine finance, including plant, equipment and working capital; rural finance, including livestock, crop, equipment and capital; and commercial mortgages.
Craigs Investment Partners broker Peter McIntyre said a new New Zealand-owned bank "would add competitive tension against all banks", especially Kiwibank and the SBS Bank.
"Rabobank has the advantage of no branch structure, so it is cheaper to operate, but the proposal really puts pressure on South Canterbury Finance while it is mulling over its own restructuring," he said.
South Canterbury is recapitalising and restructuring in a bid to secure its future.
It is looking to raise up to $1.25 billion from a recent prospectus, plus gain a healthy roll-over rate of more than 55% from its existing investors.
"The Heartland idea has stolen a march on the likes of Kiwibank, announcing they intend to list, which will give them access to additional capital," he said.
The Heartland group said in a joint statement that "most importantly" the scale and growth opportunities from the proposed consolidation would drive shareholder value more "than would likely be achievable with three separate entities".
"Customers will be able to share in these benefits by becoming shareholders," they said.
Forsyth Barr broker Peter Young noted the proposal was only a memorandum of understanding, "so there is a fair amount of due diligence to be undertaken".
However, Mr Young believed an initial public offering (IPO) "would be a fairly well sought after".
"It would be the only listed New Zealand-owned bank on the New Zealand exchange and for that reason investors would be keen to invest in a wholly-owned New Zealand bank," he said when contacted.
The Heartland group members each have a rating of BB or higher from international rating agency Standard & Poor's and come under the extended Crown retail deposit guarantee scheme, which lasts until the end of 2011.
However, the Heartland group said in a joint statement yesterday they wanted to have a "fast-track exit" from the scheme.
In launching the Heartland proposal, they wanted to "achieve the critical mass and quality of assets to support an investment grade credit rating and a banking licence".
The consolidation of the non-bank sector could provoke further mergers and create "more robust structures", which were "able to withstand credit cycles", the group said.
However, Mr McIntyre noted the main Australian-owned banks had S&P ratings of AA or better, offering investors "security and strength", and the SBS Bank had a Fitch BBB rating.
"The four southern hemisphere majors [banks] all have recognised AA S&P ratings, globally being recognised as exceptionally strong," he said in reference to their operations during the global financial crisis and recession.
Following yesterday's announcement, primary credit analyst for S&P Derryl D'silva said the individual ratings of the Heartland group remained unchanged.
"Should the merger be completed, debt providers could benefit from a larger and more diversified financial institution with more than NZ$2 billion in total assets and a significant capital base," Mr D'silva said.
Since the global financial crisis, tier 1 core capital held by banks - essentially cash in hand - has risen from 8% of deposits to levels of 10%-12%.
Heartland said it had "in excess of 10%" of tier 1 capital, which indicated it was "already in the ball park" to gain a licence and trade beside the four major banks, Mr McIntyre said.
Two listed banks in Australia, with market capitalisations near the proposed Heartland's $2.2 billion, had a proven track record in terms of amalgamation and profitability, Mr McIntyre said.
The Bank of Queensland, a standard retail bank which in 2007 merged with the House Building Society, had a market capitalisation of $A2.3 billion ($NZ2.8 billion), 250 owner-managed branches and 2500 ATMs.
Its full-year after-tax profit to the end of October last year was $A187 million, up 21% on the previous corresponding period.
Bendigo and Adelaide Banks, standard retail banks which combined in November 2007, reported after-tax profits of $A104.4 million for the half-year to December last year, a 105% increase on the previous corresponding period.
Mr McIntyre noted the Bendigo and Adelaide Bank was in a separate joint venture with ASX listed-stock and station company Elders in a rural bank, whose after-tax profit in the six months to December last year was $A26.8 million.
The Heartland group said the proposed merger, and associated business benefits, would also create a platform "for building valuable market share".
"It would bring together these three very strong and recognisable brands, and our goal would be to more than double the combined [$2.2 billion] asset base," they said.
