Private equity buyers would have an advantage over banks in bidding for ANZ Bank New Zealand's UDC Finance business because they would not be bound by capital adequacy ratio requirements, says First NZ Capital in analysis that suggests Heartland Bank [NZX: HNZ] is nonetheless a potential buyer.
"There is some cross over between Heartland and UDC's operations in vehicle financing while UDC is heavily exposed to equipment financing," First NZ says in a note to investors. "The businesses are of similar size, meaning if Heartland were to bid and be successful, it would need to raise capital."
Heartland head of banking Chris Flood told Fairfax Media the Auckland-based lender would "absolutely have our hand up", while the deputy chief executive of TSB Bank, Charles Duke told BusinessDesk the issue was live at the New Plymouth-based bank.
"We are still having some high-level internal discussions as to the likely fit of a 'UDC' with our strategy," said Duke. "No decision on pursuing the company, should this opportunity come to the market, has yet been made."
Neville Todd of investment house Woodward Partners suggested a sharemarket float might also be an option for ANZ.
"The other option is the IPO route," said Todd. "There's such interest in New Zealand. It would be a great addition to the bourse and some of the valuations are getting up there to the point where a corporate might shy away."
So far, ANZ has yet to make a decision on whether to sell its trade finance unit, which had total assets of $2.4 billion at balance date in the 2015 financial year, making it slightly smaller than Heartland, whose total assets stood at $3.6 billion in 2015.
"As part of ANZ's strategy to review our focus on where we allocate capital and resources, we explore various strategic options from time to time, although this does not mean they will be sold," said an ANZ spokesman. "However, it remains very preliminary and no decisions have been made. It's business as usual for UDC staff, customers and investors.
UDC is considerably more profitable than Heartland, reporting net profit after tax of $57 million in the last financial year on its smaller asset base, compared with Heartland's $48 million. The primary difference between the two appears to be their cost to income ratio, which sits at a relatively low 26 percent for UDC, compared with 47 percent for Heartland, although First NZ Capital says it's difficult to know how much of UDC's costs may be charged through ANZ.
"The combination of where stand-alone earnings may be, allowance for any revenue synergies UDC may get through its association with ANZ, possible synergies to an acquirer, as well as other items such as the nature of UDC's revenue contracts with dealer floorplans will all weigh on where potential acquirers see value and what may be considered UDC's potential earnings contribution to an acquirer," the First NZ Capital note says.
The broking house estimates Heartland has surplus capital of around $58 million and some flexibility to raise Tier 2 capital.
"If Heartland were to acquire UDC, an equity capital raise may be net of a Tier 2 equity issue (over the larger entity, around $100 million) and debt funding so that its post-acquisition capital ratio to the new combined entity's risk-weighted assets was appropriate."
While First NZ sees UDC as a potentially strong fit for Heartland, it expects "a contested process".
"Heartland is limited by being a bank relative to potential private equity acquirers who are not limited by how much capital they need to put aside," the research note says.
Heartland Bank shares rose 0.8 percent to $1.22 in trading this morning, having traded as low as $1.11 in February for a fall over the last year of 2.7 percent.
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