Originally Posted by
ithaka
HGH
20/10/2022 09:54
TRANSACT
PRICE SENSITIVE
REL: 0954 HRS Heartland Group Holdings Limited
TRANSACT: HGH: Heartland to purchase Challenger Bank in Australia
NZX/ASX release
20 October 2022
Heartland to purchase Challenger Bank in Australia, and provides lending
growth update
Entry into acquisition documentation for Challenger Bank
Heartland Group Holdings Limited (Heartland) (NZX/ASX: HGH) is pleased to
announce that it has signed a conditional share purchase agreement for the
purchase of Challenger Bank Limited (Challenger Bank) from Challenger Limited
(ASX: CGF). The share purchase agreement is subject to obtaining the
requisite regulatory approvals.
Based in Melbourne, Australia, Challenger Bank is an established authorised
deposit-taking institution (ADI) which offers customers a range of savings
and lending products. Challenger Bank's products include
government-guaranteed retail term deposits and home loans - its system is
also capable of Reverse Mortgage origination. As at 30 June 2022, Challenger
Bank had A$89 million of retail lending, A$17 million of corporate lending
and A$228 million of deposits.
Subject to completion, Heartland's existing Reverse Mortgage and Livestock
businesses in Australia will be transferred to sit in or under Challenger
Bank. The opportunity to grow these existing businesses in Australia either
as part of a bank or a broader banking group is significant. Challenger Bank
also affords further opportunities to expand Heartland's best or only
products into Australia.
For regulatory reasons, Heartland will be required to hold Challenger Bank
through an Australian incorporated non-operating holding company (NOHC) which
is approved and regulated by the Australian Prudential Regulatory Authority
(APRA). It is anticipated that Heartland's top-level holding company in
Australia, Heartland Australia Holdings Pty Limited (HAH), would be the
appropriate vehicle to apply to APRA for authority to act as a NOHC.
Heartland continues to engage with the Reserve Bank of New Zealand (RBNZ) to
obtain consent for HAH to also act as the NOHC of Heartland Bank Limited in
New Zealand. Completion of the transaction is also conditional upon consent
under the Financial Sector (Shareholdings) Act.
The consideration payable by Heartland on completion is expected to be
approximately A$36 million, subject to adjustments for net assets delivered
at completion. Heartland's intention is to cover the costs of the acquisition
through existing resources.
Strategic rationale
Heartland's strategic objective for expansion in Australia requires the
establishment or acquisition of an ADI. Becoming a bank through an ADI in
Australia would make possible a number of benefits:
o access to a deep and efficient pool of funding to support ongoing growth;
o potential uplift in margin, to the extent that retail funding rates are
less than wholesale rates; and
o providing a platform to extend Heartland's best or only strategy into
Australia.
The aim is to create a digital bank which, once Heartland assets are
transferred to it, will be profitable. This, together with Heartland's best
or only strategy, provides the opportunity for a differentiated proposition.
On 23 August 2022, Heartland announced it had entered into a non-binding
memorandum of understanding with Avenue Hold Limited (Avenue Hold) for the
potential acquisition of Avenue Hold and Avenue Bank Limited (Avenue Bank), a
restricted ADI. Following that announcement, Heartland continued due
diligence and negotiation of binding transaction documentation with Avenue
Hold.
Since then, market conditions have changed. Heartland also became aware of
Challenger Bank as an alternative opportunity. Heartland Board's assessment
is that Challenger Bank is a stronger acquisition opportunity for Heartland's
execution of its strategic objective for growth in Australia as it offers a
full ADI licence. Challenger Bank has also recently undertaken a programme of
significant investment to build out its digital capability, which fits with
Heartland's digitalisation strategy.
Heartland has accordingly advised Avenue Hold that it will no longer be
exploring the potential acquisition opportunity previously disclosed, and has
discontinued due diligence and negotiations. Heartland made an initial
subscription for A$5 million of capital (circa 11%) in Avenue Hold. No
decision has been made on the future of this shareholding. For accounting
purposes, this investment is classified as fair value through other
comprehensive income, with any change in value not impacting Heartland's net
profit after tax.
Heartland was advised by Corrs Chambers Westgarth, Deloitte and Jarden in
relation to the acquisition.
Business update
The first quarter of the financial year ending 30 June 2023 (1Q2023) has seen
growth across key lending portfolios of Reverse Mortgages, Motor and Asset
Finance.
Reverse Mortgages in both New Zealand and Australia maintained strong growth
momentum, recording 24.4% and 19.3% annualised growth in 1Q2023 respectively.
The Motor portfolio is starting to return to growth levels seen before the
New Zealand Credit Contracts and Consumer Finance Act 2003 and the Credit
Contracts and Consumer Finance Regulations 2004 (CCCFA) were amended with
effect from 1 December 2021, recording 7.8% annualised growth in 1Q2023.
Asset Finance recorded annualised growth of 10.3% in 1Q2023.
Other areas are performing satisfactorily, noting that the Livestock lending
season has only just commenced.
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