Heartland's TSB deal passes shareholder vote, but the Reserve Bank and a Deloitte review still stand in the way

Heartland shareholders approved the $620 million takeover of TSB with 94.80% of votes cast on 30 September. The deal still has to clear the Reserve Bank, and a review of TSB's own books could decide whether it goes through as agreed.

Shareholders holding 58.09% of Heartland's issued capital voted, interest.co.nz reported. The main resolution, a special resolution that needed 75%, got 520,505,170 votes in favour and 28,556,745 against. All four resolutions passed.

On 18 September the Reserve Bank required TSB to commission an independent report on how it calculates its capital and liquidity ratios, according to Mortgage Professional (MPA). TSB itself found errors in how it calculated and reported those ratios, and told the Reserve Bank. Deloitte is doing the work. A draft is due at the end of October and the final report in November, MPA reported. Heartland is aiming to complete the merger in December.

TSB said its liquidity and funding were sound and that it remained well capitalised.

Heartland considered putting off the vote and decided against it. "We take regulatory matters very seriously, and obviously this is a matter between TSB and the Reserve Bank, so I'm not going to speculate on the outcomes of that," Heartland Group chief executive Andrew Dixson told interest.co.nz. Asked whether Heartland could negotiate a lower price, he said: "we have contractual protections should those outcomes be different to what we may expect, and we will assess that once the report comes out." The published coverage does not say what those protections are.

Heartland applied to the Reserve Bank for consent on 31 August. No decision has been reported.

How the deal is paid for

No cash changes hands. The Toi Foundation, the Taranaki community trust that owns TSB, will be paid in new Heartland shares, vendor loans and subordinated debt, and will end up owning 17.5% of Heartland, MPA reported. Shareholders approved issuing Toi 200 million shares at $1.25 each, which values the share portion at $250 million. They also approved putting Toi nominee Mark Darrow, TSB's chair since January 2022, on the Heartland board.

Getting the seller on board took some doing. Toi had to reopen public consultation in July after getting the original timeframe wrong, and a Taranaki community group tried to stop the sale with an injunction in August, interest.co.nz reported. The High Court's Justice Andru Isac called the group's claims "legally and factually weak", according to MPA. Toi approved the sale on 27 August.

The $620 million is 0.76 times TSB's $814.6 million book value. In its independent report for Heartland, Calibre Partners put the discount down to the low returns a bank without scale earns. TSB's return on equity was 5.7% for the year to March, interest.co.nz reported.

What changes for customers and Heartland

The merged TSB Heartland Bank would have about $15 billion in assets and roughly 320,000 customers. It would rank seventh among New Zealand banks, where TSB already sits. Heartland is ninth by total assets today. TSB's home-loan book was $6.5 billion at 30 June. On Heartland's pro forma figures, home loans would make up 44% of the group's $15.1 billion in total lending. Heartland expects about $34 million a year in savings once the merger is fully bedded in after three years, MPA reported.

For Heartland, the deal cuts its reliance on reverse mortgages. It holds more than 90% of that market in New Zealand. In Australia its share of new reverse-mortgage lending has fallen from about 90% five years ago to about 40%. After the merger, reverse mortgages are expected to drop from about half of Heartland's lending to about a quarter, interest.co.nz reported.

Borrowing costs could come down too. Fitch rates Heartland Bank BBB and TSB BBB+, both with a stable outlook. Calibre said the merged bank might get a higher rating, which could lower its funding costs.

TSB customers have already watched the bank shrink its branch network to 12 from 21 four years ago. Mortgage brokers wrote about 60% of its home loans last year, up from 43% in 2022, interest.co.nz reported. Taranaki will stay a major base for the merged bank, and two TSB directors will join its board, according to MPA.

On 2 October Heartland's Establishment Panel endorsed Heartland Bank chief Leanne Lazarus as CEO-designate of TSB Heartland Bank. Her appointment depends on the deal completing and on the Reserve Bank not objecting. TSB chief executive Kerry Boielle will help with the transition, and both banks stay under their current leaders until then.

Markets

Heartland shares closed at $1.28 on 1 October, the day after the vote, and the yield on Heartland Bank's 2033 notes rose 23 basis points to 6.18%, its highest since July last year. The next day the shares fell 2.3% to $1.25, NBR reported. That is exactly the price at which Toi is getting its shares.