HGH - Heartland Group Holdings

[Snoopy]

Hint: Think carefully about the ABCP Trust financials

A web search uncovered some information about ABCP trust financials.

From: http://www.thaipr.net/finance/718556

"Heartland ABCP Trust 1 is a single-seller, ABCP program sponsored by the New Zealand-based Heartland Bank Ltd. The ABCP is backed by hire purchase agreements, finance leases, and loans secured by motor vehicles and equipment and originated by MARAC, a division of Heartland Bank Ltd."

"We are affirming our 'A-1+ (sf)' rating on the ABCP issued by New Zealand Permanent Trustees Ltd. as trustee of Heartland ABCP Trust 1 after a restructure of the trust."

This comment was attached to the top of what looks like an Oz market news release (my italics):

------

"MELBOURNE (S&P Global Ratings) Aug. 16, 2016--S&P Global Ratings today said it has affirmed its 'A-1+ (sf)' rating on the asset-backed commercial paper (ABCP) issued by New Zealand Permanent Trustees Ltd. as trustee of the Heartland ABCP Trust 1. The rating affirmation follows a restructure of the trust."

That is interesting. "Heartland ABCP Trust 1" now has a higher credit rating than Heartland Bank!

"Heartland ABCP Trust 1 is a single-seller, ABCP program sponsored by the New Zealand-based Heartland Bank Ltd. (Heartland). The ABCP is backed by hire purchase agreements, finance leases, and loans secured by motor vehicles and equipment and originated by MARAC, a division of Heartland Bank Ltd."

"The restructuring of the Trust involved the replacement of Heartland as Trust Manager with AMAL New Zealand Ltd. (with certain functions delegated to Heartland) and a change in the beneficiary of the Trust, with the intention of ensuring that the Trust would not be considered an associated person of Heartland."

-----

Now I am more confused than ever. If "Heartland ABCP Trust 1" is no longer considered "an associated person of Heartland" (Note HY2017 is the first reporting period after the "Heartland ABCP Trust 1" restructuring), why are the

"Undrawn committed bank facilities of $49.3 million are available to be drawn down on demand."

for Heartland ABCP Trust 1, still part of Heartland's accounts?

SNOOPY

[Snow Leopard]

Snoops:

Think of a water bottle with a capacity of 1000ml.
You put 900ml of water in it,
then you drink 600ml from it.

If you have a sudden demand for water then you can drink nearly 300ml, being the water left and allowing for that little bit that sloshes around but you can never get out again and not 400ml right?

Now apply that thought process to the ABCP Trust.

But do not overthink it.

Best Wishes
Paper Tiger

[Snow Leopard]

I see your three ratios with 'On Demand', '0-6 months', '0-12 months' ratios...
...So you are saying that I am 'double counting' in my addition because the 'Cash & Cash Equivalents' includes the 'Undrawn Committed Bank Facilities"?

SNOOPY

When I was young and lived in Cote d'Ivoire my sole source of English language TV was CNN. Apart from the legendary Dave the Dog advert there was also another one where some guy in the USA watching the Sun going down phones his friend half way round the world who is watching the same Sun rising.

We are currently in the same boat.

Well, I am in the boat, and you are at the dog end of the Earth.

Anyway, so you have dug yourself into a deep hole and I keep sending you ladders so that you can climb out.
After a good nights sleep I awake to find that you have converted the ladder into another digging implement and are that little bit closer to the center of the earth.

So going back to basics - assume everything you think you know on this subject is wrong - then you will be right. Especially drop the abuse of the term cash flow.

Because HBL says "The banking group does not manage its liquidity risk on a contractual liquidity basis" this does not mean you ignore the figures from the contractual table and make something up instead.

Anyway I am sure you will continue to make a dog's breakfast of your analysis and I will chase the sunrise.

Must cast off
Paper Tiger

[Baa_Baa]

While Paper Tiger and Snoopy slug it out, one wonders what makes Paper Tiger so confident that he/she is the bona fide guru of bank finance analysis that is perfectly correct in every way at all times, while on the other hand as implied frequently, Snoopy doesn't have a clue.

Personally, I enjoy reading both viewpoints, albeit not the snide and facetious comments that come from one side of the analysis, but still cannot decide on which analysis has any merit. If I knew as much about valuing a bank as either of these characters do, I would probably not be sharing it on the internet but using it to make a gazillion on the sharemarket. Maybe even buy a bank!

For avid readers of this bank financial analysis soap opera, it might be time for the actors to front up with some credentials. By that I don't mean that the recidivist sideline bully's wade in (albeit they will be tempted) to slight the history of the discussion and analysis, moreover why should anyone believe anything either of them are saying right now, and going forward?

[percy]

Baa Baa.
One has a history of being 100% correct.
The other has a history of being 100% wrong.
Follow who ever you want.Fact or fiction.
I tend to follow those who are right.
It works out a lot more profitable.
We have had nearly 6 years of this thread,so it is easy to back test,and see who is correct.

[Snow Leopard]

While Paper Tiger and Snoopy slug it out, one wonders what makes Paper Tiger so confident that he/she is the bona fide guru of bank finance analysis that is perfectly correct in every way at all times, while on the other hand as implied frequently, Snoopy doesn't have a clue.

Personally, I enjoy reading both viewpoints, albeit not the snide and facetious comments that come from one side of the analysis, but still cannot decide on which analysis has any merit. If I knew as much about valuing a bank as either of these characters do, I would probably not be sharing it on the internet but using it to make a gazillion on the sharemarket. Maybe even buy a bank!

For avid readers of this bank financial analysis soap opera, it might be time for the actors to front up with some credentials. By that I don't mean that the recidivist sideline bully's wade in (albeit they will be tempted) to slight the history of the discussion and analysis, moreover why should anyone believe anything either of them are saying right now, and going forward?

I will have you know that not only have I been into a bank on several occasions but I have spoken to people who work in banks and I also have a piggy bank, called Perky.

And you, do you have any qualifications that allows you to make authoritative comments on squiggly lines?

Best Wishes
Paper Tiger

[Snoopy]

For avid readers of this bank financial analysis soap opera, it might be time for the actors to front up with some credentials. By that I don't mean that the recidivist sideline bully's wade in (albeit they will be tempted) to slight the history of the discussion and analysis, moreover why should anyone believe anything either of them are saying right now, and going forward?

Baa-Baa, I guess I could make up any credentials on an anonymous forum but would you believe them? For this reason I prefer to let my posts do the talking. I do not claim to be the great banking guru who always gets everything right. But if my posts gradually get 'righter', as a result of further reading or forum banter, then that is enough. And I do try to reference where I get my base information from so that others are free to check it.

My interest in financial institutions stems from being a long term shareholder in both ANZ and Westpac. My general observation that banks do well in both good times and bad, meant my analysis and scrutiny of these two investments became lazy. It was the GFC in general , and its effect on the NZ Finance industry in particular that got me thinking that I should make a real effort to understand my banking investments better. Shortly afterwards a company that I held shares in, PGG Wrightson, sold their 'golden goose' finance division to the newly minted Heartland Bank (as it would become). It was this transaction that drew me to Heartland as a good testing ground for better understanding banks.

When PGG Wrightson as a group became 'short of capital', the banking syndicate at the time drew up various 'solvency tests' that the PGG Wrightson Finance Division should satisfy. It is these tests, nothing that I have made up myself, that I am applying to Heartland bank to test its robustness. Some have said that these tests are inappropriate, or at least have the wrong hurdles for Heartland to jump over. The people who say this may have some valid points, and I have changed the 'hurdle heights' for some tests.

It may appear that PT and I spar on opposite sides of a boxing ring. But in fact we agree on many things. To take the latest 'spat' on bank liquidity as an example, I am reasonably satisfied that Heartland is OK and I don't think that PT has any liquidity issues either. It is true that I have 'failed' Heartland on the liquidity test at FY2016 and HY2017. But these failures, on what has become a mechanical calculation process, I feel are likely from a lack of disclosure on extra borrowings that may be available from Heartland's parent banks, rather than a fundamental liquidity weakness within Heartland itself. If I can find this extra information, and it is enough for Heartland to pass my liquidity test, then I will move on. If not though, then I will keep 'banging away' until the information door opens!

SNOOPY

[Snow Leopard]

For those of you that are actually interested in banking I suggest you watch the movie 'It's A Wonderful Life' which shows what I am going to be talking about in action. But I do warn you now to make sure you have your hanky handy for the weepy bit.

For percy and other HBL groupies then it is best that you not read this post at all.

For Snoopy we are going to stick to On Demand only, OK?

----------

So what is the worst thing that can happen to a bank?

Well has you have asked I will tell you that it is probably a loss of confidence in the bank such that everybody wants their money out of it as soon as possible:

A run on the bank.

At 31st December 2016 people had the contractual right to walk into a bank, or up to an ATM, or connect to the website etc and suck $754.6M dollars out of HBL.

To make it worse HBL have promised to loan another $99.1M to people who may still insist they hand over the cash so that they can buy that new boat.

That is $853.7M that HBL would have to provide pronto - can they do it?

NO.


There is ready money they can lay their hands on consisting of $69.7M of cash and cash equivalents and another $49.3M that the ABCP Trust 'Water Bottle (see a previous post) can provide for a grand total of $119.0M.

So they could actually meet 13.9% of the demand. That is the liquidity ratio.


Now what is much more likely to happen? What has they say, is expected?

Well people take money out and people put money in and some days there may be a few million more out than in and other days a few million more in than out and each day will be different.


But expect the unexpected.

So they have the facilities in place to cope with a sudden 'biggish' run.

Best Wishes
Paper Tiger

[Snoopy]

For Snoopy we are going to stick to On Demand only, OK?

----------

At 31st December 2016 people had the contractual right to walk into a bank, or up to an ATM, or connect to the website etc and suck $754.6M dollars out of HBL.

To make it worse HBL have promised to loan another $99.1M to people who may still insist they hand over the cash so that they can buy that new boat.

That is $853.7M that HBL would have to provide pronto - can they do it?

NO.


There is ready money they can lay their hands on consisting of $69.7M of cash and cash equivalents and another $49.3M that the ABCP Trust 'Water Bottle (see a previous post) can provide for a grand total of $119.0M.

Heartland HY2017 Liquidity 'On Demand' (Contractual): Refer Note 14 -{Snoopy Version}
Cash & Cash Equivalents	$69.655m
plus Unrecognised loan commitments	$99.061m
less Borrowings Contracted for Repayment	($754.583m)
add Undrawn Committed Banking Facilities	$49.294m
Worst Case Contracted Net Cashflow	($576.573m)

Heartland HY2017 Liquidity 'On Demand' (Contractual): Refer Note 14 -{Tiger Version}
Borrowings Contracted for Repayment	($754.583m)
less Unrecognised loan commitments	($99.061m)
add Cash & Cash Equivalents	$69.655m
add Undrawn Committed Banking Facilities	$49.294m
Worst Case Contracted Net Cashflow	($734.695m)

I am completely baffled that despite these numbers being 'grouped' correctly for you by your friendly local Tiger you then go and re-arrange them in an apparently random manner and come up with a complete load of utter junk as a result.

Right, so at last we can pin point the view of the secretive Tiger and we find that the 'complete load of utter junk' actually contains only one line different to what the Tiger was proposing. That line represents 'Unrecognised loan commitments'. PT has assumed this means loan commitments where the nod and the wink has been given. But the paperwork is still in the system so the loans have not yet appeared on the books. This could be the correct interpretation. But there are other possible interpretations.

One other interpretation is that these loans are already made. But they are on the books of ABCP trust, not on the Heartland books directly. We know ABCP Trust is no longer an 'associated person' of Heartland Bank, and has managed to get a higher credit rating than Heartland Bank. The higher credit rating would not be possible if ABCP Trust was still legally controlled by Heartland. IOW the 'unrecognised loans' are 'off balance sheet' as far as Heartland's accounting reporting standards are concerned. Yet these loans still form part of an overall Heartland picture. This is my interpretaion of what is printed in IR2017 Note 14. And if this is the correct way of interpreting that table, then my 'complete load of utter junk' is entirely reflective of the true situation and it is actually the Tiger version that is a ... I'd better stop there if I don't want a flame war.

Now what is much more likely to happen? What has they say, is expected?

Well people take money out and people put money in and some days there may be a few million more out than in and other days a few million more in than out and each day will be different.

Now we find that the Tiger suggested that the 'expected' cashflows' are quite different to the 'contracted cashflows'. I agree with the Tiger on this. Yet the 'expected cashflows' can be extrapolated from the 'contracted cashflows' using assumptions based on past behaviour of customers.

The Tiger suggests that studying 'contracted cashflows' is the way to study liquidity becasue anything more than that is just data corruption. I do have some sympathy with keeping just to the base contractual data. But we know it is virtually certain that:

1/ most debenture funds will be reinvested AND
2/ some loans will be repaid early.

So any data we generate from 'contracted cashflows' will almost certainly be meaningless in the real world. Meaningless in absolute value, but possibly still useful in comparing the state of the books at two different snapshots in time.

The way I have converted 'contracted cashflows' to 'expected cashflows' is not ideal. That is because I have used conversion factors based only on one year of data (FY2014) published by Heartland. Extrapolating what will happen in all other years from what happened in just one year is not good modelling practice. Nevertheless if you regard the FY2014 year as representative, and I do, then I think calculating the 'behavioural data' is an exercise worth doing. I stand by using my 'behavioural data'. And if PT disagrees with that then I respect his position. But it doesn't make me wrong.

SNOOPY

[Snow Leopard]

There must have lived in dread of you at the puppy farm, Snoopy!

I will see if I can get a photo of a dog peeing on the statute of Captain Cook for you if I ever make it into harbour at Whitby.

Best Wishes
Paper Tiger