HGH - Heartland Group Holdings

[winner69]

Last guidance especially 50m to 60m wasn't it

Must be a profit upgrade coming in next week or two if 62m plus is what's it's going to be

They've known all along

[Snoopy]

You're over-thinking it. Current year EPS is forecast at 12 cps. Current year dividends are forecast at ~ 8.5 cps

If you ignore all the dividend money reinvested as part of the dividend reinvestment plan, you may be right.

EPS 12 cents is more than $62m

Jeff wouldn't want it to be that much over guidance would he (proactively managed)

But then we know current guidance is a load of rubbish anyway ' a disgrace really

A good cost cutting saving is on offer for Jeff here. Get rid of the PR department, and sack all those accountants tied up 'looking forwards'. Sharetrader provides much better forecasts, and it's all for free ;-)

SNOOPY

[Snoopy]

Just to confuse readers, I will start in the middle of the story and ask them to look at column V and column W.

Column V is a measure of what management decide they want to do to adjust the size of the impaired balance bucket, to keep things running smoothly.

Column W is a measure over the same period of what is leaking out of the impaired balance bucket, actual loans written off over that period.

We can expect Column W to be far more lumpy that Column V. This is because actual right offs and the timing of those would not be expected to follow a regular pattern. OTOH taking a longer timeframe and a portfolio view of the loans, we might expect the proportion of loans that become impaired to converge around a steady figure. The impairment provisions are there to bring everything back to this management predicted 'steady state':

Smaller adjustments are needed on average, than actual write offs over the same period.

So if this is what we might expect, what do the numbers actually tell us?

On a half yearly period basis, what I see is pretty much what I expect. But the two totals tell a different story.

Over time I would expect the impairment expenses (what is adding to the bucket) and the write off expenses (what is leaking out of the bucket) to balance out. That doesn't seem to be happening here though. This sort of imbalance can happen over the short to medium term with a healthy total impairment provision (big bucket size). However, over the longer term even the biggest bucket will run dry.

Normalising the results tell a similar story. In proportional terms too, a lot more is flowing out of the impairment bucket than is flowing into it. There are at least a couple of different ways to explain this:

1/ The quality of loans could be getting ever increasingly better.
2/ The annual loan provisioning on average is being underdone, and consequently profit on average is being overstated.

Depending on whether you are a 'fan' or not, that will decide which explanation you choose to accept.

Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (V)	Write Off (W)	Gross Financial Receivables (Z)	(V)/(Z)	(W)/(Z)
EOHY2012	$87.728m	$2,075.211m	4.23%	$3.788m	$13.823m	$2,104.591m	0.18%	0.66%
EO2HY2012	$90.489m	$2,078.276m	4.35%	$1.854m	$3.993m	$2,105.702m	0.09%	0.19%
EOHY2013	$80.383m	$2,044.793m	3.93%	$5.254m	$4.824m	$2,072.270m	0.25%	0.23%
EO2HY2013	$48.975m	$2,010.393m	2.43%	$17.313m	$3.836m	$2,060.867m	0.84%	0.19%
EOHY2014	$42.498m	$1,905.850m	2.23%	$3.325m	$19.036m	$1,940.064m	0.17%	0.98%
EO2HY2014	$41.354m	$2,566.039m	1.59%	$2.570m	$19.582m	$2,631.754m	0.10%	0.74%
EOHY2015	$33.469m	$2,722.433m	1.23%	$5.102m	$1.456m	$2,749.232m	0.19%	0.05%
EO2HY2015	$32.824m	$2,862.070m	1.15%	$7.003m	$2.119m	$2,893.724m	0.24%	0.07%
EOHY2016	$29.147m	$2,928.601m	1.00%	$5.610m	$14.282m	$2,951.075m	0.19%	0.48%
EO2HY2016	$32.864m	$3,113.957m	1.06%	$7.891m	$4.381m	$3,140.105m	0.25%	0.14%
EOHY2017	$28.646m	$3,334.800m	0.86%	$6.892m	$6.552m	$3,361.934m	0.21%	0.19%
Total				$66.602m	$93.884m
Average							0.25%	0.37%

Ello ello ello. Wot goes on ear? The key point is to think about the progression of a loan going bad.

1/ At first a problem loan might come to management's attention.
2/ Next the loan may become partially impaired or fully impaired.
3/ Finally, when all hope is lost, the loan -or part of the loan- is written off.

Of course the above sequence is a simplification of the spectrum of real possibilities. A loan that comes to management's attention may end up coming right. Part of a loan may end up being written off while another part recovers and yet another part remians in the 'problem' bin. There are many paths a particular loan may take.

I have defined a 'stressed loan' ( > 90 days overdue (collective loans) OR individually impaired OR Restructured Assets) in the above table as a loan (or part of a loan) that has 'come to management's attention' (by being classified in the accounts as described) , but is not impaired. I have finished the calculation of the 'Stressed loans' as I have defined them, by subtracting out the impaired portion. The important thing is that there is no overlap between the loans or portions of loans in the 'stressed loan box' and the 'impaired loan box' in the table above, the way I have defined them.

While one cannot project the path of any particular loan that has come to management's attention, overall one might expect the trend in 'stressed loans' to be broadly indicative of the trend in 'impaired loans'. This might not be true, and what I have just said is an assumption. It is possible that a loan jumps from 'OK' to suddenly becoming impaired. But if management were that unaware that such a loan could end up being a problem - their credit control system was really that poor - would you want to invest with them? Put another way, if you thought Heartland was an investment worth considering, you would hope that Heartland management had a good handle on how loans coming to management's attention might behave as a collective group. That means I think the assumption that there should a correlation between 'stressed loans' and 'impaired loans' is reasonable.

The 'Stressed Loan' trend plotted over 11 half year periods is a beautifully decreasing curve (as a percentage of the unimpaired loan book). However, there is no such equivalent decreasing curve when comparing to the 'write offs' or 'impairments' over the same 11 half year time periods. I wonder why there are so many less 'stressed loans' now, in percentage terms, compared to the number 'write offs' and 'impairment provisions' in percentage terms that management are making? Is this consistent with management being on top of things?

SNOOPY

[percy]

Disclosure.
I sold 8.47% of my HBL holding last night and this morning at $1.69,as I may need the funds.
It still leaves me overweighted.I rather enjoy being overweighted,and if things work out, HBL will not be the only share I am nicely overweighted with.
Watch this space as good things take time.!!...lol.

[janner]

Disclosure.
I sold 8.47% of my HBL holding last night and this morning at $1.69,as I may need the funds.
It still leaves me overweighted.I rather enjoy being overweighted,and if things work out, HBL will not be the only share I am nicely overweighted with.
Watch this space as good things take time.!!...lol.

You have spooked the market perc. Dropped already.

[percy]

You have spooked the market perc. Dropped already.

Think the market has recovered, as it realises I have retained 91.53% of my holding.!!..lol.

[winner69]

Because Column V will be quite high this year no profit upgrade likely (proactively provisioning it's called). $60m it will be

But I reckon the market per se will demand to see a decent return on the extra capital used so Jeff will relent and Column V might be a lower number and $62m/$63m might be it

Don't you love this Column V

[Joshuatree]

Disclosure.
I sold 8.47% of my HBL holding last night and this morning at $1.69,as I may need the funds.
It still leaves me overweighted.I rather enjoy being overweighted,and if things work out, HBL will not be the only share I am nicely overweighted with.
Watch this space as good things take time.!!...lol.

I understand if its an age issue for you percy or even an aged care issue lol

[percy]

I understand if its an age issue for you percy or even an aged care issue lol

No .................no..............no............... .lol.

[Snoopy]

Because Column V will be quite high this year no profit upgrade likely (proactively provisioning it's called). $60m it will be

But I reckon the market per se will demand to see a decent return on the extra capital used so Jeff will relent and Column V might be a lower number and $62m/$63m might be it

Don't you love this Column V

Winner is referring to one aspect of 'the art of profit manipulation', which is one way to interpret the table in my post 9372.

Put succinctly Column 'V' is the 'Impaired Asset Provision' going into the problem loan bucket. Column 'W' is the 'Impaired Asset Expense' leaking out of the problem loan bucket. In any particular six monthly period, there is no reason these two should be exactly the same. Over time though, one might expect the 'Impaired Asset Provision' to 'fully feed' the 'Impaired Asset Expense'. If it didn't, then the impaired assets on the books would eventually disappear. And it is unrealistic to think that a bank would have no impaired assets on the books at all.

"1st April 2014: Seniors 'Reverse Mortgage' Business Acquired." This is the date I recognise as the birth of the 'modern' Heartland we see today. It is probably unfair to compare the 'modern' Heartland with the Heartland that was born with all sorts of legacy property portfolio issues. So I have cut down my table to just show the half year time periods from 1st July 2014 onwards (HY2015 onwards).

Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (V)	Write Off (W)	Gross Financial Receivables (Z)	(V)/(Z)	(W)/(Z)
EOHY2015	$33.469m	$2,722.433m	1.23%	$5.102m	$1.456m	$2,749.232m	0.19%	0.05%
EO2HY2015	$32.824m	$2,862.070m	1.15%	$7.003m	$2.119m	$2,893.724m	0.24%	0.07%
EOHY2016	$29.147m	$2,928.601m	1.00%	$5.610m	$14.282m	$2,951.075m	0.19%	0.48%
EO2HY2016	$32.864m	$3,113.957m	1.06%	$7.891m	$4.381m	$3,140.105m	0.25%	0.14%
EOHY2017	$33.050m	$3,334.800m	0.99%	$6.892m	$6.552m	$3,361.934m	0.21%	0.19%
Total				$32.498m	$28.790m
Average							0.22%	0.19%

This shows a better picture with 'V' and 'W' more in balance. There is still a solid trend for X (the Stressed Loans of the Books) coming down. But this could be becasue we have a particularly favourable market for borrowers at the moment. Could it be that there are genuinely less stressed loans out there? Does that mean that my complaining about the divergence between the trends of 'Stressed Loans' and 'Impairment Provisions' over time is merely a product of benign market conditions? So there is nothing to worry about?

SNOOPY