HGH - Heartland Group Holdings

[BlackPeter]

...

One option (the only option?) would be to redeem the reverse mortgages early. Doesn't sound so bad. Until you realise what it means is 'sell houses' and throw old people out onto the street!

SNOOPY

I am not a lawyer and didn't yet analyse a REL contract either. However - based on the information I have seen (e.g. a report in Consumer) does this last option not exist for the bank. The existing REL contracts explicitly guarantee the homeowner that they can stay in their house for life, no matter whether the house equity drops below the drawn loan.

It is the job of the bank to make sure they stay on the cautious side when approving the loan ... and if they err, they have to take that on their balance sheet.

[Snoopy]

The opportunity to back their strong organic growth in Australian RELs should be taken.
To miss this opportunity would not be in Heartland shareholders best interest.
I too will be voting in favour of all resolutions.


Heartland can already grow their Reverse Mortgage business in Australia by 100% (this is a conservative estimate on my part, the true figure may be closer to 150%) by doing nothing to restructure the business. 100% is quite a lot of organic growth. It would bring Australian reverse mortgages up to 20% of the loan book. Are you saying that Heartland want to boost the Aussie REL business by even more than this? To 30% of the loan book? Or 40%? That would be quite a different business mix than exists today under the Heartland umbrella.

I am not saying that Shareholders should never approve a resolution to extract the Aussie REL mortgages from under the bank structure. I am saying there is no need to do it now, or for a couple of years. The only thing shareholders will 'gain' by doing this now is to lose the supervision of RBNZ for that part of the business.

Of course where such a restructure might make sense is if Heartland wanted to buy up an existing REL loan book from another market player. But if that is what they want to do, just come clean and let shareholders know. That way at least shareholders will know exactly what they are voting for.

SNOOPY

[Snoopy]

I am not a lawyer and didn't yet analyse a REL contract either. However - based on the information I have seen (e.g. a report in Consumer) does this last option not exist for the bank. The existing REL contracts explicitly guarantee the homeowner that they can stay in their house for life, no matter whether the house equity drops below the drawn loan.

It is the job of the bank to make sure they stay on the cautious side when approving the loan ... and if they err, they have to take that on their balance sheet.


I think that is all correct BP. But remember the REL business of Australia will be taken outside of the bank umbrella. I think ASIC may have a say as to what goes on in Australia. But there will be no banking authority oversight. The securitized loan process mooted should transfer some of the any potential capital loss to the as yet unissued supporting bondholders. But it will be the job of the nobody to make sure "Heartless 'Stick it up the Ozzie Pensioners' Not a Bank Limited." stay on the cautious side when approving any loan ...

SNOOPY

[winner69]

Snoops me old mate ...you are thinking too hard about Heartlands REL activities in Oz and seeing an awful lot of things that don’t or are ever likely to exist.

Seniors Finance has been going since 2004 in Oz and no doubt the likes of APRA and ASIC have no issues with them.

Life we go on as usual whether they double their business or not ...no worries

[percy]

Seniors REL business was outside of any banking umbrella when HBL brought it.
HBL and The Reserve Bank of NZ agree the REL business should be outside Heartland Bank.
Having a business outside of the bank never affected Westpac with AGC or ANZ with UDC.
So no reason Heartland Group can not own a NZ bank, and REL businesses as well.

[winner69]

Using the new Heartland App

Bit disappointed it doesn’t give me a Te Reo option.

Utua is pay and penapena is save

BNZ apparently gives that option

[percy]

Another interesting presentation from Heartland last night.
When they first brought Seniors Reverse Equity Loan business ,they were very much aware of NZ companies failures in Australia.
They were therefore very cautious.The REL business has been an out standing success, and the growth is set to continue,particularly in Australia.
The average Australian loan is higher than in NZ,usually between au$50,000 and au$60,000,against an average RVL of 12%.They will lend up to 20% to 30% of RVL,.Nearly 70% of RELs are repaid early.Talking with Australian regulators ,any new requirements will not be an issue for Heartland.
The restructure group is to facilitate the growth in their Australian REL business.Australian REL business growth rate is much higher than in NZ,however Heartland see good prospects in NZ as well.
Heartland need 70% shareholders to vote in favour of this resolution,so if you have not already voted,please do.

[Snoopy]

Having a business outside of the bank never affected Westpac with AGC or ANZ with UDC.
So no reason Heartland Group can not own a NZ bank, and REL businesses as well.


Not sure about AGC. I know that UDC have their own board. But I believe that UDC is consolidated within the ANZ.NZ accounts. That is the reason that UDC as a 'separate entity' (sic) is not under supervision by RBNZ. So UDC is not outside of ANZ in any legal way.

SNOOPY

[Snoopy]

We can only gess at how it might work out. Ultimately, it comes down to whether you trust the directors to do their job or not.
I do trust them and have voted for the restructure, if I didn't trust them I would sell my shares.


Freddagg, I accept your position, it is legitimate, and I won't attempt to change your mind.

For others reading, I believe it is also legitimate to have shares in a company and yet not agree with everything the directors do. I myself have publicly voted against what directors have suggested (in another company), yet I still retained my shares after my vote was 'lost'. I retained my shares because I thought that the overall company direction was good, even though I disagreed about one particular resolution. I have now moved on from that particular issue, even though my voiced concern at the time has largely been proved correct with hindsight. I don't feel a 'fraudulent' shareholder because I keep holding. I think internal contesting of ideas is healthy.

In this Heartland vote, I don't believe that the issue is black and white. What Heartland directors are proposing as 'new' was the status quo anyway only three years ago. And most of the directors that voted to bring the REL business within the Heartland Bank fold are still there. IOW Heartland directors have flip flopped on this issue. At the time IIRC, the benefits of having a simplified corporate structure with only one board was mentioned. If this deal goes through there will be two boards again. Progress?

SNOOPY

[percy]

I am not a lawyer and didn't yet analyse a REL contract either. However - based on the information I have seen (e.g. a report in Consumer) does this last option not exist for the bank. The existing REL contracts explicitly guarantee the homeowner that they can stay in their house for life, no matter whether the house equity drops below the drawn loan.

It is the job of the bank to make sure they stay on the cautious side when approving the loan ... and if they err, they have to take that on their balance sheet.

As they are doing with the 104 year old in Geelong.
Good on her.....lol.

[davflaws]

Using the new Heartland App

Bit disappointed it doesn’t give me a Te Reo option.

Utua is pay and penapena is save



BNZ apparently gives that option

He aha te tikanga maori mo te "stirrer!"??

[minimoke]

Using the new Heartland App

Bit disappointed it doesn’t give me a Te Reo option.

Have HBL given any commitment to Signing or deaf interpretation at their branches?

[forest]

Another interesting presentation from Heartland last night.
When they first brought Seniors Reverse Equity Loan business ,they were very much aware of NZ companies failures in Australia.
They were therefore very cautious.The REL business has been an out standing success, and the growth is set to continue,particularly in Australia.
The average Australian loan is higher than in NZ,usually between au$50,000 and au$60,000,against an average RVL of 12%.They will lend up to 20% to 30% of RVL,.Nearly 70% of RELs are repaid early.Talking with Australian regulators ,any new requirements will not be an issue for Heartland.
The restructure group is to facilitate the growth in their Australian REL business.Australian REL business growth rate is much higher than in NZ,however Heartland see good prospects in NZ as well.
Heartland need 70% shareholders to vote in favour of this resolution,so if you have not already voted,please do.

I am not to sure Percy that I share your enthusiasm to vote in favour of this resolution to have the Australian REL business in a separate entity.
The reason is that I notice the following, a few months ago Richard Lorraway resigned. Richard was HBL Chief Risk Officer, if one person would understand the implications of the changes I would have thought it would be Richard. Ok, maybe coincidental he left right at the time risk management of HBL is up for discussion. But why then did Richard decided since to sell all of his share holding.
Also there are 2 other directors Ellen Comerford and Venessa Stoddart without a share holding in HBL.
Does not feel that everybody in top management believes strongly in great things to come.
To counter that some directors have a serious large shareholding but this was mostly acquired quit some time ago.
Your thoughts?

[winner69]

Have HBL given any commitment to Signing or deaf interpretation at their branches?


Getting prepared to do that at the AGM maybe


But sadly I think all thius diversity stuff is just one big charade to give themselves the warm fuzzies or maybe they think its good 'marketing'


I still remember the horrified look the Chairman had at a AGM a couple of years ago when a shareholder said the Board was a pack of fuddy duddys ...he seriously looked shooked, in other words he just doesn't get this diversity stuff.

[winner69]

I am not to sure Percy that I share your enthusiasm to vote in favour of this resolution to have the Australian REL business in a separate entity.
The reason is that I notice the following, a few months ago Richard Lorraway resigned. Richard was HBL Chief Risk Officer, if one person would understand the implications of the changes I would have thought it would be Richard. Ok, maybe coincidental he left right at the time risk management of HBL is up for discussion. But why then did Richard decided since to sell all of his share holding.
Also there are 2 other directors Ellen Comerford and Venessa Stoddart without a share holding in HBL.
Does not feel that everybody in top management believes strongly in great things to come.
To counter that some directors have a serious large shareholding but this was mostly acquired quit some time ago.
Your thoughts?


That Lorraway guy has probably left the office and that's why he sold his shares.


Has a habit of working for a few years and then taking a break ....travel



I wouldn't read much into him resigning ....but then a lot of risk management **** came out after he left his previous job

[percy]

I am not to sure Percy that I share your enthusiasm to vote in favour of this resolution to have the Australian REL business in a separate entity.
The reason is that I notice the following, a few months ago Richard Lorraway resigned. Richard was HBL Chief Risk Officer, if one person would understand the implications of the changes I would have thought it would be Richard. Ok, maybe coincidental he left right at the time risk management of HBL is up for discussion. But why then did Richard decided since to sell all of his share holding.
Also there are 2 other directors Ellen Comerford and Venessa Stoddart without a share holding in HBL.
Does not feel that everybody in top management believes strongly in great things to come.
To counter that some directors have a serious large shareholding but this was mostly acquired quit some time ago.
Your thoughts?

I spoke with CEO Jeff Greenslade and deputy CEO Chris Flood. before the meeting.In fact I had all my questions answered before the meeting started.
After the meeting I spoke with CFO David Mackrill,and Investor Relations Manager,Julia Belk..
When the restructure was first announced I was a bit disappointed HBL would not have to answer fully to The Reserve Bank of NZ.Thought that gave shareholders extra protection.I then came around to thinking OK I can see we still be able to analyse their full accounts.HBL have earnt my respect as they have always been honest with their objectives,and I have been very pleasantly surprised they do as they say they will do.
HBL have really made their REL business work.They see continuing huge growth in Australia.It is a very profitable low risk secure sector.Repeat "very profitable low risk secure sector."
To take advantage of this growth they have to restructure their structure.
The long and short of it, I went from being luke warm,to hot,and now I am boiling with enthusiasm.
I thought the previous CFO,Craig Stephen was very capable.I found him easy to talk to.His replacement David Mackrill, is also very capable and easy to talk with.Jeff Greenslade attracts capable people,including Investor Relations Manager Julia Belk.
Yes a couple of directors do not hold shares,however the other directors and management have a lot of skin on the line.

[CD_CHCH]

I have voted to support the proposal for pretty much the same reasons Percy has set out. HBL have proven to be reliable when setting targets and meeting them, and to date all moves made have increased the share price and/or dividends therefore they have my support.

[forest]

I spoke with CEO Jeff Greenslade and deputy CEO Chris Flood. before the meeting.In fact I had all my questions answered before the meeting started.
After the meeting I spoke with CFO David Mackrill,and Investor Relations Manager,Julia Belk..
When the restructure was first announced I was a bit disappointed HBL would not have to answer fully to The Reserve Bank of NZ.Thought that gave shareholders extra protection.I then came around to thinking OK I can see we still be able to analyse their full accounts.HBL have earnt my respect as they have always been honest with their objectives,and I have been very pleasantly surprised they do as they say they will do.
HBL have really made their REL business work.They see continuing huge growth in Australia.It is a very profitable low risk secure sector.Repeat "very profitable low risk secure sector."
To take advantage of this growth they have to restructure their structure.
The long and short of it, I went from being luke warm,to hot,and now I am boiling with enthusiasm.
I thought the previous CFO,Craig Stephen was very capable.I found him easy to talk to.His replacement David Mackrill, is also very capable and easy to talk with.Jeff Greenslade attracts capable people,including Investor Relations Manager Julia Belk.
Yes a couple of directors do not hold shares,however the other directors and management have a lot of skin on the line.

Thanks Percy, I will keep a close eye on how this develops.

[percy]

Thanks Percy, I will keep a close eye on how this develops.

Exciting future.
However, for it to happen, HBL need you to vote in favour of the resolution..

[forest]

I have voted to support the proposal for pretty much the same reasons Percy has set out. HBL have proven to be reliable when setting targets and meeting them, and to date all moves made have increased the share price and/or dividends therefore they have my support.

Meeting targets without raising capital is admirable, meeting targets and regurlarly raising capital well.......how hard can that be.

[percy]

Meeting targets without raising capital is admirable, meeting targets and regurlarly raising capital well.......how hard can that be.

Was pretty easy when the ROE was 5%.
Getting harder at ROE at 11%.
Guess they will have to work a bit harder when they get to an ROE of 13%.
Bring it on....lol

Be even harder if they don't get the growth in Aussie RELs, because they did not get the restructure over the line.
If you want growth with improving ROE,EPS and dividends,you must vote for it.

[forest]

Was pretty easy when the ROE was 5%.
Getting harder at ROE at 11%.
Guess they will have to work a bit harder when they get to an ROE of 13%.
Bring it on....lol

Be even harder if they don't get the growth in Aussie RELs, because they did not get the restructure over the line.
If you want growth with improving ROE,EPS and dividends,you must vote for it.

I will be at the AGM next week, I hope this will give me the same confidence as you have Percy. :)

[percy]

I will be at the AGM next week, I hope this will give me the same confidence as you have Percy. :)

I am sure it will.

Directors Bruce Irvine and Greg Tomlinson are good to talk to,as is deputy CEO Chris Flood, and CFO David Mackrill.

[winner69]

When Heartland applied to be a Bank the then CFO admitted it was more for marketing purposes than anything else. Gain much needed credibility and all that sort of stuff. Banks are safer than finance companies eh ...at least in the environment when finance companies were not well thought off.

Being a Bank per se has served its purpose but it is really a finance company at heart.

So breaking free from the constraints has to be good - it allows Heartland to move on and continue to grow, especially in Australia.

The only downside from a share price point of view is that the market might might see them as a finance company and not a Bank and rerate them accordingly. Maybe seen as a more ‘risky’ investment

But continued growth will offset that to a large extent, hopefully

Anyway Heartland Group sounds bigger and better than Heartland Bank

[percy]

W69.
Are you attending the HBL Wellington presentation.?

[peat]

Anyway Heartland Group sounds bigger and better than Heartland Bank

Not to me!

[percy]

Not to me!

Ha ha,
I note you have an H in WHanganui.
More groupie than bankie I would have thought.?...………..lol.

[SCOTTY]

I have voted in favour as I am very happy to support the proposal.

[peat]

Ha ha,
I note you have an H in WHanganui.
More groupie than bankie I would have thought.?...………..lol.

Yes thats the correct spelling.
:confused:

[janner]

Yes thats the correct spelling.
:confused:

Hope the pronunciation remains correct and does not go the way of FANGARAY.

[peat]

Hope the pronunciation remains correct and does not go the way of FANGARAY.
its Maori Language week mate how can you say this!!?

It is correctly pronounced Fungarei , but Whanganui stays the way it was always pronounced. No F sound just Wonganui - Maori in this region dont pronounce the H
Yes its not easy keeping up huh

Back to Heartland I have a few under a CFD, but not in my name as yet. I am quite disappointed with it technically. Been going down for the last 9 months - i cant see any compelling reason to own it at present so may ditch the few I have.

[janner]

its Maori Language week mate how can you say this!!?

It is correctly pronounced Fungarei , but Whanganui stays the way it was always pronounced. No F sound just Wonganui - Maori in this region dont pronounce the H
Yes its not easy keeping u
p huh
Back to Heartland I have a few under a CFD, but not in my name as yet. I am quite disappointed with it technically. Been going down for the last 9 months - i cant see any compelling reason to own it at present so may ditch the few I have.

A position I find myself in.. However having been in from ground zero.. The returns have been excellent..
Will hang in there for the time being..

Maori Language week. " Yes its not easy keeping up huh. "

I can only refer you to...... But that is off topic.

[Snoopy]

When the restructure was first announced I was a bit disappointed HBL would not have to answer fully to The Reserve Bank of NZ.Thought that gave shareholders extra protection.I then came around to thinking OK I can see we still be able to analyse their full accounts. HBL have earnt my respect as they have always been honest with their objectives,and I have been very pleasantly surprised they do as they say they will do.
HBL have really made their REL business work.They see continuing huge growth in Australia. It is a very profitable low risk secure sector. Repeat "very profitable low risk secure sector."


I agree with what Percy has written above. The ability to fully monitor shareholders' potential downfall with fully audited accounts will certainly be painted up in lights for everyone to see.

Yet I think Percy skirts the main risk issue which is actually cashflow. It is possible to have a highly profitable business unit that nevertheless cannot pay its bills in cash. Heartland does not have the money to fork out large Reverse Mortgage cash sums with no cashflow coming back for many years. They are looking to fix the cashflow problems by borrowing large amounts of money on the wholesale bond market in Australia. And this creates the risk that if the wholesale bond market tightens up, not only will Heartland's REL business not be able to grow. It means that Heartland will not have the money to pay the interest on the bonds they have created already. How likely is this to happen in reality? I would say that the chances are low. So if the chances are low, why worry about it? Because if it does happen the downstream damage will be severe!

The only realistic way out of such a potential pickle that I can see is that new parent 'Heartland Holdings' would have to sell all or part of Heartland Bank based in New Zealand. That could leave today's "Heartland Bank' shareholders with only a distressed REL portfolio in Australia. The question is, as a Heartland shareholder today, are you prepared to entertain that low risk with high consequences? The best way to avoid such a risk is to stick with the current structure.



To take advantage of this growth they have to restructure their structure.


No they don't. They can still grow the Australian REL business by 100% (measured by the size of the loan book) under the existing structure.

SNOOPY

[percy]

70% of RELs are repaid early.
Snoopy says HBL can grow REL business in Australia 100% under existing structure.
HBL say they need new structure to grow the Australian REL business.
Difficult choice,believing Snoopy, or HBL board and management,who actually have shares [ a lot] in the business,and know the business better than anyone.
Tough decision..? ,,,lol.

[BlackPeter]

70% of RELs are repaid early.
Snoopy says HBL can grow REL business in Australia 100% under existing structure.
HBL say they need new structure to grow the Australian REL business.
Difficult choice,believing Snoopy, or HBL board and management,who actually have shares [ a lot] in the business,and know the business better than anyone.
Tough decision..? ,,,lol.

Actually - I do think that Snoopy is pointing out a very real risk worthwhile considering ... and even good directors have no 20/20 foresight of what the future might bring. As well - ask CBL shareholders whether large director shareholdings are a useful indicator. On the other hand - they will tell you as well that while RBNZ oversight may or may not add value to some stakeholder interests - its value for shareholders is quite negative.

Anyway - the proposed changes are likely to improve HBL's earning capabilities if things go well - and it will increase the risks for the shareholders if things don't go well.

Classical investors decision - higher (potential) rewards vs higher risks. Everybody needs to decide for themselves which model fits better to their investment profile.

Discl: Don't hold at present and not really sure how I would vote ...

[iceman]

I agree BP that Snoopy has pointed out a real risk with the cashflow intensity of the REL business. No doubt about that. That's why I've just voted online for the proposed restructure to allow the Directors to seek more avenues for funding the big REL growth ahead. Yes it is a classic risk reward scenario that investors have to weigh up. I'm all for it.

[Beagle]

For me the decoupling from RBNZ oversight is something of a worry and gives me echo's from finance company days but this is not finance company lending.
Reverse equity lending margins are FAT and growth is very high and the risk with this sort of lending is very, very low.

[Enjay]

They can still grow the Australian REL business by 100% (measured by the size of the loan book) under the existing structure.

I wonder if this understates the opportunities for HBL in Aussie.

From the Scheme Booklet, HBL reckons the Aussie reverse mortgage business hits 35% annual growth.

On page 6, HBL notes that RBNZ limits wholesale funding to 20% and overall Aussie assets not to exceed 33% of the assets.

Absolutely, based on the HBL's current size, the reverse mortgage business has 100% growth. Assuming continued 35% growth, HBL's going to hit that upper limit within a couple more years.

Growth may be bigger if HBL can also increase its access to wholesale funding by restructuring away from the 20% wholesale funding limit.

Thoughts?

[BlackPeter]

For me the decoupling from RBNZ oversight is something of a worry and gives me echo's from finance company days but this is not finance company lending.
Reverse equity lending margins are FAT and growth is very high and the risk with this sort of lending is very, very low.

I guess I am still a bit struggling to quantify the risks.

Anybody has seen one of these REL contracts? If they cap the interest rate - or worse - fix a long term interest rate than it would be not too difficult to picture a scenario where anybody giving out these REL loans is receiving significantly less interest than they are paying to fund the capital.

Just one example .... imagine Trump crushes the Chinese economy and China does not need anymore Australian resources (coal, IO, other ores). Australia'n economy turns Argentina ... and interest rates approach 100% (give or take) annually. How safe would be a finance company holding long term (life can be long) REL loans capped at 8%?

And even if interest rates are not capped - how long at 100% interest that the principle is higher than the mortgage?

Not saying this is happening, but as said - life can be a long time, the future is impossible to predict and the risks are real.

[Snow Leopard]

...The only realistic way out of such a potential pickle that I can see is that new parent 'Heartland Holdings' would have to sell all or part of Heartland Bank based in New Zealand...

2/ Sell Heartland REL Oz
3/ Put Heartland REL Oz into liquidation

I voted against the restructure, but I only owe a few HBL shares these days.

[Beagle]

I guess I am still a bit struggling to quantify the risks. Plenty of doomsday scenario's if one wants to let their mind wander but for me several of the directors have serious skin in the game and as Percy keeps reminding us the average reverse equity loan is very small and only a tiny percentage of the value of retiree's homes, (unlike other banks which are lending as high as 95% loans again). Maybe other banks are actually higher risk in any of the doomsday scenarios one cares to conjure up ?

[percy]

Exactly.
Big difference between REL lending at 12% of LVR .and mortgage lending up to 95% of LVR.
Worth thinking about.
Heartland have.

[BlackPeter]

Just received the NZSA voting intentions for undirected proxies.

By the way - a useful document with company background and reasoning for every voting recommendation. They prepare these for every ASM they are attending. If you join the NZSA (https://www.nzshareholders.co.nz/members.cfm) you will be able to read them and get future copies as well ;):

Anyway - they say that "NZSA has met with the company and is satisfied the grounds for the restructuring are justified. " They will vote in favour of the proposal.

[minimoke]

Exactly.
Big difference between REL lending at 12% of LVR .and mortgage lending up to 95% of LVR.
Worth thinking about.
Heartland have.Though realistically, the 95% (greater than 80%) LVR risk exposure is limited to 15% of a banks loan book. Still can add up to a tidy sum of problems though.

[percy]

Though realistically, the 95% (greater than 80%) LVR risk exposure is limited to 15% of a banks loan book. Still can add up to a tidy sum of problems though.

Fun happened in UK a number of years ago.
Can't remember the exact details,but property values dropped over 10%.
Hundreds of thousands of people with no equity in their house,as they owed more than it was worth.
Banks did not sell them up,as it would have depressed values further,and meant they would have had to realise their losses.
Fun would be if Sydney,Melbourne and Auckland house prices fell more than 15%.
Think Heartland would be the last bank standing.

ps 15% [of most banks] would be their equity.
pps.Thanks Blackpeter for letting us know NZ Shareholders Assn are in favour.Positive.

[freddagg]

70% of RELs are repaid early.
Snoopy says HBL can grow REL business in Australia 100% under existing structure.
HBL say they need new structure to grow the Australian REL business.
Difficult choice,believing Snoopy, or HBL board and management,who actually have shares [ a lot] in the business,and know the business better than anyone.
Tough decision..? ,,,lol.

I think all the first three sentences are true because it is very likely HBL want to grow the business by a lot more than 100%.

[percy]

I think all the first three sentences are true because it is very likely HBL want to grow the business by a lot more than 100%.

Agree.
Their growth is gaining momentum.
Maybe over 40% in the coming year or more.?

[minimoke]

F
Think Heartland would be the last bank standing.
.
I think you would be dead right there. I was quite surprised when I look at HBL's REL at little you could actually borrow against equity - there was a grand canyon chasm of head room between the two.

Contrasted with banks residential lending I am horrified how much people can borrow (80% in a "flat market) where there is a risk of properties devaluing, relative to their income and the long length of term of the loan. Came across a person the other day. Aged 54, earning $21 an hour. Got a $400k loan on a property with an RV of $475. (must have got a $500k valuation). How is that not high risk?

[Snoopy]

I wonder if this understates the opportunities for HBL in Aussie.


Yes it does. My 100% growth in Australian REL comment was based on what Heartland can do with their current structural arrangements. It wasn't a comment on the potential of the market.



From the Scheme Booklet, HBL reckons the Aussie reverse mortgage business hits 35% annual growth.

On page 6, HBL notes that RBNZ limits wholesale funding to 20% and overall Aussie assets not to exceed 33% of the assets.

Absolutely, based on the HBL's current size, the reverse mortgage business has 100% growth. Assuming continued 35% growth, HBL's going to hit that upper limit within a couple more years.


Yes that's how I read it too. So why not vote for the restructuring in a couple of years, when it may actually be needed? Why the big rush to put through the restructuring now?



Growth may be bigger if HBL can also increase its access to wholesale funding by restructuring away from the 20% wholesale funding limit.

Thoughts?


Yes I imagine the Oz REL market could get a lot bigger than anyone is speculating here. But if that happens it will fundamentally change the nature of the Heartland Group. Provided Heartland keeps growing REL Australia out of proportion, the cashflow issue remains. Keep REL roughly the same size in proportion to the NZ loan book as they are now and the rest of Heartland could probably bail out any REL trouble in Australia. But once REL in Australia grows to 50% of all of the Heartland Group's business, that will no longer be an option.

SNOOPY

[hamish]

I attended the Wellington Shareholder presentation last night. Spoke with CFO, Deputy CEO, Investor Relations. Anyone else there?

Based on the presentation and conversations..

The plusses
- Heartland team members spoke very well, clearly understand their business model. Expertise seems high. Strong line of sight of their revenue streams, capital sourcing and capital efficiency.
- Were able to articulate what Heartland does in terms of value for their customers and their segments
- Strong revenue growth in some products such as Motor/RELs and they demonstrated a clear way of thinking about products (eg rural livestock) and how they meet customer needs.
- Appear to do very well with intermediary relationships - from who they Partner with, why, and when in the value chain
- Soon to launch App mass market, via TV advertising their "O4B - Open For Business" SME loan origination and fulfilment. 3 mins origination (apply and approve) based on AI, credit risk logic of 100 or so data points, through their mobile app for loans $50,000 (I think they were meaning on average there). Seeking to drive 40% increase in SME base (not stated the current baseline).
- I asked about relationship with RBNZ in terms of transparency, trust etc (I have shares in CBL - so would not want a repeat with HBL) and risk of any negative review, impositions, etc resulting from proposed restructure or in general. Response was that great relationship with RBNZ, low risk of interventionism, who 'support' the proposed structure (take that with a grain of salt I think as not sure Govt Agency would 'support'..HBL might 'comply')

The minuses

- EPS Growth - Notwithstanding the predicted revenue and profitability growth, EPS likely to remain flat. Due DRP and (I assume) capital raise(s). The response here is that they are paying out more in net dividend $$ each year
- Their core IT system replacement was north of $20m. Had significant impact on their service centre, which in turn had impact on their collections and impairments resolution (as call centre staff pre-occupied with IT issues). When pressed, not an entirely convincing response that this is all put to bed..and also that the 'integration' between this core platform and the 'digital' solutions is streamlined / easily scaleable. So, was not clear if any remnant costs for this to occur in FY19
- Harmony business overall profitability and business model perhaps not where it was expected to be (by Harmony themselves). Heartland have 11% slice of this and returns are 'as expected'. However, the tone was lukewarm

Questions from the floor
- Why don't you promote further the 'kiwiness' of Heartland (Kiwibank do this) for awareness etc - Answer, we do this in our Annual Report and Corporate material. Not a key 'push' message with the current marketing budget
- Is Heartland still interested in UDC - Answer, we're not sure if it's for sale or not... but we'd be delighted to buy it
- "What are the biggest risks ahead for FY19 and mitigations".. The response ended up circular talking about the opportunities..not the risks. Deflected entirely, which was disappointing. Growth is easy to be positive about... what about regulatory, liquidity, political, GDP risks...?
- A few others, but I can't now recall.

There was a strong message for shareholders to (1) vote as 50% shareholders are needed to vote for resolution to pass and (2) to vote in favour for the restructure.

My personal take - I'm left reflecting and mulling it all today still. With a fairly decent shareholding now, I'm honestly erring towards halving it post receiving DRP, allocating this elsewhere, and buying back at some point.. The year ahead seems to me, that while there will be revenue and profit growth.. the EPS and SP may well just remain steady until such time as the new business model (if approved) is embedded. There's also increase risk (as I see it) with some of the product lines as they scale and possibly NZ economy .. their modelling for impairments and impacts are just that, modelling vs fully proven. Another unknown , I wish I had asked in hindsight, was what their plan for their people and resource looks like in the next 12 months. Investment in knowledge and training in particular, along with ability to scale and service customer needs should they grow as intended.

Oh - I asked if HBL read this forum.... Answer, YES and they even are familiar with some of the usernames...

[horus1]

A long term hold. The only NZ bank I can invest in with good management and divs. I have a lot,voting for the new structure.

[moka]

Getting prepared to do that at the AGM maybe


But sadly I think all thius diversity stuff is just one big charade to give themselves the warm fuzzies or maybe they think its good 'marketing'


I still remember the horrified look the Chairman had at a AGM a couple of years ago when a shareholder said the Board was a pack of fuddy duddys ...he seriously looked shooked, in other words he just doesn't get this diversity stuff.
Yes, the Chairman would have been insulted by the comment. However Ray Dalio from Bridgewater Capital gets this diversity stuff and invites feedback from his employees about his performance at meetings, and on this TED talk gives an example of employee giving him feedback “Ray, you deserve a D- for your performance today in the meeting because...”
Rather than thinking I am right he started to ask himself “How do I know I am right.” And he uses algorithms to this. This is a good example of how AI can be used for better decision-making.

https://www.youtube.com/watch?v=HXbsVbFAczg
How to build a company where the best ideas win | Ray Dalio
Learn more about how these strategies helped Dalio create one of the world's most successful hedge funds and how you might harness the power of data-driven group decision-making.

[forest]

I am leaning towards voting against the new structure,

As I have mentioned before, risk manager resigned AND sold his complete shareholding, 2 directors do not own any shares in HBL and as far as I understand only 1 of the remaining directors took the opportunity to increase his shareholding in the April 18 DRP.
My impression is that management is not uniform in their enthusiasm for this major change in direction.

I like companies in general to grow relatively slowly (10 to 20%), this reduces a lot of risk. HBL is able to grow under the present structure in a controlled way and it was not that long ago that the present structure was created.

[Filthy]

I attended the Wellington Shareholder presentation last night. Spoke with CFO, Deputy CEO, Investor Relations. Anyone else there?

Based on the presentation and conversations..

The plusses
- Heartland team members spoke very well, clearly understand their business model. Expertise seems high. Strong line of sight of their revenue streams, capital sourcing and capital efficiency.
- Were able to articulate what Heartland does in terms of value for their customers and their segments
- Strong revenue growth in some products such as Motor/RELs and they demonstrated a clear way of thinking about products (eg rural livestock) and how they meet customer needs.
- Appear to do very well with intermediary relationships - from who they Partner with, why, and when in the value chain
- Soon to launch App mass market, via TV advertising their "O4B - Open For Business" SME loan origination and fulfilment. 3 mins origination (apply and approve) based on AI, credit risk logic of 100 or so data points, through their mobile app for loans $50,000 (I think they were meaning on average there). Seeking to drive 40% increase in SME base (not stated the current baseline).
- I asked about relationship with RBNZ in terms of transparency, trust etc (I have shares in CBL - so would not want a repeat with HBL) and risk of any negative review, impositions, etc resulting from proposed restructure or in general. Response was that great relationship with RBNZ, low risk of interventionism, who 'support' the proposed structure (take that with a grain of salt I think as not sure Govt Agency would 'support'..HBL might 'comply')

The minuses

- EPS Growth - Notwithstanding the predicted revenue and profitability growth, EPS likely to remain flat. Due DRP and (I assume) capital raise(s). The response here is that they are paying out more in net dividend $$ each year
- Their core IT system replacement was north of $20m. Had significant impact on their service centre, which in turn had impact on their collections and impairments resolution (as call centre staff pre-occupied with IT issues). When pressed, not an entirely convincing response that this is all put to bed..and also that the 'integration' between this core platform and the 'digital' solutions is streamlined / easily scaleable. So, was not clear if any remnant costs for this to occur in FY19
- Harmony business overall profitability and business model perhaps not where it was expected to be (by Harmony themselves). Heartland have 11% slice of this and returns are 'as expected'. However, the tone was lukewarm

Questions from the floor
- Why don't you promote further the 'kiwiness' of Heartland (Kiwibank do this) for awareness etc - Answer, we do this in our Annual Report and Corporate material. Not a key 'push' message with the current marketing budget
- Is Heartland still interested in UDC - Answer, we're not sure if it's for sale or not... but we'd be delighted to buy it
- "What are the biggest risks ahead for FY19 and mitigations".. The response ended up circular talking about the opportunities..not the risks. Deflected entirely, which was disappointing. Growth is easy to be positive about... what about regulatory, liquidity, political, GDP risks...?
- A few others, but I can't now recall.

There was a strong message for shareholders to (1) vote as 50% shareholders are needed to vote for resolution to pass and (2) to vote in favour for the restructure.

My personal take - I'm left reflecting and mulling it all today still. With a fairly decent shareholding now, I'm honestly erring towards halving it post receiving DRP, allocating this elsewhere, and buying back at some point.. The year ahead seems to me, that while there will be revenue and profit growth.. the EPS and SP may well just remain steady until such time as the new business model (if approved) is embedded. There's also increase risk (as I see it) with some of the product lines as they scale and possibly NZ economy .. their modelling for impairments and impacts are just that, modelling vs fully proven. Another unknown , I wish I had asked in hindsight, was what their plan for their people and resource looks like in the next 12 months. Investment in knowledge and training in particular, along with ability to scale and service customer needs should they grow as intended.

Oh - I asked if HBL read this forum.... Answer, YES and they even are familiar with some of the usernames...

great post, thanks for the summary mate.

[Beagle]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/323712/286553.pdf

Fitch affirms rating, worth a read.

[minimoke]

Not sure if its my greatest decision. But I'm back in at $1.66 after selling out at $1.75 and missing out on the 5.5 c divi. Lets see where we are after the vote. (Divi yield vs risk of SP dropping significantly got the better of me)

[winner69]

Keen to get punters to vote .....just got a text as Heartland ‘needs me to vote’

I felt important

[winner69]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/323712/286553.pdf

Fitch affirms rating, worth a read.

Interesting

A bit of Snoopy and a bit of percy rolled into one page — cool

[Beagle]

Interesting

A bit of Snoopy and a bit of percy rolled into one page — cool


Reading that report I was wondering if the Snoop Dog actually works for Fitch lol

[percy]

Interesting

A bit of Snoopy and a bit of percy rolled into one page — cool

I thought it was a disgrace.

[moka]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/323712/286553.pdf

Fitch affirms rating, worth a read.
I read it and this paragraph caught my eye and I did some research on Open Bank Resolution. I knew a bail-in existed but didn’t know it was called OBR.
“We believe the Open Bank Resolution (OBR) framework reduces the propensity of the sovereign to support its banks. The OBR framework allows for the imposition of losses on depositors and senior debt holders to make up capital shortfalls if a deposit-taking institution fails.”

So what I learned was


as a depositor I’m expected to assess a bank’s liquidity and risk. Sorry Snoopy my eyes glaze over when I read the calculations in your posts.
I may need to consult a registered financial adviser (not one employed by the bank) to help me decide whether to continue banking with ASB. Yeah right!
I am an unsecured creditor with the bank, not a depositor. I have made an unsecured loan to the bank, and if it fails I am treated just like an unsecured creditor is with any other failed business.
I am happy to accept risk in the sharemarket but I didn’t realise that I need to assess risk with my bank. I accept that finance companies are risky but my reading of the OBR policy is that a bank is now in the same category as finance companies = assess risk.
It’s my responsibility to assess risk and make choices. If my bank fails I made a bad choice - tough.
The Australian banking inquiry title says it all - Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Risky lending, liar loans, bribes, involved in multiple scandals- the same behaviour that led to the GFC is being repeated. No lessons learned or restraints put in place.
Where can I put my money that is safe?

https://www.rbnz.govt.nz/faqs/open-bank-resolution-policy-faqs
Why should depositors bail-out banks?
The OBR policy is designed to ensure that first losses are borne by the bank’s existing shareholders. In addition, a portion of depositors’ and other unsecured creditors’ funds will be frozen to bear any remaining losses. …….. The primary advantage of the OBR scheme, however, is that depositors would have access to a large proportion of their balances throughout the process. This contrasts with what would happen under a normal liquidation, where depositors might not have access to any of their funds for a significant period.

https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution
This ‘OBR Made Simple’ fact-sheet (PDF 1.4MB) explains OBR and how it works.
Where is the safest place for my money?
Every financial decision carries risk. You may need to consult a registered fnancial adviser to match your investments to your willingness to take risk. To assist in assessing potential risks, the Reserve Bank publishes a Financial Stability Report twice a year, in May and November.

[minimoke]

From memory thsi came in after the GFC and after the Tax Payer bailed out South Canterbury Finance - and allowed deposits secured by the tax payer.

[moka]

From memory thsi came in after the GFC and after the Tax Payer bailed out South Canterbury Finance - and allowed deposits secured by the tax payer.

https://www.beehive.govt.nz/release/maintaining-confidence-financial-system
11 March 2011
"The Government is considering options for maintaining confidence in the financial system when the Retail Deposit Guarantee Scheme expires at the end of this year, Finance Minister Bill English says.
The Government does not favour compulsory deposit insurance. This is difficult to price and blunts incentives for both financial institutionsand depositors to monitor and manage risks properly.
“One option for minimising disruption of the financial system and maintaining investor confidence is referred to as Open Bank Resolution. This aims to provide continuity of core banking services, allow the banking system to get back to normal and limit the costs to taxpayers."

[Beagle]

moka - Yes I'm afraid you are quite correct and many people are unaware of the risks. Australian banks are paying a scandalously low call rate on funds, many standard call accounts from the Australian owned banks only pay 0.1% (that is not a typo) and there are real risks in earning this "phenomenal" return. In Australia by comparison the Govt guarantees the first $250K of depositors personal deposits.

As close to risk free as it gets here is N.Z. Govt stock with various maturities that you can buy on market through your broker around 2-2.7% depending upon maturity date or invest in Kiwi Bonds https://www.nzdmo.govt.nz/individual-investors/kiwi-bonds/kiwi-bond-interest-rates Interest rates are VERY low but these are not subject to the OBR.

Senior ranked corporate bonds issued by major corporates are another option but are higher risk in as much as the company itself is a risk but again these are not subject to the OBR.

Some people (myself included) are using REIT's like ARG and power companies like GNE to achieve effective rates of return of about 8% gross which in my view is a far better risk adjusted return for one's funds than any of the above and again are not subject to the OBR.

P.S. At least Heartland give you some return for the risk with their on call interest rate of 2.75%. Using that account for one's funds that one wants to keep on call is a no brainer compared to the Australian owned banks in my opinion.

[Enjay]

So why not vote for the restructuring in a couple of years, when it may actually be needed? Why the big rush to put through the restructuring now?

Yes I imagine the Oz REL market could get a lot bigger than anyone is speculating here. But if that happens it will fundamentally change the nature of the Heartland Group.

Provided Heartland keeps growing REL Australia out of proportion, the cashflow issue remains... But once REL in Australia grows to 50% of all of the Heartland Group's business, that will no longer be an option.


All good points. Taking another look at those RBNZ restrictions on Oz wholesale borrowing, I think the answer about timing reveals itself.

Against total assets of 4,496M as at 30 June '18, HBL is able to borrow a max. of 20% or 899M. Current Oz borrowing (at that date) was at 615M.

A very rough and ready assessment shows that one year of 39% growth in existing borrowing takes HBL up to the limit (assuming no asset growth).

Those figures were as at June so, if we follow that timeline, HBL could be seen to be doing this 6ish months before hitting that upper cap.

Cash flow, certainly an issue, but the Scheme booklet suggests that CBA are happy to lend to support HBL's REL growth.

NJ

[iceman]

Thanks for you post 11315 Hamish. Very appreciative of you sharing your thoughs from the presentation.
P.S. it has gone XD so you´ve got your DRP. If you start selling at a good price, I´ll probably buy them off you :-)

[RTM]

Keen to get punters to vote .....just got a text as Heartland ‘needs me to vote’

I felt important

You are not so special, I got the txt as well. Just voted for the restructure.
The REL loans are probably the safest of them all. And profitable.

Hamish...thanks for your long report, appreciated.

[percy]

All good points. Taking another look at those RBNZ restrictions on Oz wholesale borrowing, I think the answer about timing reveals itself.

Against total assets of 4,496M as at 30 June '18, HBL is able to borrow a max. of 20% or 899M. Current Oz borrowing (at that date) was at 615M.

A very rough and ready assessment shows that one year of 39% growth in existing borrowing takes HBL up to the limit (assuming no asset growth).

Those figures were as at June so, if we follow that timeline, HBL could be seen to be doing this 6ish months before hitting that upper cap.

Cash flow, certainly an issue, but the Scheme booklet suggests that CBA are happy to lend to support HBL's REL growth.

NJ

This is posted in good faith as I am not sure I heard Jeff Greenslade correctly.

I think he said currently 80% of RELs being written in Australia, are being written by HBL's REL business..

[moka]

I am leaning towards voting against the new structure,

As I have mentioned before, risk manager resigned AND sold his complete shareholding,
Rather than just a mention I think that this needs to be emphasised. The expert in risk management has just left and sold down his complete holding. Probably because management has chosen to see the opportunities and has ignored the threats. I’d be gone too if I was the risk manager because of the overvalued Australian housing market.
Risk managers work with companies to assess and identify the potential risks that may hinder the reputation, safety, security and financial prosperity of their organisation.

[dabsman]

The risk manager might have also had a mortgage or needed to build a deck or decided to go to Europe or maybe buy his kids a house or build a bach....

[iceman]

The risk manager might have also had a mortgage or needed to build a deck or decided to go to Europe or maybe buy his kids a house or build a bach....

That guess is as good as any. Unless we know for sure why he left, it is just speculation, which of course is fine on this forum :-) But that´s all it is.

[ziggy415]

That guess is as good as any. Unless we know for sure why he left, it is just speculation, which of course is fine on this forum :-) But that´s all it is.
Google search reveals his work records are with finance institutions but each job he only stays
3 years 10 months
3 years 4 months
3 years 3 months (heartland)
1 year 3 months
he achieves all he can then moves on to his next challenge ....or he gets itchy feet, either way heartland wasn,t out of the ordinary

[bull....]

im voting for the restructure , big opportunities coming and growth

[winner69]

As I have said several times now nothing sinister with the Risk Officer leaving and selling his shares.

Three years seemed to be his attention span and then does a bit of travelling. He’s left the office and taken his bonus (the shares he sold) with him. Nothing more than that

Wasn’t one of Heartlands best hires and maybe the new guy strengthens the organisation .

[winner69]

I thought it was a disgrace.

Seriously ........

[winner69]

.....
Also there are 2 other directors Ellen Comerford and Venessa Stoddart without a share holding in HBL.

Your thoughts?

A good thing — they are truly independent and can make decisions without considering what’s in it for me and my bank account (no vested interest)

Directors not holding shares not a sign of lacking commitment, rather they can keep a rein on directors who think it’s their company.

[percy]

Seriously ........

Seriously.
HBL's lack of exposure to Sydney,Melbourne,and Auckland property market via large mortgages,means to me the large banks have greater exposure through any credit cycle.A 10% to 20% fall in property values, would see no ,or very little effect on HBL,while the major banks would most probably need Australian and NZ government assistance..
HBL for the main part have a great number of smaller loans,and these are more of a lot safer shorter term,ie the likes of motorvehicle lending and livestock.These loans have low default rates.
It is my opinion these "high risk" loans are in fact "low risk" loans going through any credit cycle.
This should be acknowledged.
Although they mentioned HBL's high NIM,maybe they should have pointed out more, how helpful this is to HBL.

[moka]

,while the major banks would most probably need Australian and NZ government assistance..


New rules now Percy. The government is saying no financial assistance from taxpayers. The shareholders and depositors carry the cost with Open Bank Resolution.
Can you imagine what it would do to business confidence if there was a bail-in and depositor’s funds were confiscated? The economy would tank. This would affect businesses as well as savers. Putting funds in finance companies was a choice and it was savings. With a bank there is no choice - you have to have a bank for your day to day transactions, especially for businesses.

Open Bank Resolution (OBR) is a long-standing Reserve Bank policy aimed at allowing a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than the taxpayer.
https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution
(https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution)
For me this changes the rules of commerce. Now the money owed to an unsecured creditor remains as a debt until the business is wound up. With OBR the bank continues in business and the creditor doesn’t get all their money back, because some is confiscated. I accept that the government can confiscate assets but I don’t think a private business should be able to even with government approval. With OBR depositors get punished for bank’s bad behaviour.

[minimoke]

New rules now Percy. The government is saying no financial assistance from taxpayers. .
I think, that if it comes to it again (which I'm sure it will), the old mantra Privatise Profits and Socialise Losses will come into play. The government of the day will do what it can to shore up votes which means minimising impact on bank depositors.

[Beagle]

New rules now Percy. The government is saying no financial assistance from taxpayers. The shareholders and depositors carry the cost with Open Bank Resolution.
Can you imagine what it would do to business confidence if there was a bail-in and depositor’s funds were confiscated? The economy would tank. This would affect businesses as well as savers. Putting funds in finance companies was a choice and it was savings. With a bank there is no choice - you have to have a bank for your day to day transactions, especially for businesses.

Open Bank Resolution (OBR) is a long-standing Reserve Bank policy aimed at allowing a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than the taxpayer.
https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution
(https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution)
For me this changes the rules of commerce. Now the money owed to an unsecured creditor remains as a debt until the business is wound up. With OBR the bank continues in business and the creditor doesn’t get all their money back, because some is confiscated. I accept that the government can confiscate assets but I don’t think a private business should be able to even with government approval. With OBR depositors get punished for bank’s bad behaviour.

Vast numbers of older folks have money in term deposits with banks, (because they think the sharemarket is too high risk) so they get really low returns and are blissfully unaware of the risks. They think their money is really safe. It is a VERY sad state of affairs.

[percy]

New rules now Percy. The government is saying no financial assistance from taxpayers. The shareholders and depositors carry the cost with Open Bank Resolution.
Can you imagine what it would do to business confidence if there was a bail-in and depositor’s funds were confiscated? The economy would tank. This would affect businesses as well as savers. Putting funds in finance companies was a choice and it was savings. With a bank there is no choice - you have to have a bank for your day to day transactions, especially for businesses.

Open Bank Resolution (OBR) is a long-standing Reserve Bank policy aimed at allowing a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than the taxpayer.
https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution
(https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution)
For me this changes the rules of commerce. Now the money owed to an unsecured creditor remains as a debt until the business is wound up. With OBR the bank continues in business and the creditor doesn’t get all their money back, because some is confiscated. I accept that the government can confiscate assets but I don’t think a private business should be able to even with government approval. With OBR depositors get punished for bank’s bad behaviour.

I was really meaning the Australian banks,however the NZ banks with Australian parents would also be under pressure.
Yes you are right,however I can not see either the Australian or NZ government,letting the likes of ANZ,CBA or Westpac fail.There would be some sort of arrangement.

[Marilyn Munroe]

Yes you are right,however I can not see either the Australian or NZ government,letting the likes of ANZ,CBA or Westpac fail.There would be some sort of arrangement.

The Reserve Bank of New Zealand is not your friend. Its job is to protect the banks. It would not hesitate to impose a haircut on depositors of a minor deposit taking institution like Heartland to teach people a lesson.

The systemic risk of a major bank imposing a cram down on depositors would make the Reserve Bank hesitate and make politicians eager to fix it.

Boop boop de do
Marilyn

PS. Mid Canterbury where Heartland does its major deposit taking business is so staunchly National they could put up a cockies dog as a candidate and it would still get elected. Thus there is no political risk to either of the main parties from cutting Mid Canterbury depositors adrift.

[Joshuatree]

Voted for , lets get this done and keep this company growing!.

[Beagle]

The Reserve Bank of New Zealand is not your friend. Its job is to protect the banks. It would not hesitate to impose a haircut on depositors of a minor deposit taking institution like Heartland to teach people a lesson.

The systemic risk of a major bank imposing a cram down on depositors would make the Reserve Bank hesitate and make politicians eager to fix it.

Boop boop de do
Marilyn

PS. Mid Canterbury where Heartland does its major deposit taking business is so staunchly National they could put up a cockies dog as a candidate and it would still get elected. Thus there is no political risk to either of the main parties from cutting Mid Canterbury depositors adrift.

And said dog would probably have more of an idea how to run the country than half the present lot in power...for one thing he'd boost funding for the SPCA lol

[percy]

That post made my day....lol.

[Fred_Rubble]

Long term reader of this forum. Many thanks to all the long term posters.

Investor in HBL from the beginning - DRP and capital raising participant.

Voted Yes - Growth should be pursued - Low risk growth - even better

[Snoopy]

All good points. Taking another look at those RBNZ restrictions on Oz wholesale borrowing, I think the answer about timing reveals itself.

Against total assets of 4,496M as at 30 June '18, HBL is able to borrow a max. of 20% or 899M. Current Oz borrowing (at that date) was at 615M.

A very rough and ready assessment shows that one year of 39% growth in existing borrowing takes HBL up to the limit (assuming no asset growth).

Those figures were as at June so, if we follow that timeline, HBL could be seen to be doing this 6ish months before hitting that upper cap.


You are referring to this quote in the 'small print' on p6 of the scheme of arrangement book?

"1/ The Reserve Bank expects Heartland Bank to limit the extent to which its loans (both in New Zealand and Australia) are secured to wholesale funders to not more than 20%." ?

I think this note is referring to what are normally termed 'securitized loans'. These are loans packaged up and sold to third parties. The reason I think this is that other interpretations seem to me to make little sense.

I think your suggestion that 'borrowings' should not exceed 20% of the total balance sheet assets is an incorrect interpretation of what this note means. If you look at the balance sheet just down from where you took the $4,496m total asset figure from, you will see that borrowings already total $3,796m. This is way over your calculated ceiling of $899m.

Not sure where you get your Oz borrowing figure of $615m. Under note 13 of AR2018 we learn that $A562m has been drawn on the CBA facility in Australia of $A600m. Maybe you have converted this to $NZ at the following exchange rate?

$A562/$NZ615 => $NZ1 = $A0.9138

'Securitized Loans' involve a compromise. The parent bank will charge Heartland a lower than market interest rate. In return Heartland will swallow a larger than normal amount of lost capital should the loan ever go bad. This implied capital guarantee to the buyer of those loans is an extra risk to Heartland and the reason why the 'sold' loans must still appear on the Heartland balance sheet. But how much of a burden will the securitized loan guarantee be? Heartland aren't saying. But the Reserve Bank are saying:

"Don't securitize more than 20% of your loan portfolio."

or that risk becomes too great. This is how I interpret the foot note on p6.

SNOOPY

[Snoopy]

The Reserve Bank of New Zealand is not your friend. Its job is to protect the banks. It would not hesitate to impose a haircut on depositors of a minor deposit taking institution like Heartland to teach people a lesson.


Yes, but if what you say is true MM, and I think it is, then: What we shareholders need is a higher standard of protection than the Reserve Bank oversight gives. The argument that Reserve Bank oversight has let shareholders down (e.g. CBL Insurance), and so we should not be concerned about the loss of Reserve Bank oversight with Heartland seems a perverse one.

The 'good riddance to Reserve Bank oversight' attitude is akin to saying that one cop is not enough of a police presence to keep order in a small town, so let's get rid of the one cop we have and that will be better! Yet all the while the actual solution to small town unrest is that you need two cops, not just one. What we shareholders need is a more stringent application of Reserve Bank standards, if we shareholders are to avoid a loss of shareholder capital. We don't want Reserve bank oversight to be abolished. At least that is the way I see it.

SNOOPY

[BlackPeter]

Yes, but if what you say is true MM, and I think it is, then: What we shareholders need is a higher standard of protection that the Reserve Bank oversight gives. The argument that Reserve Bank oversight has let shareholders down (e.g. CBL Insurance), and so we should not be concerned about the loss of Reserve Bank oversight with Heartland seems a perverse one.

The 'good riddance to Reserve Bank oversight' is akin to saying that one cop is not enough of a police presence to keep order in a small town, so let's get rid of the one cop we have and that will be better! Yet all the while the actual solution to small town unrest is that you need two cops, not just one. What we shareholders need is a more stringent application of Reserve Bank standards, if we shareholders are to avoid a loss of shareholder capital. We don't want Reserve bank oversight to be abolished. At least that is the way I see it.

SNOOPY

Maybe we talked cross purpose ... just in case you are referring to my posts. I absolutely agree that NZ would need a financial authority overseeing banks, insurance business and actually all listed companies. NZ seems still to be the wild west - too many crooked and incompetent boards (not referring to HBL here) and no authority seems to be seriously concerned to sort the mess out.

Whoever thinks that the RBNZ will protect them as shareholders is wrong.

So, yes - lets get some financial authority properly resourced (with teeth) and tasked to keep our boardrooms crook free and our companies playing to the rule book.

However - whoever thinks that the RBNZ is this authority in its current state is mistaken - at the moment the RBNZ is not doing more for shareholders than a "she'll be right" bumper sticker at the car. Only difference - the bumper sticker might be more funny and less damaging (remember - the RBNZ even prevented the CBL board to comply with the continuous disclosure regime). I am not sure whether RBNZ are the good guys. In my view they should be investigated by themselves before they are assumed to protect others.

[percy]

From discussions I have had with HBL directors/management, they speak highly of their close working relationship with The Reserve Bank of NZ.
Started well before the granting of HBL's banking licence, and continues today, with their current corporate restructure.

[BlackPeter]

From discussions I have had with HBL directors/management, they speak highly of their close working relationship with The Reserve Bank of NZ.
Started well before the granting of HBL's banking licence, and continues today, with their current corporate restructure.

I am sure the CBL board would have spoken as well highly about their working relationship with the RBNZ .... maybe they did?

Probably a discussion for some other thread. The point for this thread is: It is not the role of the RBNZ to protect shareholder interests. Whatever the RBNZ oversight might be good for - share holders would be mistaken if they rely on it in any shape or form. If there are problems with HBL (hypothetical - I don't assume there are ...) than the RBNZ will be the last authority to inform shareholders or protect their interest. They even might be instrumental in keeping any problems under cover as they did in the case of CBL.

[bull....]

can watch the annual meeting via webcast , cool i wont need to leave the house.

https://www.nzx.com/announcements/323858

if you have a question let them know by the 18th

[winner69]

can watch the annual meeting via webcast , cool i wont need to leave the house.

https://www.nzx.com/announcements/323858

Cool

Hope somebody calls Ricketts a fuddy duddy again ....need a bit of light entertainment after the boring serious stuff.

Hope they cover off diversity initiatives

[BlackPeter]

Cool

Hope somebody calls Ricketts a fuddy duddy again ....need a bit of light entertainment after the boring serious stuff.

Hope they cover off diversity initiatives

Why not running the AGM in Te Reo? I guess the least they could do is alternating every other year ...

[minimoke]

Hope they cover off diversity initiativesThats an excellent idea. Especially at the time when someone asks how the share price has moved from approx $1.90 a year ago and is now $1.67 off a high of $2.14

[bull....]

Thats an excellent idea. Especially at the time when someone asks how the share price has moved from approx $1.90 a year ago and is now $1.67 off a high of $2.14

good question for them to explain there poor stock price performance and how they are planning to rectify being one of the worst places to park your money in the last year

[percy]

Thats an excellent idea. Especially at the time when someone asks how the share price has moved from approx $1.90 a year ago and is now $1.67 off a high of $2.14

Great idea,with directors and management having so much "skin on the line",their answers would be interesting.

[Beagle]

My thoughts.
Market was disappointed with just 2% EPS growth this year.
Market was disappointed with no dividend growth this year
Market has some trepidation about the whole restructuring thing.
Current PE is 13.2. FY19 PE is 12.7, FY20 PE is 11.8 and FY21 PE is 11.2 (based on average analyst forecasts as recorded on market screener) so there is decent growth in EPS forecast in future years with EPS of 14.8 cps forecast in FY21 which suggests 18% total growth in earnings over the next 3 years or just on 5.7% compound average EPS growth.

Unlike Ben Graham's model which priced shares based on historical EPS and applied a multiple of 8.5 for a no growth company and 2 x g (where g is estimated long term growth for the next 7-10 years) I apply a multiple of 1 to ensure I am buying value but use current year earnings.

This suggests to me a fair PE is 8.5 + 5.7 (yes I think with HBL's unique business model they can grow earnings sustainably at that rate with their very high NIM and very strong growth in reverse equity loans) = 14.2. Current year earnings are forecast at 13.1 cps so to me the shares have an intrinsic value of 14.2 x 13.1 = $1.86 and are underpriced.

I looked this morning at the average PE of the six major Australian banks I follow, NAB, ANZ, BEN, CBA, WBC and BOQ. Their current average FY18 PE is 12.37 compared to HBL of 13.2 however forecasted PE based on earnings growth in the FY20 year sees the Australian peer group average decline to just a PE of 12 (showing quite moderate average EPS growth in the next 2 years), whereas HBL declines to a PE of 11.8 in FY20 and just 11.2 in FY21.

We can see that HBL's forecasted EPS growth is materially higher than its peer group in the years ahead which I think warrants the PE mentioned above.
My Conclusion. The current SP of HBL is being affected by factors mentioned at the beginning of this post and is not fairly representative of the future earnings potential and earnings growth of the company.
I think its underpriced by about 20 cps at present and I expect relative outperformance in the year ahead from the current level of $1.66.

I correctly called this a SELL at $2.14 in December 2017 when it got well ahead of itself. I now rank it as a BUY and have been doing exactly that. Presently my #1 investment position even ahead of SUM !

[Blue Skies]

My thoughts.
Market was disappointed with just 2% EPS growth this year.
Market was disappointed with no dividend growth this year
Market has some trepidation about the whole restructuring thing.
Current PE is 13.2. FY19 PE is 12.7, FY20 PE is 11.8 and FY21 PE is 11.2 (based on average analyst forecasts as recorded on market screener) so there is decent growth in EPS forecast in future years with EPS of 14.8 cps forecast in FY21 which suggests 18% total growth in earnings over the next 3 years or just on 5.7% compound average EPS growth.

Unlike Ben Graham's model which priced shares based on historical EPS and applied a multiple of 8.5 for a no growth company and 2 x g (where g is estimated long term growth for the next 7-10 years) I apply a multiple of 1 to ensure I am buying value but use current year earnings.

This suggests to me a fair PE is 8.5 + 5.7 (yes I think with HBL's unique business model they can grow earnings sustainably at that rate with their very high NIM and very strong growth in reverse equity loans) = 14.2. Current year earnings are forecast at 13.1 cps so to me the shares have an intrinsic value of 14.2 x 13.1 = $1.86 and are underpriced.

I looked this morning at the average PE of the six major Australian banks I follow, NAB, ANZ, BEN, CBA, WBC and BOQ. Their current average FY18 PE is 12.37 compared to HBL of 13.2 however forecasted PE based on earnings growth in the FY20 year sees the Australian peer group average decline to just a PE of 12 (showing quite moderate average EPS growth in the next 2 years), whereas HBL declines to a PE of 11.8 in FY20 and just 11.2 in FY21.

We can see that HBL's forecasted EPS growth is materially higher than its peer group in the years ahead which I think warrants the PE mentioned above.
My Conclusion. The current SP of HBL is being affected by factors mentioned at the beginning of this post and is not fairly representative of the future earnings potential and earnings growth of the company.
I think its underpriced by about 20 cps at present and I expect relative outperformance in the year ahead from the current level of $1.66.

I correctly called this a SELL at $2.14 in December 2017 when it got well ahead of itself. I now rank it as a BUY and have been doing exactly that. Presently my #1 investment position even ahead of SUM !


Thanks Beagle for sharing this clear insightful analysis, much appreciated.

[Sinvester]

My thoughts.
Market was disappointed with just 2% EPS growth this year.
Market was disappointed with no dividend growth this year
Market has some trepidation about the whole restructuring thing.
Current PE is 13.2. FY19 PE is 12.7, FY20 PE is 11.8 and FY21 PE is 11.2 (based on average analyst forecasts as recorded on market screener) so there is decent growth in EPS forecast in future years with EPS of 14.8 cps forecast in FY21 which suggests 18% total growth in earnings over the next 3 years or just on 5.7% compound average EPS growth.

Unlike Ben Graham's model which priced shares based on historical EPS and applied a multiple of 8.5 for a no growth company and 2 x g (where g is estimated long term growth for the next 7-10 years) I apply a multiple of 1 to ensure I am buying value but use current year earnings.

This suggests to me a fair PE is 8.5 + 5.7 (yes I think with HBL's unique business model they can grow earnings sustainably at that rate with their very high NIM and very strong growth in reverse equity loans) = 14.2. Current year earnings are forecast at 13.1 cps so to me the shares have an intrinsic value of 14.2 x 13.1 = $1.86 and are underpriced.

I looked this morning at the average PE of the six major Australian banks I follow, NAB, ANZ, BEN, CBA, WBC and BOQ. Their current average FY18 PE is 12.37 compared to HBL of 13.2 however forecasted PE based on earnings growth in the FY20 year sees the Australian peer group average decline to just a PE of 12 (showing quite moderate average EPS growth in the next 2 years), whereas HBL declines to a PE of 11.8 in FY20 and just 11.2 in FY21.

We can see that HBL's forecasted EPS growth is materially higher than its peer group in the years ahead which I think warrants the PE mentioned above.
My Conclusion. The current SP of HBL is being affected by factors mentioned at the beginning of this post and is not fairly representative of the future earnings potential and earnings growth of the company.
I think its underpriced by about 20 cps at present and I expect relative outperformance in the year ahead from the current level of $1.66.

I correctly called this a SELL at $2.14 in December 2017 when it got well ahead of itself. I now rank it as a BUY and have been doing exactly that. Presently my #1 investment position even ahead of SUM !

Thanks Mr Beagle very informative.

[Nasi Goreng]

Thanks too Beagle. Question, I see they raised capital in 2017 so that would explain why eps is 2% when they increased their profit by 11%... sneaky... didn't explain that too well in the quick announcement summary.

So is it unlikely they will be able to increase profits by say 8-11% going forward?

[Beagle]

You're most welcome guys. Profits will grow in that order NG but shares issued by the dividend reinvestment scheme and possibly more capital to be raised at some point to fund more organic growth will suppress EPS growth a bit. Nothing wrong with 5-6% EPS growth going forward on an average basis and as mentioned this certainly puts them well ahead of average Australian bank EPS growth.

I am forecasting 9.5 cps dividends this year fully imputed. 9.5 / 0.72 = 13.194 cps gross. 13.194 / 166 = 7.95% gross yield.

Interestingly some of the Australian banks are on a net yield of just over 7% so with Australians being able to avail themselves of franking credits and unable to claim our imputation credits and vice versa the investment landscape from an effective net yield perspective is heavily tilted towards backing banks in one's own country.

[percy]

Thanks too Beagle. Question, I see they raised capital in 2017 so that would explain why eps is 2% when they increased their profit by 11%... sneaky... didn't explain that too well in the quick announcement summary.

So is it unlikely they will be able to increase profits by say 8-11% going forward?

They have stated 11% earnings growth,
A question for the agm is whether that is eps growth.?
If not,what is the expected eps growth.?

[Beagle]

They have stated 11% earnings growth,
A question for the agm is whether that is eps growth.?
If not,what is the expected eps growth.?

You can email questions to them Percy and if its anything like the AIR AGM they answer them publicly during the meeting. Shall we leave that one for you to ask ?

Please note that you will not be able to ask questions during the webcast and
conference call, but you are invited to submit a question in advance of the
meeting at the time of registering for the webcast. Please submit your
questions by 5pm Tuesday 18 September.

[minimoke]

Thats taken a while. Just got my txt message urging me to vote.

[winner69]

Thats taken a while. Just got my txt message urging me to vote.

.need 50% of shares to be voted uso you had better do the necessaries

Be a shame if all that expense and effort was wasted because of shareholder apathy

[Beagle]

.need 50% of punters to vote so you had better do the necessaries

Be a shame if all that expense and effort was wasted because of shareholder apathy

Yes fair comment. After yet another email reminder I just voted online in favor of the restructure. The minimum vote size (type of quorum), is 50% of all issued shares and of those that vote 75% or more must vote in favor for this special resolution (to pass muster).

[Joshuatree]

Yes , all hands on deck, rattle your dags, swab the decks, get down off the poop deck, go below, pull out the laptop and vote, its never been easier, whether on sealegs or queasier, DYB, DYB, DYB, DOBBIDY DYB DOB, be proactive on the good ship Heartland, turn that wheel and steer her through charted waters, like you oughter. Weigh the anchor, for the would be banker.VOTE!:sleep:

[Beagle]

Yes , all hands on deck, rattle your dags, swab the decks, get down off the poop deck, go below, pull out the laptop and vote, its never been easier, whether on sealegs or queasier, DYB, DYB, DYB, DOBBIDY DYB DOB, be proactive on the good ship Heartland, turn that wheel and steer her through charted waters, like you oughter. Weigh the anchor, for the would be banker.VOTE!:sleep: and just as well they don't even check one's sobriety when voting online eh :p

[percy]

Received my FIN number today in the post, after I rang Link for it on Monday,so voted online.
Wife was able to vote via post the other day.
So we have done our bit.

[Benny1]

I voted in favor a couple of days ago was very easy to do online.:)

Was going to go along to the AGM as well, although the thought of watching it in the comfort of ones home also appeals!

Would be a bugger will miss out on the free savories though .... oh decisions decisions! :scared:

[777]

Received my FIN number today in the post, after I rang Link for it on Monday,so voted online.
Wife was able to vote via post the other day.
So we have done our bit.

You need a FIN number to sell shares. Does this mean that you are only buyer?

[percy]

You need a FIN number to sell shares. Does this mean that you are only buyer?

No my FIN number,and the wife's,are encrypted in Craigs' system.Craigs' can not tell me what it is. I had to ring the share registry to get it,and they only post it.
I get my correspondence via email,to save waste,and get hard/printed copy for the wife,so she had no trouble voting..

[Joshuatree]

They kindly emailed my FIN to me percy as long as i promised to delete the email.
Maybe like me 777, i forgot FIN and where i recorded it.

[percy]

They kindly emailed my FIN to me percy as long as i promised to delete the email.
Maybe like me 777, i forgot FIN and where i recorded it.

You must have a better phone manner than me.....lol.
Crazy but it was the same number I tried, that did not work on Sunday.
I put ours in a safe place,only trouble it was years ago and now I can't remember where that safe place was.Early or late stages of Alzheimers,I forget which.?

[winner69]

You must have a better phone manner than me.....lol.
Crazy but it was the same number I tried, that did not work on Sunday.
I put ours in a safe place,only trouble it was years ago and now I can't remember where that safe place was.Early or late stages of Alzheimers,I forget which.?

Yes that’s what happened to me twice. Link systems are pretty crap at times

[kiwico]

Link systems are pretty crap at times

But the Computershare website still makes Link look good!

[Snoopy]

Maybe we talked cross purpose ... just in case you are referring to my posts. I absolutely agree that NZ would need a financial authority overseeing banks, insurance business and actually all listed companies. NZ seems still to be the wild west - too many crooked and incompetent boards (not referring to HBL here) and no authority seems to be seriously concerned to sort the mess out.

Whoever thinks that the RBNZ will protect them as shareholders is wrong.

So, yes - lets get some financial authority properly resourced (with teeth) and tasked to keep our boardrooms crook free and our companies playing to the rule book.

However - whoever thinks that the RBNZ is this authority in its current state is mistaken - at the moment the RBNZ is not doing more for shareholders than a "she'll be right" bumper sticker at the car. Only difference - the bumper sticker might be more funny and less damaging (remember - the RBNZ even prevented the CBL board to comply with the continuous disclosure regime). I am not sure whether RBNZ are the good guys. In my view they should be investigated by themselves before they are assumed to protect others

I don't think I was clear about what I had in mind by doubling down on what the Reserve Bank of New Zealand do in overseeing Heartland Bank.

There is a section in the annual report titled 'Capital Adequacy' with a subsection on 'Capital Ratios'. The 'Minimum Total Capital as Condition of Registration' for Heartland is listed as 8%.

While the Reserve Bank consider this restriction:

1/ Appropriate for the stability of the banking system.

they also consider it fair game to ...

2/ Give shareholders and deposit holders a haircut in pursuit of the stability of the banking system.

I am all for 1/ but not so keen on 2/. So to protect my interests as a shareholder and/or debenture holder I see that it will only be in my interest to invest in Heartland if:

'Minimum Total Capital as a Condition of Snoopy Investment' is >> 8% (That means much much greater than 8%).

Employing more people in the Reserve Bank compliance/regulation department won't do this. You have to make your own calculation taking into account what level of total backing capital that you think is acceptable. There is no reinvention of the wheel here. I would advocate exactly the same registration test that the Reserve Bank does, but with a suitably higher acceptable threshold.

SNOOPY

[peat]

well set out Beagle.
As one great poster on this forum used to say every action sees a reaction. A sort of Newtons 3rd Law for the markets

I see this phase of HBL as undergoing a 'reaction' as a direct response to the 'action' of the last year.

Currently this is manifesting itself as a descending triangle , crudely shown here

9932

which raises a possible target of $1.55. Indeed this matches a previous support/resistance zone in late 2016.

I am also seeing some divergence in the RSI which may point to a turnaround but its somehow not that convincing
9935

What worries me is that right leaning H+S where we just gapped through the shoulder line. Even if the gap gets filled in a 'back to test' scenario its likely the downwards gap is portending lower prices.




9934

I'll wait for clearer evidence of a reversal but will totally keep looking for it

My Mum has a reverse mortgage with CBA , quite possibly funded by HBL, its safe as houses I reckon, the limit is small compared to value, but it keeps her flush in cash which I reckon is nice.

[Snow Leopard]

Go for a dividend adjusted chart or use weekly bars and you have no gap to worry about :)

[winner69]

Peat - scary charts mate

The H&S pattern particulary scary ..... looks we heading to $1.40 or lower if it plays out and has a bit of bling added. That should send the shivers up Beagles spine

Beautiful eh

[Beagle]

Just as well I sold right at the head...gives me more wiggle room around the shoulders now I'm back in eh Winner. TA does not look flash but FA does ! Might be a while before you get your $2.50 though :)

[horus1]

I have started to buy. Have close to 1M shares. This is a good co and is in niche markets .,but i take risk and do not often sell,just hold. Lucky the shares are for the kids.

[winner69]

Heartlands much touted NIM (more than double its peers) doesn’t seem to translate into superior ROE. Heartland’s ROE is just average and nothing special.

Using Beagles peer group and tabling their ROE and Price Book ratios gives interesting insights as below.

Appears as if a Heartland share price of $1.66 is neither cheap or expensive.

Price/Book for me a better measure than PE ratios etc ....note higher the ROE the more it’s rewarded with a higher multiple

Numbers from Morningstar so don’t blame me if wrong

[Beagle]

Peat - scary charts mate

The H&S pattern particulary scary ..... looks we heading to $1.40 or lower if it plays out and has a bit of bling added. That should send the shivers up Beagles spine

Beautiful eh

Might be tempted to do "A Couta1" if it goes down there. Coutts needs to come up with SUM relativity theory for this one.

[moka]

The Reserve Bank of New Zealand is not your friend. Its job is to protect the banks. It would not hesitate to impose a haircut on depositors of a minor deposit taking institution like Heartland to teach people a lesson.

The systemic risk of a major bank imposing a cram down on depositors would make the Reserve Bank hesitate and make politicians eager to fix it.

Boop boop de do
Marilyn

PS. Mid Canterbury where Heartland does its major deposit taking business is so staunchly National they could put up a cockies dog as a candidate and it would still get elected. Thus there is no political risk to either of the main parties from cutting Mid Canterbury depositors adrift.

I thought that OBR was for the too-big-to-fail banks but you may be right that it could be used with a smaller bank like HBL. I assumed that because HBL wouldn’t have got a taxpayer bailout and would have been left to fail under the old rules that it wouldn’t fit into the OBR rules. Hopefully we will never know what the intentions are with OBR.

[GTM 3442]

I thought that OBR was for the too-big-to-fail banks but you may be right that it could be used with a smaller bank like HBL. I assumed that because HBL wouldn’t have got a taxpayer bailout and would have been left to fail under the old rules that it wouldn’t fit into the OBR rules. Hopefully we will never know what the intentions are with OBR.

Should one of the big 4 (ASB, ANZ, BNZ, WBC) or Kiwibank get into difficulty, they will be bailed out by the government.

If more than one is in trouble, then it's a moot point. If anyone else is in trouble, the OBR will be down on them like a ton of bricks.

Looking at what happened to the finance companies a decade or so ago, you might say that "size does matter" - did anyone other than SCF get bailed?

[Beagle]

Strike price for the shares in lieu of dividend has been announced and for those canny investors participating they enjoy a 2.5% discount to the VWAP ex divvy trading price over recent days ($1.625). Participation is actually a good way to boost one's effective yield. For example I am forecasting 7.95% gross yield as recently posted in the year ahead but for those taking the shares in lieu their gross yield becomes 7.95 / 0.975 = 8.154%.

Just on 5.3m shares are being issued for this dividend and I am modelling 10.6m shares issued for the year or 1.9% increase in the number on issue. Provided they don't do a capital raise the vast majority of this year's profit growth should translate to EPS growth but I agree with Percy that asking whether this years forecast profit growth will be reflected in an ostensibly similar EPS growth is an excellent question for the annual meeting. After only 2% EPS growth last year I will be seeking some comfort the company hasn't lost focus on the importance of EPS growth.

[peat]

Go for a dividend adjusted chart or use weekly bars and you have no gap to worry about :)

yeh I did consider that, but all the factors seemed to add up to a 'view' .

[minimoke]

Strike price for the shares in lieu of dividend has been announced and for those canny investors participating they enjoy a 2.5% discount to the VWAP ex divvy trading price over recent days ($1.625). Participation is actually a good way to boost one's effective yield. For example I am forecasting 7.95% gross yield as recently posted in the year ahead but for those taking the shares in lieu their gross yield becomes 7.95 / 0.975 = 8.154%..
Its not very canny if you buy a div yield stock only to see its value plummet. In the past 6 months HBL had a high of $1.85 and is now 1 cent above the 52 week low of $1.65

[couta1]

Its not very canny if you buy a div yield stock only to see its value plummet. In the past 6 months HBL had a high of $1.85 and is now 1 cent above the 52 week low of $1.65 Yep I never participate in any DRP, although most stocks recover their divvy in a few weeks that's not always the case and you can be seriously under water for a long time or worse still be permanently skunked.

[Beagle]

Its not very canny if you buy a div yield stock only to see its value plummet. In the past 6 months HBL had a high of $1.85 and is now 1 cent above the 52 week low of $1.65

Discount is what it is @ 2.5% and many investors have done well over the years using this approach. I can assure you mate you're not the only investor disappointed with the present SP.

Dividend stripping :- I think 8-9 times out of ten shares recover the dividend paid in the SP within a month of going ex. There will always be exceptions but the odds or relative SP outperformance in the month after going ex divvy are very good in my opinion.

[winner69]

Don’t complain about the DRP ...punters are getting more shares for their buck than the previous payout (for the second time in a row)

That must be good ...isn’t it?

[bull....]

dont forget about the 1% of shares which have to be sold because they are not allowed to participate in the restructure.

[winner69]

Strike price for the shares in lieu of dividend has been announced and for those canny investors participating they enjoy a 2.5% discount to the VWAP ex divvy trading price over recent days ($1.625). Participation is actually a good way to boost one's effective yield. For example I am forecasting 7.95% gross yield as recently posted in the year ahead but for those taking the shares in lieu their gross yield becomes 7.95 / 0.975 = 8.154%.

Just on 5.3m shares are being issued for this dividend and I am modelling 10.6m shares issued for the year or 1.9% increase in the number on issue. Provided they don't do a capital raise the vast majority of this year's profit growth should translate to EPS growth but I agree with Percy that asking whether this years forecast profit growth will be reflected in an ostensibly similar EPS growth is an excellent question for the annual meeting. After only 2% EPS growth last year I will be seeking some comfort the company hasn't lost focus on the importance of EPS growth.

Beagle ...don’t overlook last years eps was calculated on a weighted average number of shares.

Some 4% of shares ‘weren’t counted’ last year but will be this year.

[minimoke]

Good to see diversity means equal treatment under the law: (something for all directors to think about) https://www.stuff.co.nz/business/industries/107130930/former-mainzeal-director-dame-jenny-shipley-defending-reckless-trading-allegations

[Beagle]

Beagle ...don’t overlook last years eps was calculated on a weighted average number of shares.

Some 4% of shares ‘weren’t counted’ last year but will be this year.

Good point the reminder about weighted average number of shares on issue. Forecast at mid point is $76m. Shares currently on issue are 560.14m. Add estimated 5.3m to be issued shortly for this dividend, (on issue for approx. 9 months in FY19) and another estimated 5.3m shares to be issued 6 months hence which will be on issue for just 3 months gives weighted average shares on issue for the year of ~ 566m.

$76m / 566m = EPS of 13.43 cps up 7% on last years 12.54 cps. Average analyst view is EPS of 13.1 cps so it would appear analysts are anticipating a small capital raise at some point in FY19.

13.1 cps / 12.54% EPS is still 4.5% EPS growth.

Might ask an awkward question about EPS growth at the annual meeting and throw the directors a curved ball and bleat about last year's very modest 2% EPS growth.

85-90% chance this is back into the mid $1.70's by late next month (despite the ugly head and shoulders TA, "thanks" Peat), in my opinion.

[minimoke]

Fvck me. Heres me not tuning into the AGM

"E ngā mana, e ngā reo, e ngā rau rangatira, tēnā koutou katoa
Greetings to all of you, all voices, all authorities and leaders
Ki ngā iwi o te whenua nei, ki a Ngāi Tai, Ngāti Paoa, me Ngāti Whātua o Ōrākei, tēnākoutou
To you the local iwi, I acknowledge your role as tangata whenua
Ki Te Wai o Taiki kei waho nei, tēnā koe
To the Tamaki estuary we see outside, I acknowledge you and your history, its strands and pathways, bringing us all here today
Tēnā koutou ki a koutou katoa kua hui mai nei i tēnei rā, kei te mihi, kei te mihi, keite mihi
To each and every one of you, welcome and thank you for your supportKi ngā kaumātua o te kāhui nei, ki a Chris kōrua ko Geoff, tēnā kōrua"

C'mon jeff - how many shareholders are fluent in Maori. How About a bit of Chinese or Indian for the "Diversity" Virtue Badge

[Beagle]

They must do a lot of Iwi business on both sides of the ledger eh minimoke.
Pleased to see they are looking to wind back their exposure on big dairy relationship lending and concentrate on more profitable area's of the business.
All looks good, didn't have time today to attend. Hope someone else asks them the hard question about concentration on EPS growth but overall I think they have a pretty good handle on where they going and I am happy with my XXXL holding...biggest I've ever had.

[winner69]

Fvck me. Heres me not tuning into the AGM

"E ngā mana, e ngā reo, e ngā rau rangatira, tēnā koutou katoa
Greetings to all of you, all voices, all authorities and leaders
Ki ngā iwi o te whenua nei, ki a Ngāi Tai, Ngāti Paoa, me Ngāti Whātua o Ōrākei, tēnākoutou
To you the local iwi, I acknowledge your role as tangata whenua
Ki Te Wai o Taiki kei waho nei, tēnā koe
To the Tamaki estuary we see outside, I acknowledge you and your history, its strands and pathways, bringing us all here today
Tēnā koutou ki a koutou katoa kua hui mai nei i tēnei rā, kei te mihi, kei te mihi, keite mihi
To each and every one of you, welcome and thank you for your supportKi ngā kaumātua o te kāhui nei, ki a Chris kōrua ko Geoff, tēnā kōrua"

C'mon jeff - how many shareholders are fluent in Maori. How About a bit of Chinese or Indian for the "Diversity" Virtue Badge

More female leaders on the way Mini ...the mediocre men better start worrying

In terms of gender diversity, we are actively working to develop and attract females into senior leadership positions to promote diversity of thought. Our Strategic Management Group has been 50% female and 50% male for over a year now. The wider Senior Leadership Team is now 33% female and 67% male and we recognise there is more work to be done here. Initiatives are underway to ensure we have a strong pipeline of female talent in the business.

[winner69]

Diary problems are quite widespread these days

Jeff says 'Good Afternoon" ...hope he turns up

[bull....]

Fvck me. Heres me not tuning into the AGM

"E ngā mana, e ngā reo, e ngā rau rangatira, tēnā koutou katoa
Greetings to all of you, all voices, all authorities and leaders
Ki ngā iwi o te whenua nei, ki a Ngāi Tai, Ngāti Paoa, me Ngāti Whātua o Ōrākei, tēnākoutou
To you the local iwi, I acknowledge your role as tangata whenua
Ki Te Wai o Taiki kei waho nei, tēnā koe
To the Tamaki estuary we see outside, I acknowledge you and your history, its strands and pathways, bringing us all here today
Tēnā koutou ki a koutou katoa kua hui mai nei i tēnei rā, kei te mihi, kei te mihi, keite mihi
To each and every one of you, welcome and thank you for your supportKi ngā kaumātua o te kāhui nei, ki a Chris kōrua ko Geoff, tēnā kōrua"

C'mon jeff - how many shareholders are fluent in Maori. How About a bit of Chinese or Indian for the "Diversity" Virtue Badge

how about sign language - the official language in nz

[percy]

They must do a lot of Iwi business on both sides of the ledger eh minimoke.
Pleased to see they are looking to wind back their exposure on big dairy relationship lending and concentrate on more profitable area's of the business.
All looks good, didn't have time today to attend. Hope someone else asks them the hard question about concentration on EPS growth but overall I think they have a pretty good handle on where they going and I am happy with my XXXL holding...biggest I've ever had.
I have read Chairman's, CEO's, and the meeting presentation.
All on track.
Still, as Beagle points out, the question about actual EPS growth needs to be asked.
Real growth is not earnings or revenue growth, but eps growth, which leads to dividend growth.

[minimoke]

They must do a lot of Iwi business on both sides of the ledger eh minimoke.
.
I wouldnt have thought so. In an MBIE report, the strategic direction appears to be

"Iwi and government should work together to facilitatethe development of a template for iwi-led savingsschemes capable of being tailored to suit iwi priorities(e.g. iwi with a particular focus on whänau homeownership could design a scheme allowing for earlywithdrawal of retirement savings for the purposes ofhome ownership);

• Iwi and government should work together to drivethe development and utilisation of infrastructuresupporting iwi-led savings schemes, to be brandedand promoted by individual iwi"

Then there is the risk of security - that being shared title ownership of land

As for REL's, 28.2% of Maori own, or part own their own home - compared to 49.8% of the total population.

HBL might want to clarify theri strategy with Whai Rawa and their Kiwisaver plans for theri Maori stakeholders.

[Beagle]

Lets move on mate...just part of the crazy PC world we live in there days. Before departure from Queenstown airport Tuesday night last week the captain came out and gave a long welcome and dissertation on flight proceedings in Maori before doing the English translation. Maybe because it was the very late flight or Maori language week or simply because I was happy and rested from a great holiday but it didn't bother me. This PC nonsense started way back when for reason unknown we started singing the national anthem in Te Reo before singing it in English. No stopping this mate, just go with the flow otherwise it does your head in. (Free psychology 101 advice just for you)

Percy, I think the whole restructuring thing is aimed at growth without new share issuance and the wind back of lower margin resource intensive large business and dairy lending to concentrate on higher areas of NIM lending where they have a unique competitive advantage gives me comfort that mid single digit EPS growth going forward is highly likely.

[bull....]

webcasts a bit poor got background music going over the talking

[minimoke]

Lets move on mate...just part of the crazy PC world we live in there days. .We should not move on. There is an insidious drift where the loonies are taking over, bit by bit the asylum. We now have the Vice Chancellor of Massey lying, and blocking "racist" don Brash from speaking.

People in positions of authority need to be held to task. The directors, and management responsibility is to look after shareholder interests. The best way they can signal their virtue is to grow the company which would then empower individual shareholders to pursue whatever personal social agendas they choose.

If HBL are pursuing Marori related financial opportunities then they should be declared - they are opportunities that come with greater risk than your bog standard REL.

(with the stated aim of pushing into Australia I look forward to an AGM introduction in Aborigine next year). Heres a draft for them. https://about.curtin.edu.au/who/aboriginal-welcome/

[bull....]

anyone watching webcast? problems with background music over talking?

[winner69]

anyone watching webcast? problems with background music over talking?

Surely not Pokarekare Ana infiltrating the webcast?

[minimoke]

anyone watching webcast? problems with background music over talking?Is the powhiri over yet?

[bull....]

no wonder the share price has performed dismally cant even get a webcast right

[percy]

Percy, I think the whole restructuring thing is aimed at growth without new share issuance and the wind back of lower margin resource intensive large business and dairy lending to concentrate on higher areas of NIM lending where they have a unique competitive advantage gives me comfort that mid single digit EPS growth going forward is highly likely.

I am sorry I had to go out and help a family member so missed the web cast until 10 past 11.
Do not know whether anyone asked about eps growth.?

No I think they are up front about Australian growth driving the restructure,driven mainly by RELs,although they see other opportunities too.

They have been looking to lower their exposure from large loans, where they have competition from the major banks, to a lot of smaller loans.
So rural lending, including dairying, is now focused on livestock.
The out come of this, is as you point out, better margins,but I like the facts they lower their risks, and can recycle funds quickly,as the loans are for shorter terms..
Interesting were Chris Floods comments about motor vehicle lending.Still an active market,with much better quality lending ,with few poor loans.[TRA should be the same].

[davflaws]

(with the stated aim of pushing into Australia I look forward to an AGM introduction in Aborigine next year). Heres a draft for them. https://about.curtin.edu.au/who/aboriginal-welcome/

No - that welcome would only be appropriate coming from one of the locals welcoming visitors to a particular site. Just as the mihi you quoted was specific to a particular site.

[minimoke]

No - that welcome would only be appropriate coming from one of the locals welcoming visitors to a particular site. Just as the mihi you quoted was specific to a particular site.I'm anticipating, on the passing of the resolution, a "hybrid" AGM in Australia at some point.

[winner69]

Suppose a morning AGM would have saved a few bob on the grog bill ....and probably reduced the numbers that attended.

[winner69]

I am sorry I had to go out and help a family member so missed the web cast until 10 past 11.
Do not know whether anyone asked about eps growth.?

No I think they are up front about Australian growth driving the restructure,driven mainly by RELs,although they see other opportunities too.

They have been looking to lower their exposure from large loans, where they have competition from the major banks, to a lot of smaller loans.
So rural lending, including dairying, is now focused on livestock.
The out come of this, is as you point out, better margins,but I like the facts they lower their risks, and can recycle funds quickly,as the loans are for shorter terms..
Interesting were Chris Floods comments about motor vehicle lending.Still an active market,with much better quality lending ,with few poor loans.[TRA should be the same].


Percy ...it’s on replay now

About 40 minutes in is question time

[Beagle]

Suppose a morning AGM would have saved a few bob on the grog bill ....and probably reduced the numbers that attended.

I hate it when people work out why I didn't attend lol.

When do we find out how the voting on the restructure went ?

[Benny1]

I hate it when people work out why I didn't attend lol.

When do we find out how the voting on the restructure went ?

Think it was supposed to be announced to the sharemarket today .
Been watching but nothing yet...

[percy]

[QUOTE=Beagle;729714]I hate it when people work out why I didn't attend lol.

Gone downhill.
4pm Friday afternoon was delightfull.?

[minimoke]

"

Heartland Bank Limited (Heartland) (NZX: HBL) is pleased to advise that all


resolutions put to shareholders at its Annual Meeting were passed."

[Fred_Rubble]

Resolution 1: That the Restructure (details of which are set out in the Scheme Booklet) is approved
For: 333,558,468 (99.57%)
Against: 1,450,852 (0.43%)
Abstain: 9,484,391

Landslide Result

[percy]

Resolution 1: That the Restructure (details of which are set out in the Scheme Booklet) is approved
For: 333,558,468 (99.57%)
Against: 1,450,852 (0.43%)
Abstain: 9,484,391

Landslide Result

Incredible result.

[Beagle]

My Conclusion. The current SP of HBL is being affected by factors mentioned at the beginning of this post and is not fairly representative of the future earnings potential and earnings growth of the company.
I think its underpriced by about 20 cps at present and I expect relative outperformance in the year ahead from the current level of $1.66.

I correctly called this a SELL at $2.14 in December 2017 when it got well ahead of itself. I now rank it as a BUY and have been doing exactly that. Presently my #1 investment position even ahead of SUM !

From late last week.
Yes a VERY solid endorsement indeed from shareholders with the voting. SP was too cheap at $1.66. Onward and upward now eh...SP might be back to mid-late $1.70's by as early as the end of this week !
Disc: Bought more OCA today and that's now #1.

[bull....]

yes big vote in confidence , now they just need to improve the dismal share price performance

http://www.scoop.co.nz/stories/BU1809/S00495/heartland-needs-access-to-wholesale-funding.htm

[winner69]

Honest, it wasn’t me that asked the question about getting more younger digitally aware people on the Board ....the person even mentioned the current Board looks a bit old and needs refreshing.

Glad to hear Chairman say they are on the case ...ha ha

[winner69]

Whoever asked that question as to why 2 directors don’t own shares probably didn’t get an answer they wanted ...but the questioner was probably only trying to make a point

At least those two directors remain truly independent ...no vested interest and all that.

[SCOTTY]

And a very popular site, clicking over 2m hits today :).

[iceman]

After reading the Chairman’s and CEO’s reports to the AGM, I am pleased with where we are heading with this Company. I think it was great that the restructuring found such a resounding favour with shareholders.
This will now allow the company to go ahead full steam into the Australian REL business by seeking the necessary wholesale funding and possibly some capital raising, to grow this business very fast. Responsibly, they also held the dividends at the same level as last year to give them more cash for growth. I wouldn’t mind them holding the dividend there for the next few years or even reduce it, but realise that wouldn’t go down well with all SH.
It is great that the focus with RELs will be in Australia where we already have a market leading position in a country where the over 65 yo are increasing by around 20,000 per month. Next year that population is expected to grow as much in numbers as the same NZ cohort will do in the next 10 years !

Good to read tat the debacle with the Oracle core banking system seems to be behind us but totally expect further issues, as is the norm with such systems that start giving headaches.

I like what they call the “best or only” policy where they want to be best in the market for a particular product or have the only product in the market, as they pretty much do with the RELs on both sides of the Tasman.
In line with that policy they have reduced their risk to big business loans where they have more competition from the big banks towards smaller and shorter loans to businesses, such as livestock to farmers and the “open for business” digital platform.
I am less enthused by the increasing use of words such as “community”, “culture” and “diversity of thought” but realise this seems to be the way things are heading today. HBL represents 21 ethnic groups for their staff. Wow ! Hope they are all capable, not just the right race or colour. My favourite comment from Jeff about this great community commitment was that HBL is striving to put “New Zealander’s into better cars and helping seniors live a more comfortable retirement”. Makes me feel really good being part of this business doing such wonderful things.

One thing I am unclear on is who will be the CEO of the new Heartland Group Holdings. I assume Jeff. Will he also be CEO of Heartland Bank ? I do note (and disagree with) that he is also to be a Director of both these companies. I question how wise that is.

Now we just need to see all of this turn very quickly into good growth in EPS

Discl: accumulating

[Vaygor1]

Honest, it wasn’t me that asked the question about getting more younger digitally aware people on the Board ....the person even mentioned the current Board looks a bit old and needs refreshing.

Glad to hear Chairman say they are on the case ...ha ha

I think HBL are a good company to have ownership in and have been thinking seriously about investing in them quite recently.

The one big disturbing factor that is stopping me in my tracks is Oracle.
I have worked for extensive periods in two companies that used it, and in my most humble of opinion it is a complete and utter sack of sh!t.

Systems like these can make or break companies. Jade nearly broke The Warehouse.

I have personally seen millions and millions being poured into Oracle year after year by the two companies I used to work for that used it. One of them finally cut their massive losses and threw the whole lot in the bin (as The Warehouse did with Jade) and started again. The other one, I don't know if they still use it or not.

Disadvantages:
Slooooooooow
Unreliable
Super user-unfriendly
Super duper expensive to implement
Super duper duper expensive to maintain.

Advantages:
None I can think of.

Maybe Oracle has improved from those times, but I can't bring myself to buy into HBL while they're using it.
I heard about the trouble & cost of this new system of HBL's long before I found out it was Oracle.... and when I found out, it all fell into place.

[Beagle]

Finally a big day for the banks on the American markets overnight. They've been real laggards in recent months but a 2% index pop overnight.
Expecting a very good day for HBL shares today, (given the positive vote endorsement announcement was after the market closed yesterday).

[winner69]

Finally a big day for the banks on the American markets overnight. They've been real laggards in recent months but a 2% index pop overnight.
Expecting a very good day for HBL shares today, (given the positive vote endorsement announcement was after the market closed yesterday).

Go for it mate ...the market needs people with heaps of exuberance to keep it rising

[Beagle]

Go for it mate ...the market needs people with heaps of exuberance to keep it rising

Very, very close to my self imposed 10% portfolio limit already mate. (Note to self, no matter how tempting the opportunity I must, must, must stick to my own rules) Old dogs can learn new tricks and this one learned during the GFC never to stick your neck out too far with any one investment in case you're wrong and get a really serious hair cut.

I think this whole risk mitigation for my money, (portfolio spreading) is age related. When you're young you can afford huge risks and putting all or nearly all your eggs in one basket. At various stages of one's life the risk mitigation should start to come into play especially once one is within about 10 years or so from retirement or in semi retirement or retirement already. Hopefully by one's mid 50's for example, there's no real need to take untoward risks and one is already well positioned. (You reading this Couta1 ?).

[percy]

Go for it mate ...the market needs people with heaps of exuberance to keep it rising

Was it 3 years ago,or 4 years ago,or maybe it was 5 years ago, a number of people on ST went 100% cash, as the market looked to have topped.?

They seemed to have disappeared.

[Beagle]

Some people ran for the hills about 2 years ago when Trump was elected and I don't mind admitting I was one of them. It cost me a bit but I didn't stay out for long.

[percy]

Yes Trump certainly was a "Black Swan" event we all got wrong.!
No the posters going 100% cash was well before that.

[couta1]

Very, very close to my self imposed 10% portfolio limit already mate. (Note to self, no matter how tempting the opportunity I must, must, must stick to my own rules) Old dogs can learn new tricks and this one learned during the GFC never to stick your neck out too far with any one investment in case you're wrong and get a really serious hair cut.

I think this whole risk mitigation for my money, (portfolio spreading) is age related. When you're young you can afford huge risks and putting all or nearly all your eggs in one basket. At various stages of one's life the risk mitigation should start to come into play especially once one is within about 10 years or so from retirement or in semi retirement or retirement already. Hopefully by one's mid 50's for example, there's no real need to take untoward risks and one is already well positioned. (You reading this Couta1 ?). The trouble is that if I had held my previous undiversified approach I would be massively better off than I currently are, selling off my outrageous sized positions too early has been my biggest mistake.Lol.PS-I finally learnt my lesson and have held my XXXOS sized position in HLG for near a year now and refuse to be Beaglised out of it.PPS-I need to get back to investing like I ski.

[winner69]

Was it 3 years ago,or 4 years ago,or maybe it was 5 years ago, a number of people on ST went 100% cash, as the market looked to have topped.?

They seemed to have disappeared.

It was every one of those years percy ...and even January thisvyear

[BlackPeter]

The trouble is that if I had held my previous undiversified approach I would be massively better off than I currently are, selling off my outrageous sized positions too early has been my biggest mistake.Lol.PS-I finally learnt my lesson and have held my XXXOS sized position in HLG for near a year now and refuse to be Beaglised out of it.PPS-I need to get back to investing like I ski.

Just a curious question - did this investment approach always work for you?

[couta1]

Just a curious question - did this investment approach always work for you? To date it has.

[Beagle]

The trouble is that if I had held my previous undiversified approach I would be massively better off than I currently are, selling off my outrageous sized positions too early has been my biggest mistake.Lol.PS-I finally learnt my lesson and have held my XXXOS sized position in HLG for near a year now and refuse to be Beaglised out of it.PPS-I need to get back to investing like I ski.

:lol: :lol: Classic... Just make sure you don't fall over at high speed, (same principle applies with investing) :)

[minimoke]

I need to get back to investing like I ski.Must be different from me. I tend to take a slow steady way to the top. Maybe with a bit of a change in track along the way. And then its a hell for leather descent until I quickly end up right back down the bottom again.

[777]

Just got a letter from them telling me they are closing their Takapuna branch. All to be done by phone and internet from now on. If only they would improve their hopeless app.

[Joshuatree]

I think HBL are a good company to have ownership in and have been thinking seriously about investing in them quite recently.

The one big disturbing factor that is stopping me in my tracks is Oracle.
I have worked for extensive periods in two companies that used it, and in my most humble of opinion it is a complete and utter sack of sh!t.

Systems like these can make or break companies. Jade nearly broke The Warehouse.

I have personally seen millions and millions being poured into Oracle year after year by the two companies I used to work for that used it. One of them finally cut their massive losses and threw the whole lot in the bin (as The Warehouse did with Jade) and started again. The other one, I don't know if they still use it or not.

Disadvantages:
Slooooooooow
Unreliable
Super user-unfriendly
Super duper expensive to implement
Super duper duper expensive to maintain.

Advantages:
None I can think of.

Maybe Oracle has improved from those times, but I can't bring myself to buy into HBL while they're using it.
I heard about the trouble & cost of this new system of HBL's long before I found out it was Oracle.... and when I found out, it all fell into place.

Wow, thanks for that Vaygor, just what no one wanted to hear, an inconvenient truth! And yes it could be a major flaw, a brake to the downside if it still is a crock. We need to know more about this from the company.The truth.

[Bjauck]

I think HBL are a good company to have ownership in.....
.....Maybe Oracle has improved from those times, but I can't bring myself to buy into HBL while they're using it.
I heard about the trouble & cost of this new system of HBL's long before I found out it was Oracle.... and when I found out, it all fell into place.
I always fractionalise my term deposits so as to have staggered maturity dates. Unfortunately Heartland has a limit of ten term deposits. If you want more you need to have a separate head account with a new head account number. It is certainly a disincentive (for me) to add funds with Heartland. Would that be an Oracle database limitation or some other factor?

[percy]

Wow, thanks for that Vaygor, just what no one wanted to hear, an inconvenient truth! And yes it could be a major flaw, a brake to the downside if it still is a crock. We need to know more about this from the company.The truth.

I have been to two presentations where Jeff Greenslade spoke of the issues they had with the new system.
Two months of hell.
However the key word was "had".
Now the systm is giving them the opportunity to do more of what they want to do.
Sounds to me as though "all is now well" with the Oracle system .
Hopefully any new system update is years away.
Something must be working just fine to achieve the huge growth in Aussie REL business.
[Maybe the phone.?]..lol.

[Beagle]

Just got a letter from them telling me they are closing their Takapuna branch. All to be done by phone and internet from now on. If only they would improve their hopeless app.


Wow, thanks for that Vaygor, just what no one wanted to hear, an inconvenient truth! And yes it could be a major flaw, a brake to the downside if it still is a crock. We need to know more about this from the company.The truth.
I like Vaygor1 and have no reason to disbelieve him but I'm satisfied with the past tense reference direct from the horses mouth as posted by Percy below. I have had absolutely no issues with my call account with Heartland since opening it last year, really enjoying the special (for some customers) 3.0% call account return :D


I have been to two presentations where Jeff Greenslade spoke of the issues they had with the new system.
Two months of hell.
However the key word was "had".
Now the systm is giving them the opportunity to do more of what they want to do.
Sounds to me as though "all is now well" with the Oracle system .
Hopefully any new system update is years away.

Onward and upward eh Percy. :t_up:

[percy]

Onward and upward eh Percy. :t_up:

Maybe HBL's phones still work.?...………..lol.
Yes it will certainly be an interesting year or two ahead of us.
I am pleased they are "going for" the Australian opportunities with shareholders backing.

[peat]

I always fractionalise my term deposits so as to have staggered maturity dates. Unfortunately Heartland has a limit of ten term deposits. If you want more you need to have a separate head account with a new head account number. It is certainly a disincentive (for me) to add funds with Heartland. Would that be an Oracle database limitation or some other factor?

Highly unlikely
Oracle is a enterprise software provider meaning it can deal with Very Large numbers.

I agree Vaygor it is complex and costly to run Oracle systems. But its all in the detail.

[Joshuatree]

I really hope as a shareholder it doesn't keep "teething" on us and that the $22 million spent on it proves its worth.Could be more clarity and detail clarifying its really fixed and not patched imo.


"Teething" problems after Oracle roll-out cost Heartland Bank ... (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwj_t4zHn8jdAhVCErwKHUY9Dz0QFjAAegQIChAB&url=https%3A%2F%2Fwww.reseller.co.nz%2Farticle%2F6 33600%2Fteething-problems-after-oracle-roll-out-cost-heartland-bank%2F&usg=AOvVaw1kJ5cx5Hu0D0e4OwpSSSHS)

[minimoke]

I always fractionalise my term deposits so as to have staggered maturity dates. Unfortunately Heartland has a limit of ten term deposits. If you want more you need to have a separate head account with a new head account number. It is certainly a disincentive (for me) to add funds with Heartland. Would that be an Oracle database limitation or some other factor?if you can have 10 I can see why you cant have at least 99 accounts. So it cant be a numbers thing. eg "Head Account Number - 99"

Maybe anti- money laundering or something like that. To encourage people to keep money under closer control.

[winner69]

That shareholder who asked why his dividend had not increased this year got shortchanged in the answer he go.

We are growth mode and we’re holding more back for growth was the response in a rather gruff tone ....so there you stupid shareholder

Interesting the dividend payout ratio this year was much the same as last year (~75%) and as such the total dividend paid was $4m than previous year

The real reason for holding the dividend at 9.0 cents per share was the significantly increased number of shares......this reinvesting for growth is just a convenient story. More credence would be given tonthat story if they actually cut the dividend.

[Snow Leopard]

...The one big disturbing factor that is stopping me in my tracks is Oracle.
I have worked for extensive periods in two companies that used it, and in my most humble of opinion it is a complete and utter sack of sh!t.....

The very important question here is:
Were these two companies both financial institutions using the Oracle FLEXCUBE product or two companies whose software systems which used an Oracle database as the datastore?

If the former then may be it is an issue otherwise it is not.

Name a database and I can give you a few disaster stories involving them, though usually the problem was not the database per se.

[winner69]

I really hope as a shareholder it doesn't keep "teething" on us and that the $22 million spent on it proves its worth.Could be more clarity and detail clarifying its really fixed and not patched imo.




"Teething" problems after Oracle roll-out cost Heartland Bank ... (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwj_t4zHn8jdAhVCErwKHUY9Dz0QFjAAegQIChAB&url=https%3A%2F%2Fwww.reseller.co.nz%2Farticle%2F6 33600%2Fteething-problems-after-oracle-roll-out-cost-heartland-bank%2F&usg=AOvVaw1kJ5cx5Hu0D0e4OwpSSSHS)

Could be as bad as that mega costly experience Kiwibank are having

[beetills]

Also closing their Hamilton Branch after spending heaps to refurbish it.

[percy]

Also closing their Hamilton Branch after spending heaps to refurbish it.

I think we can all see that HBL have seen opportunities they want to take advantage of.
Branch network is not, and has never been, where they see their future.

[Vaygor1]

The very important question here is:
Were these two companies both financial institutions using the Oracle FLEXCUBE product or two companies whose software systems which used an Oracle database as the datastore?

If the former then may be it is an issue otherwise it is not.

Name a database and I can give you a few disaster stories involving them, though usually the problem was not the database per se.

Hi Snow Leopard.

I agree with your sentiments and was aware upon posting that I may receive a response similar to yours. I am well aware that crap in = crap out when it comes to data and data-structure, and not necessarily the fault of the database engine itself.

The company that dumped their system was a hydrocarbons processing facility in NZ that employed an Oracle system as their Computerised Maintenance Management System (CMMS) and also made an attempt to implement Oracle HR. I think it was the failure of the Oracle HR rollout that was the straw that broke the camels back. Tens of millions spent but they had to cut their losses I think.

The company I worked for that may (or may not) be continuing to use their Oracle system was an Australian international Engineering and Design Company with offices in 80 countries employing about 40,000 staff at the time I left.

Around then (about 10 years ago) the main selling point of Oracle was the concept of a central repository for all data, and an engine that would not slow down even with massive data volumes.

The system was so cumbersome, slow, user unfriendly, and ugly (referring to the MMI... able to be tailored a bit but not in terms of real look & feel). Even the internal staff employed to maintain the system cost large sums of money (they had to have Oracle experience) and these staff would invariably form a 'Oracle is everything and nothing else comes close and MUST be banned' attitude, even with unrelated systems... likely due to (in my opinion) Oracle being their life, plus a healthy element of job protectionism.

Oracle may have come out with new products and new architecture since back then, but I assume they would always use their Engine which I imagine lies at the heart of their empire. I think I probably need to be personally exposed to an Oracle success story before reviewing my current feelings about them.

[Beagle]

^^^ Lots of talk this boat had some pretty fancy Oracle software to make the comeback of all time...does that success story count :) https://www.cbsnews.com/news/oracle-team-usa-caps-stunning-comeback-to-win-americas-cup/

[minimoke]

^^^ Lots of talk this boat had some pretty fancy Oracle software to make the comeback of all time...does that success story count :) https://www.cbsnews.com/news/oracle-team-usa-caps-stunning-comeback-to-win-americas-cup/Only to be undone by a poxy flightless bird from some place down south no one has heard of https://en.wikipedia.org/wiki/2017_America%27s_Cup

[Beagle]

Only to be undone by a poxy flightless bird from some place down south no one has heard of https://en.wikipedia.org/wiki/2017_America%27s_Cup

I suspect there might be one or two of those silly flightless birds that enjoyed that series " a little" more than the previous one :)

[Snoopy]

The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is dervied from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.



Loan MaturityExpected Behaviour MultipleFY2014 Financial Receivables Maturity: Contracted/ ExpectedFY2015 Financial Receivables Maturity: Contracted/ Expected
FY2016 Financial Receivables Maturity: Contracted/ ExpectedFY2017 Financial Receivables Maturity: Contracted/ Expected


On Demand100% $50.254m / $50.254m $37.012m / $37.012m $84.154m / $84.154m
$57.040m / $57.040m


0-6 months132% $477.190m / $629.445m $664.557m / $877.215m $743.389m / $961.274m
$618.271m / $816.118m


6-12 months132% $367.564m / $483.727m $450.638m / $594.842m $484.420m / $639.962m
$521.215m / $688.004m



Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.



Deposit MaturityExpected Behaviour MultipleFY2014 Financial Liabilities Maturity: Contracted/ ExpectedFY2015 Financial Liabilities Maturity: Contracted/ Expected
FY2016 Financial Liabilities Maturity: Contracted/ ExpectedFY2017 Financial Liabilities Maturity: Contracted/ Expected


On Demand3.01% $629.125m / $18.922m $748.332m / $22.450m $718.587m / $21.630m
$836.829m / $25.189m


0-6 months32.4% $748.129m / $242.431m $1,213.450m / $395.102m $892.944m / $289.314m
$1,191.957m / $386.194m


6-12 months36.4% $538.050m / $195.682m $686.159m / $249.762m $837.844m / $304.975m
$729.145m / $265.409m



Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



Deposit MaturityFY2014: 'Expected' combined Loan and Deposit CashflowFY2015: 'Expected' combined Loan and Deposit CashflowFY2016: 'Expected' combined Loan and Deposit Cashflow
FY2017: 'Expected' combined Loan and Deposit Cashflow


On Demand $31.332m $14.562m $62.524m $31.851m


0-6 months $387.014m $482.113m $691.960m $429.924m


6-12 months $288.045m $345.080m $334.987m $422.595m


Total $706.391m $841.755m $1,089.471m $884.370m



Once again lots of numbers here. Now there are four years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposiit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

From an historical perspective, the 'On Demand' net position outlook for FY2015 looked a little weak. IIRC there was serious promotion of Heartland's 'on call' account at the time and new money flowed in. Some of this money belonged to members of this forum who responded to the incentive of Heartland offering 3% at the time (? - please correct me forum members if I have remember this figure incorrectly) on their call money just as the big banks were reducing their on call deposit rates to near zero (ANZ, BNZ and Westpac now offer just 0.1% on 'at call' deposit money). By EOFY2016 there was a relative abundance of 'net on call cash available' ($62.5m) and that nearly halved to a still acceptable (beacuse Heartland hasn't seen fit to boost it) $31.9m at EOFY2017. I see that the 'on deposit' rate at Heartland was reduced to 2.75% last year, which no doubt took a lot of the froth out of the cash market from those seeing stars when the rate was 3% and above.

Another anomaly was the 0-6 month maturity outlook from EOFY2016 (30th June 2016). IIRC this was a period when there was real uncertainty about the milk price and Heartland may have shied away from short term loan deals to dairy customers over this time, and thus created a higher than originally planned for net maturity of 0-6 month debentures. That 'bump' also looks to be ironed out in the FY2017 figures.

I see Percy is once again 'on the ball' and has replied to this post before I have finished it. You are right about us having this discussion before Percy, this is at least the fourth time. But that doesn't mean it is a waste of time. Short term cash flow is an issue that never goes away. And an imbalance in these figures is an indicator that Heartland might need to offer higher interest rates in the future to fix any upcoming cashflow situation. Offering above market interest rates, if only for a time, means lower profits for shareholders. And that is something that shareholders should know about! Given all of this information is now historical, we can compare what was indicated with what actually happened. It looks like Heartland was not forecasting any unusual cash shortfall on the 'net' existing loan book for FY2018, so no unusually high interest rate deals would be on offer to customers over the 30th June 2017 to 30th June 2018 period. Is that what happened (I haven't kept close tabs of Heartland deposit rates over the year)?


The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.



Loan MaturityExpected Behaviour MultipleFY2014 Financial Receivables Maturity: Contracted/ ExpectedFY2015 Financial Receivables Maturity: Contracted/ Expected
FY2016 Financial Receivables Maturity: Contracted/ Expected
FY2017 Financial Receivables Maturity: Contracted/ Expected
FY2018 Financial Receivables Maturity: Contracted/ Expected


On Demand100% $50.254m / $50.254m $37.012m / $37.012m $84.154m / $84.154m
$57.040m / $57.040m $49.588m / $49.588m


0-6 months132% $477.190m / $629.445m $664.557m / $877.215m $743.389m / $961.274m
$618.271m / $816.118m $609.268m / $804.234m


6-12 months132% $367.564m / $483.727m $450.638m / $594.842m $484.420m / $639.962m
$521.215m / $688.004m $469.632m / $619.914m



Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.



Deposit MaturityExpected Behaviour MultipleFY2014 Financial Liabilities Maturity: Contracted/ ExpectedFY2015 Financial Liabilities Maturity: Contracted/ Expected
FY2016 Financial Liabilities Maturity: Contracted/ Expected
FY2017 Financial Liabilities Maturity: Contracted/ Expected
FY2017 Financial Liabilities Maturity: Contracted/ Expected


On Demand3.01% $629.125m / $18.922m $748.332m / $22.450m $718.587m / $21.630m
$836.829m / $25.189m
$924.072m / $27.815m


0-6 months32.4% $748.129m / $242.431m $1,213.450m / $395.102m
$892.944m / $289.314m
$1,191.957m / $386.194m
$1,345.316m / $435.882m


6-12 months36.4% $538.050m / $195.682m $686.159m / $249.762m $837.844m / $304.975m
$729.145m / $265.409m
$572.731m / $208.474m



Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



Deposit MaturityFY2014: 'Expected' combined Loan and Deposit CashflowFY2015: 'Expected' combined Loan and Deposit CashflowFY2016: 'Expected' combined Loan and Deposit Cashflow
FY2017: 'Expected' combined Loan and Deposit Cashflow
FY2018: 'Expected' combined Loan and Deposit Cashflow


On Demand $31.332m $14.562m $62.524m
$31.851m
$21.765m


0-6 months $387.014m $482.113m $691.960m
$429.924m
$368.352m


6-12 months $288.045m $345.080m $334.987m
$422.595m
$411.440m


Total $706.391m $841.755m $1,089.471m
$884.370m
$801.557m



Once again lots of numbers here. Now there are five years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. The above table(s) are indicative of what might be expected to happen if Heartland management took a 'hands off the tiller' approach to cashflow management. Heartland management does not do this. Instead:

1/Heartland management is a frequent raiser of new capital. That boosts cashflow in.
2/ Heartland management can manipulate 'expected' behaviour of customers by offering higher interest rates for debenture depositors over time periods that cash is needed (for example).

So while the above tables will not be an accurate picture of what really happens to cashflow over the next twelve months, they are useful in hinting where deposit rates (a customer nudge factor) might be heading for 'current period' deposits.

A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

The 'On Demand' net position outlook is the weakest since FY2015. This bodes well Heartland's 'on call' account holders who might expect the generous (with respect to finance industry peers) 'on call' rates to continue as a result.

The following current 'on call' rates, from institutions with comparable credit ratings, I have lifted from the 'interest.co.nz' website:



Heartland 'Direct Call' (no restriction)2.75%


Co-Operative bank ($100,000 minimum)1.00%


SBS bank ($100,000 minimum)1.00%


UDC Finance ($100,000 minimum)1.00%



However with Heartland now committed to raising a lot more wholesale funding in Australia post restructure and with 'cash' balances an expected source of long term funding (sounds ironic but it is true!) I wouldn't be surprised if Heartland call interest rates in New Zealand are reduced significantly over the next twelve months, back to the level of their peers. I doubt you shareholders who voted for the restructure realised you were voting for the end of your generous call account terms in New Zealand going forwards, but I am calling it. Remember you read it here first!

Expected cashflow for the 0-6 months is the weakest on record. Granted it is still significant in absolute terms. So once again we can expect Heartland's rates offered for six month term deposits to be toward the top end of their comparative peer group.



Heartland ($1,000 minimum)3.25%


Co-Operative bank ($2,000 minimum)3.05%


SBS bank ($5,000 minimum)3.25%


UDC Finance ($5,000 minimum)3.35%



And so it proves to be....

SNOOPY

[Beagle]

However with Heartland now committed to raising a lot more wholesale funding in Australia post restructure and with 'cash' balances an expected source of long term funding (sounds ironic but it is true!) I wouldn't be surprised if Heartland call interest rates in New Zealand are reduced significantly over the next twelve months, back to the level of their peers. I doubt you shareholders who voted for the restructure realised you were voting for the end of your generous call account terms in New Zealand going forwards, but I am calling it. Remember you read it here first!



Some canny investors entered into a special (I forget the exact name of it now) deal where they locked in their money for 4 months on term deposit then the deal was it rolled over into a special call account at the agreed rate of 3%. Once this new call sub account was up and running I then asked them if they minded if I transferred over my other funds in the 2.75% call account and they said fine, (I have 18 cents left in the 2.75% call account to keep it active, although they didn't mind if it went to 0). I expect they will be locked into that agreement to pay 3% because a deal is a deal but time will tell and anyway I'm losing "interest" in earning 3%. This bull market still has legs in my opinion.

On another topic, isn't it nice to be allocated shares in lieu of dividend at $1.625 when the shares are now trading at $1.72. This will be an even more rewarding proposition when the shares trade up to my fair assessed value of mid $1.80's within 6 months or so, maybe earlier.

P.S. Just got this e.mail. Well picked Snoopy, (although to be fair there was some google driven advertising popping up on my screen yesterday pushing their call account rate at 2.50%).

Hi there,
As a Direct Call Account holder we'd like to let you know about a rate change. We have reduced the rate from 2.75% p.a to 2.50% p.a effective 21 September 2018.

You will still enjoy the great features that our Direct Call Account provides:
No fees
Interest earned on every dollar
Unlimited withdrawals to your one nominated account

Regards

Mel Cadman
Head of Retail

[Frostyb0y]

Snoopy - Just received this email from Heartland "As a Direct Call Account holder we'd like to let you know about a rate change. We have reduced the rate from 2.75% p.a to 2.50% p.a effective 21 September 2018."

[Leftfield]

Good on you Snoopy - well spotted.

I've recently added HBL to my portfolio at an av of 1.70 as I like the Australian moves and think it is due for an upwards correction. I'm looking to increase the dividend yield side of my portfolio (which has been overly biased to cap gains.)

[percy]

Dividend is in my bank.

[RGR367]

Dividend is in my bank.

Same :t_up:

[Beagle]

Nice, extra shares allocated to my name on the register at $1.625, thank you Heartland.

[peat]

Nice, extra shares allocated to my name on the register at $1.625, thank you Heartland.

i find it weird how my CFD account got the credit on the 7th September (the day after it went ex) but I'm not complaining.

imo the price has to get through to 1.80 before it could be considered bullish. at this point it may just be filling the (somewhat disputed) gap

[Fred_Rubble]

Nice, extra shares allocated to my name on the register at $1.625, thank you Heartland.

Likewise - very pleasant indeed. Now just to make up the ground on the March 2018 DRP @ $1.77.

[oldtech]

Nice, extra shares allocated to my name on the register at $1.625, thank you Heartland.

And me :)

Although, I don't understand why HBL doesn't carry forward the residual balance. Not overly bothered by it as the amount I lose is trifling, but still ... how hard would it be?

[Snoopy]

P.S. Just got this e.mail. Well picked Snoopy, (although to be fair there was some google driven advertising popping up on my screen yesterday pushing their call account rate at 2.50%).


Nice to see that Google was informed of the rate cut before 'the punters'. I didn't see the ad though, honest! Nevertheless it is interesting to see how studying something as esoteric as the current year cashflow can pay off.



Snoopy - Just received this email from Heartland "As a Direct Call Account holder we'd like to let you know about a rate change. We have reduced the rate from 2.75% p.a to 2.50% p.a effective 21 September 2018."

Funnily enough you may still be better off earning 2.5% from the new Heartland Bank (with the Oz reverse mortgage assets carved off) than 2.75% from the old 'Heartland Bank'. That is because a large potential downside cashflow risk has been removed with the carve out of those Australian REL assets.

I reckon the 0.25% reduction in interest rate announced today is only the appetiser though. A new 2.25% rate to be introduced on December 21st just before Christmas? Sounds like a recipe for the main course, although it is unclear on which end of the knife you will find the turkey!

SNOOPY

[iceman]

Great to see a wise discussion on reverse mortgages in mainstream financial media and Mary Holm suggesting she may even get one herself, eventually. Of course Heartland gets a bit of free advertising https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12129348

[Snow Leopard]

And me :)

Although, I don't understand why HBL doesn't carry forward the residual balance. Not overly bothered by it as the amount I lose is trifling, but still ... how hard would it be?

I got $0.71 worth more shares than the dividend amount this time, so either they silently carry forward or they round the number of shares.

[Beagle]

I got $0.71 worth more shares than the dividend amount this time, so either they silently carry forward or they round the number of shares.

Thanks for pointing that out. Looks like they round it up as based on a strictly arithmetic calculation I should have got xxx6.5046 additional shares but ended up being allocated xxx7 extra shares which is 0.4954 extra share at $1.625 = 0.805 extra value. Not exactly a free lunch but maybe a free half a can of diet coke :)

[Snoopy]

The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.



Loan MaturityExpected Behaviour MultipleFY2014 Financial Receivables Maturity: Contracted/ ExpectedFY2015 Financial Receivables Maturity: Contracted/ Expected
FY2016 Financial Receivables Maturity: Contracted/ Expected
FY2017 Financial Receivables Maturity: Contracted/ Expected
FY2018 Financial Receivables Maturity: Contracted/ Expected


On Demand100% $50.254m / $50.254m $37.012m / $37.012m $84.154m / $84.154m
$57.040m / $57.040m $49.588m / $49.588m


0-6 months132% $477.190m / $629.445m $664.557m / $877.215m $743.389m / $961.274m
$618.271m / $816.118m $609.268m / $804.234m


6-12 months132% $367.564m / $483.727m $450.638m / $594.842m $484.420m / $639.962m
$521.215m / $688.004m $469.632m / $619.914m



Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.



Deposit MaturityExpected Behaviour MultipleFY2014 Financial Liabilities Maturity: Contracted/ ExpectedFY2015 Financial Liabilities Maturity: Contracted/ Expected
FY2016 Financial Liabilities Maturity: Contracted/ Expected
FY2017 Financial Liabilities Maturity: Contracted/ Expected
FY2017 Financial Liabilities Maturity: Contracted/ Expected


On Demand3.01% $629.125m / $18.922m $748.332m / $22.450m $718.587m / $21.630m
$836.829m / $25.189m
$924.072m / $27.815m


0-6 months32.4% $748.129m / $242.431m $1,213.450m / $395.102m
$892.944m / $289.314m
$1,191.957m / $386.194m
$1,345.316m / $435.882m


6-12 months36.4% $538.050m / $195.682m $686.159m / $249.762m $837.844m / $304.975m
$729.145m / $265.409m
$572.731m / $208.474m



Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



Deposit MaturityFY2014: 'Expected' combined Loan and Deposit CashflowFY2015: 'Expected' combined Loan and Deposit CashflowFY2016: 'Expected' combined Loan and Deposit Cashflow
FY2017: 'Expected' combined Loan and Deposit Cashflow
FY2018: 'Expected' combined Loan and Deposit Cashflow


On Demand $31.332m $14.562m $62.524m
$31.851m
$21.765m


0-6 months $387.014m $482.113m $691.960m
$429.924m
$368.352m


6-12 months $288.045m $345.080m $334.987m
$422.595m
$411.440m


Total $706.391m $841.755m $1,089.471m
$884.370m
$801.557m





Time to update the "Liquidity Buffer ratio" for FY2018.

Dear old Colin has now 'left the building', but what better way to immortalise his contribution to society than continuing with the 'Meads Test', and the 'solid as' quote with which he will alwys be identified? When Colin told us all those years ago that a certain finance company was 'solid as' with reference to investing debenture money, the end result was that this cash became tied up in illiquid property developments. So although the company had enough money to pay out their debenture holders 'on paper' and appeared to be operating profitably, the debenture holders could not get their cash back. The 'Meads Test' (as coined by Snoopy) is one method of finding out if a finance sector company really is 'solid as'. The basic data I need to check this out has already been calculated (see above). So let's get going.

To check out the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%

On the numerator of the equation, we have borrowings.

HLB Borrowings



1/ Term deposits lodged with Heartland.$2,881.805m


2/ Bank Borrowings$689.346m


3/ Securitized Borrowings total$47.504m


4/ Subordinated Bonds$3.378m


4/ Subordinated Notes$22.172m


5/ Unsubordinated Notes$151.853m


Total Borrowings of (see note 13) $3,796.058m



Note 13 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are, I believe, in relation to the Australian part of the 'Seniors Reverse Mortgage Portfolio'. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These CBA loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes (talking from a 1st July 2018 looking forwards perspective). And Heartland can’t rely on CBA Australia as a source of short-term funds.

The information given in note 13 on the securitized borrowing facilities is as follows:



Securitized bank facilities total all in relation to the Heartland ABCP Trust 1:$100.000mmaturing on 31st August 2018 (*)


less Current level of drawings against this facility$47.504m


equals Borrowing Headroom $52.496m {A}



(*) I do not expect any problem in rolling this facility over for another year.


HLB Lendings vs HLB Borrowings

Customers owe HNZ 'Finance Receivables' of $3,984.941 There is no breakdown in AR2018 (note 11) as to what loans are current or longer terms. However, if we look at note 21 'Liquidity Risk', we can derive the expected maturity profile of total finance receivables due over the next twelve months.




On Demand0-6 Months6-12 MonthsTotal


Expected Receivables Due$49.588m+ $804.234m+$619.914m= $1,473.736m


less Expected Deposits for Repayment$27.814m+ $435.882m+ $208.474m= $672.170m


equals Net Expected Cash Into Business$21.774m$368.352m $411.440m$801.566m {B}



If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for debenture holder liquidity. That is the case here.

Summing up:

(Total Current Money to Draw On {A})/(Expected Net Current Loans Outstanding {B})
= $52.496m / $801.556m
= 6.5% < 10%

=> Fail Short term liquidity test

Of course there are other ways to satisfy liquidity requirements. Issuing new shares or corporate bonds are two, and Heartland has done both in the past. But sometimes these are not options when market conditions change. This is why it is important to retain some 'headroom' with your existing borrowing arrangements. It appears that from the annual report, there is no indication there is enough.

SNOOPY

[Snoopy]

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?


To answer my own question first.

Heartland ABCP Trust 1, are still part of Heartland's accounts (despite Heartland ABCP Trust 1 being independent) , because there must be some guarantee that I don't remember ever reading about (has it ever been disclosed?) that means "Heartland Bank" must share a significant part of any shortfall should the independent 'Heartland ABCP Trust 1' ever get into trouble. Thus even though the 'Heartland ABCP Trust 1' has been sold, it cannot be deconsolidated from Heartland bank.

I am looking at the 'Heartland ABCP Trust 1' again because it is one of those securitized loan vehicles that Heartland (and maybe not co-incidentally Turners) are very keen about. Heartland seem keen to roll up their Australian Reverse Mortgage loans into such structures. If things go well this means higher profits for Heartland, offset by a higher risk for 'Heartland Group' if things don't go so well. I for one will be very interested to see any Australian wholesale funding vehicle prospectus for funding Aussie RELs, because those might 'at last' reveal what kind of downside risk 'Heartland Group' could face. Yet back in New Zealand the 'Heartland ABCP Trust 1' vehicle used for packaging up and on selling loans to third parties ( i.e. creating securitized loans) seems to be winding down.




Heartland ABCP Trust 1 (facility available)
CBS Warehouse A Trust (facility available)
Total Facility Available
Total Facility Drawn
Total Facility Headroom Remaining


FY2013
$400m$100m$500m$259m$241m


FY2014
$400m$400m$229m$171m


FY2015
$350m$350m$259m$91m


FY2016
$350m$350m$284m$66m


FY2017
$300m$300m$214m$86m


FY2018
$100m$100m$52m$48m



Of particular note is the very sharp decline as at EOFY2018:

1/ In the size of the facility drawn.
2/AND the size of the facility available.

Now why would Heartland be reducing their securitized loans in New Zealand, while at the same time telling shareholders this is their preferred method of funding loans in Australia? Sorry to keep asking the awkward questions!

SNOOPY

[Snoopy]

Winner has looked at what Heartland has asked of their funding stakeholders over the last year. It must be time to update the Heartland hunger for 'capital flow' table for the last five years:



Financial YearCapital Notes Issued during FYNew Shares Issued during FYTotal Shares on the Books EOFYNet Money Raised During FY (excl. Capital Notes)
Dividends PaidROEshareholders teat


20130 m0 m388.704m$0m$13.951m7.2%


20140 m75,562 m463.266m$64.774m$19.930m8.0%


20150 m6,624 m469.980m$9.163m$30.188m9.9%


20160 m6,579 m476.469m$6.798m$37.690m10.7%


2017$22.000m40.215m516.684m$50.991m$41.977m10.6%


Total Cash Raised$22.000m$131.726m


Total Cash Returned$143.736m



Notes

1/ The Australian 2017 'Subordinated Unsecured Capital Notes' issue for $A20m, which at $NZ1= =$A0.909c is equivalent to $NZ22m, was confirmed on April 7th 2017, and therefore issued in FY2017.
2/ ROE figures calculated using normalised earnings based on equity on the books at the end of the financial year.

If you add up the amount of capital that 'funding stakeholders' (bondholders and shareholders) have put into the business over the last five years, it exceeds the total dividend flow that Heartland has paid out over that same time period by $10m. Note that the five year time period I have chosen deliberately excludes the establishment capital raising that was used to create Heartland in the first place.

Winner says that Heartland should pay out less of their profit as dividends, and so reduce their need to raise new capital at the same time. But as this table shows, Heartland have been quite adept at raising new capital to the extent that all of the capital paid out as dividends (and $10m more) over the last five years has now been 'reclaimed'.

Heartland management has been quite clever at pandering to the dividend hounds. Probably there are several holders of Heartland today who would not invest in Heartland if there was no dividend on offer, Some of the generous dividend is reclaimed immediately via the DRP. The rest is taken back later (not necessarily from the same individuals it was paid to) via share cash issues and bond issues. The net effect is that in the five years ended June 30th 2017 Heartland has paid out a net nothing. Yes the underlying business base has grown over that time, even if no net cash has been generated. So what we have here is a share with 'ponzi type' characteristics. As long as there are confident funding stakeholders willing to put up more cash, the Heartland business will continue to grow, But as soon as Heartland loses the confidence of its funding stakeholders, the cash needed to expand the business will dry up and growth will stop. And we all know what would happen to the share price if that were to happen. This is the primary reason I don't invest in Heartland. A great business will generate lots of cash. Heartland generates none.


Time to update the Heartland hunger for 'capital flow' table for the last six years:



Financial YearCapital Notes Issued during FYNew Shares Issued during FYTotal Shares on the Books EOFYNet Money Raised During FY (excl. Capital Notes)
Dividends PaidROEshareholders teat


20130 m0 m388.704m$0m$13.951m7.2%


20140 m75,562 m463.266m$64.774m$19.930m8.0%


20150 m6,624 m469.980m$9.163m$30.188m9.9%


20160 m6,579 m476.469m$6.798m$37.690m10.7%


2017$22.000m40.215m516.684m$50.991m$41.977m10.4%


2018$150.000m43.463m560.147m$71.726m$47.895m9.6%


Total Cash Raised$172.000m$203.452m


Total Cash Returned$191.631m



Notes

1/ The Australian 2017 'Subordinated Unsecured Capital Notes' issue for $A20m, which at $NZ1= =$A0.909c is equivalent to $NZ22m, was confirmed on April 7th 2017, and therefore issued in FY2017.
2/ ROE figures calculated using normalised earnings based on equity on the books at the end of the financial year.

If you add up the amount of capital that 'funding stakeholders' (bondholders and shareholders) have put into the business over the last five years, it exceeds the total dividend flow that Heartland has paid out over that same time period by $190m. Note that the six year time period I have chosen deliberately excludes the establishment capital raising that was used to create Heartland in the first place.

Winner commented on viewing the HBL AGM broadcast:

"That shareholder who asked why his dividend had not increased this year got short changed in the answer he got."

"We are growth mode and we’re holding more back for growth was the response in a rather gruff tone ....so there you stupid shareholder."

I would pose the follow up question: If you have paid out a 'net nothing', is it even possible to hold more earnings back?

The table shows, Heartland have been quite adept at raising new capital to the extent that all of the capital paid out as dividends (and $12m more) over the last six years has now been 'reclaimed'. And that figure does not include the money raised as capital notes!

Heartland management has been quite clever at pandering to the dividend hounds. Probably there are several holders of Heartland today who would not invest in Heartland if there was no dividend on offer, Some of the generous dividend is reclaimed immediately via the DRP. The rest is taken back later (not necessarily from the same individuals it was paid to) via share cash issues and bond issues. The net effect is that in the six years ended June 30th 2018, Heartland has paid out a net nothing. Yes the underlying business base has grown over that time, even if no net cash has been generated. Does this matter? As long as there are confident funding stakeholders willing to put up more cash, the Heartland business will continue to grow, But as soon as Heartland loses the confidence of its funding stakeholders, the cash needed to expand the business will dry up and growth will stop. And we all know what would happen to the share price if that were to happen. This is the primary reason I don't invest in Heartland. A great business will generate lots of cash. Heartland (still) generates none.

SNOOPY

[winner69]

Snoops

I would contend that Bonds/Notes are just another form of borrowing, debt rather than ‘capital’. As such shouldn’t form part of your reasoning

I would also contend that as 2014 capital raise was to fund Seniors acquisition and shouldn’t be considered in this discussion (creates your $40m more)

What would you conclude re shareholder capital raised and dividends paid if you started from 2015 or even 2016

[Snoopy]

Snoops

I would contend that Bonds/Notes are just another form of borrowing, debt rather than ‘capital’. As such shouldn’t form part of your reasoning


I put the bonds in the table because they are an alternative fund raising mechanism to shares to raise funds from public stakeholders. However, they aren't central to the point I was making. Even if you leave all the bond money raised out of it, Heartland still hasn't generated any cash.



I would also contend that as 2014 capital raise was to fund Seniors acquisition and shouldn’t be considered in this discussion (creates your $40m more)


The purpose of my exercise was to look at how much cash has been generated by Heartland, excluding the cash injection at the time of Heartland's formation. I agree that if you leave out the capital created as part of the Seniors acquisition, that might turn the near $20m cash deficit into a near $20m cash surplus over the study period. But I don't agree with the premise for doing such a thing.

Seniors was acquired and around $40m of Heartland share capital was created as part of the acquisition process. There is no denying this did happen, and I can't see the attraction of looking at the Heartland history assuming no cash was created for buying Seniors. I also suspect that because the REL business has continued to grow, it is consuming more cash than it creates for Heartland. That isn't necessarily a problem if there are other arms of the Heartland business that do generate cash to cover the shortfall. But it does seem that this isn't happening.



What would you conclude re shareholder capital raised and dividends paid if you started from 2015 or even 2016




Financial YearCapital Notes Issued during FYNew Shares Issued during FYTotal Shares on the Books EOFYNet Money Raised During FY (excl. Capital Notes)
Dividends PaidROEshareholders teat


20150 m6,624 m469.980m$9.163m$30.188m9.9%


20160 m6,579 m476.469m$6.798m$37.690m10.7%


2017$22.000m40.215m516.684m$50.991m$41.977m10.4%


2018$150.000m43.463m560.147m$71.726m$47.895m9.6%


Total Cash Raised$172.000m$138.678m


Total Cash Returned$157.750m



Around $20m of cash generated.

Note: ROE figures based on normalised earnings and shareholder equity at the end of the financial year

SNOOPY

[winner69]

OK Snoops, I think I misunderstood you earlier, or at least what you meant by ‘cash generated’

So last 4 years Heartland have got $139m cash from shareholders and given $158m to shareholders as dividends — yes?

Somebody did ask me during one of raises why are they asking for cash when they are just going to give it back to me in a months time. I replied yep doesn’t seem to make sense does it eh?

Suppose Heartland know what they are doing

[Snoopy]

OK Snoops, I think I misunderstood you earlier, or at least what you meant by ‘cash generated’

So last 4 years Heartland have got $139m cash from shareholders and given $158m to shareholders as dividends — yes?

Somebody did ask me during one of raises why are they asking for cash when they are just going to give it back to me in a months time. I replied yep doesn’t seem to make sense does it eh?

Suppose Heartland know what they are doing

I think Heartland have been quite clever in that their business model meets the needs of two types of shareholders.

1/ Dividend Hounds: These are catered for by offering a decent dividend yield, well above what those shareholders would get if they took that money and put it in a bank term deposit.

2/ Growth Hounds: These are catered for by having a DRP that allows shareholders to accumulate shares at a discount to market price in lieu of a cash dividend. This discount then expands with future share price growth, leaving the growth hounds happy.

Where the 'satisfy everyone' strategy starts to unravel is when the share price stops growing and the 'discounted' shares that the growth hounds receive go underwater. If as a result, shareholders pull out of the DRP, then this means less capital for the company to expand, decreased earnings relative to the lofty forecasts (made assuming more share capital would become available) and more weakness in the share price.

The REL business is good for profits, but bad for cashflow. Heartland needs a constantly increasing capital base. This is capital that the REL business can't generate from reverse mortgage payment holder interest payments (this interest is capitalised and so not available to Heartland as cashflow until the loan is terminated). Thus REL business growth will stall without access to new supporting capital: either more shares (dilutionary in eps terms) or more wholesale debt funding (which has its own liquidity risks). If the current 'cash generation' (as I put it) from normal operations is poor now, what do you think will happen when Reverse Equity Release Loans make up an even greater proportion of the Heartland's business?

SNOOPY

[winner69]

I think Heartland have been quite clever in that their business model meets the needs of two types of shareholders.

1/ Dividend Hounds: These are catered for by offering a decent dividend yield, well above what those shareholders would get if they took that money and put it in a bank term deposit.

2/Growth Hounds: These are catered for by having a DRP that allows shareholders to accumulate shares at a discount to market price in lieu of a cash dividend. This discount then expands with future share price growth leaving the growth hounds happy.

Weren’t you saying (or implying) shareholders have been fronting up with cash (new capital) and then getting that cash back in a few months(dividend)....isn’t that like buying your dividend?

[Snoopy]

Weren’t you saying (or implying) shareholders have been fronting up with cash (new capital) and then getting that cash back in a few months (dividend)....isn’t that like buying your dividend?


Yes, I guess that is another way to look at what I was saying. I am also saying that in some circumstances this does not matter.

But I am additionally saying that the DRP will only work with 'growth' investors if the share price keeps going up. And it will only work with 'dividend' investors, if the new capital issued is deployed so that 'eps' does not decrease.

All companies are looking to increase their 'eps'. There is nothing unique to Heartland here. But the path to 'eps' increase that Heartland have mapped out is to increase in a disproportionate way their Australian REL business. A side effect of going down that path is a 'new investment capital' squeeze. Up until now there has been no problem in raising new investment capital. But a change in the global financial environment could change the ability of HBL to raise capital. And that could unravel the business strategy going forwards as I see it.

SNOOPY

[bull....]

actually i think there model is really smart in regards to reverse mortgage.

make little money now as snoopy says , but as they build scale the borrowed money today will be dwarfed by the cash flow received in future years when these reverse mtges mature. so in future hbl should end up having huge csahflows.

[Snoopy]

actually i think there model is really smart in regards to reverse mortgage.

make little money now as Snoopy says ,


I need to be quite precise with my language here. I believe that the Australian Reverse Mortgage Business is very profitable right now. But the profits are paper profits in the sense that they cannot be cashed up by Heartland until the loan is ultimately cashed in.



but as they build scale the borrowed money today will be dwarfed by the cash flow received in future years when these reverse mtges mature. So in future hbl should end up having huge cashflows.


'Building scale' is all about growing the size of the reverse mortgage portfolio. Growing the REL portfolio means that HBL will always have poor cashflow, because as 100 loans are paid back in the future (say), Heartland will have to fund 200 new equivalent loans to keep the growth going. So I see no end to the cashflow issue, provided the REL portfolio keeps growing.

Of course if the REL portfolio stops growing, then, at some time in the future (say ten-fifteen years) the cashflow situation will resolve itself. If Heartland were to decide to wind down their reverse mortgage portfolio in the future it would then become a cashflow generating engine for the company, the exact opposite of the situation now. But if the REL growth is halted, the earnings multiple that investors are prepared to pay for Heartland will go down. At that means the share price will shrink. Therein lies the 'balancing act' and the dilemma.

SNOOPY

[percy]

Bit like the problems Warren Buffett's Berkshire Hathaway would have had, if they had started paying dividends years ago.!!
Good sort of problem to have.
Think it is best understood by those who understand how compound interest works...…………….lol.

[Snoopy]

Heartland ABCP Trust 1, are still part of Heartland's accounts (despite Heartland ABCP Trust 1 being independent) , because there must be some guarantee that I don't remember ever reading about (has it ever been disclosed?) that means "Heartland Bank" must share a significant part of any shortfall should the independent 'Heartland ABCP Trust 1' ever get into trouble. Thus even though the 'Heartland ABCP Trust 1' has been sold, it cannot be deconsolidated from Heartland bank.


Just re-reading an old Heartland report on the ABCP Trust 1, and found the admission of potential liability I had been seeking:

To give "a receipt of deferred purchase consideration" to be passed on to Heartland Bank.

I believe 'a receipt of deferred purchase consideration ' simply means the end line customer has not paid their bill! It certainly sounds much better than getting a bad debt though!

SNOOPY

[Jantar]

...

'Building scale' is all about growing the size of the reverse mortgage portfolio. Growing the REL portfolio means that HBL will always have poor cashflow, because as 100 loans are paid back in the future (say), Heartland will have to fund 200 new equivalent loans to keep the growth going. So I see no end to the cashflow issue, provided the REL portfolio keeps growing.....

SNOOPY I think you may be treating this issue as too much of binary situation rather than as a variable scale. Inflation alone would mean that simply replacing 100 matured loans with 100 new ones that there would be growth in absolute terms, not not in real terms, however the cashflow would be the equivalent of the compounded interest over the period of those loans. Increasing the number or value of loans by an amount equal to say half of the cash generated would achieve both cashflow and growth.

[Snoopy]

Bit like the problems Warren Buffett's Berkshire Hathaway would have had, if they had started paying dividends years ago.!!
Good sort of problem to have.


If you take the example of 'Berkshire Hathaways'' insurance business, then what we have compared with Heartland's REL business is exactly the opposite. Berkshire accepts cash up front in insurance premiums, in the hope they won't have to pay it out later. Heartland takes on a property debt up front and hope that they will get paid back later.

Warren takes the insurance premiums and uses that free cashflow to invest in all sorts of other businesses.

Heartland takes on the immediate cashflow obligation, then has to scratch around to find the money to pay it.

The two comparative business models are polar opposites from a cashflow perspective.



Think it is best understood by those who understand how compound interest works...…………….lol.


Compound interest will certainly mean more 'cash back' to Heartland once those reverse mortgages are discharged to be sure. But it will do nothing to improve cashflow in the interim for Heartland shareholders.

SNOOPY

[Snoopy]

Scale is important for any business wanting to maintain a strong position in whatever market they operate in. If you don't have scale, you can carry on developing a business until the point that the 'big boys' notice you. If you continue to push ahead, those already dominating the market will act aggressively against you. This can severly limit any future growth and may end up being fatal for that part of the smaller expanding business. I am not saying that a small business can never match and get on equal terms with a bigger one. I am saying that when a small player starts to tread on the toes of a big player, then this introduces a significantly higher risk for those invested in the smaller player. if as an investor you can avoid such a risk, this is a good thing.

Heartland in their December 2016 presentation say that their mission statement is to:

"Pursue opportunities where they can provide innovative products in niche areas within the household, business and rural sectors, that are under-serviced by the major banks"

The Heartland mission statement is sensible, because the big four Aussie Banks are absolute gargantuans by Heartland standards. It wouldn't be too far of a stretch to say that to take on the big Aussie banks directly would be a suicide mission. But how secure is Heartland really in these market niches in which they choose to operate?

The specific target markets are listed below:

Millennials (People Reaching your Adulthood in the early 21st Century => Aged 25-35 today):

Provide a frictionless digital experience to the emerging millennial market, who value speed and ease.
e.g. Harmony joint venture, Motor Vehicle Loans, Online personal loans. Growing the consumer loan book has a lower ROE (because more capital is needed to support such loans) which needs to be balanced by a higher margin.

Current Gross Receivables: $844m, Average Loan Size $14k

Heartland vs Competitors (Motor Vehicle)
1/ Marac (Heartland Subsidiary): 12.95% to 19.95%: Finance and Insurance Loan Book $340m
2/ Motor Trade Finance: 13.75%: Finance Book $535m
3/ Turners Vehicle Finance 12.95%. Finance book $144m

Heartland vs Competitors (Consumer Peer to Peer)
1a/ Harmony (Heartland investment 10% equity): Loans from $1,000 to $35,000 (all unsecured). Interest rates depends on net assets, income and credit history. Loan Book Size : Up to $100m (approx)
2a/ Squirrel Money: target A and B grade borrowers (only approve 21% of land applications). Loans $3,000 to $30,000 (unsecured) OR $70,000 (secured). Interest rate - market base plus individual risk profile. Loan Book Size: $5m

Retired:

Provide a personalised service to the 65+ via reverse mortgages. This requires an accessible and friendly branch structure, as the retired like to be able to eyeball their bank manager. Nevertheless the information is there on line too. ( https://www.seniorsfinance.co.nz/ )
e.g. Seniors Finance (Australia and New Zealand). Growing the reverse mortgage business will result in higher ROE (lower Reserve Bank risk weighting for housing, less capital applied) but a more compressed margin.

Current Gross Receivables (NZ only): $374m, Average Loan Size (NZ Only) $94k

Heartland vs Competitors:
1/ Heartland Seniors current loan rate is 7.5%, compounding monthly, $10,000 minimum loan. 15% of house value available at age 60. 35% at age 80. 40% at age 85. maximum Loan amount $500,000
2/ SBS Bank ('Retirement Loan' floating rate of 6.74% (fixed rate no longer available). Total loan balance $61m (September 2013) Amount of loan offered from 5% of the value of your home at age 60, to 30% at age 80 (to a maximum of 50%).)
3/ ASB (closed down their HomePlus business to new customers on August 3rd 2015),

Small and Medium Enterprise:

To be a smart streamlined on-line lender in this neglected market, where 'big banks' prefer to deal with 'big companies.' Plant/Equipment and Working Capital Finance. The web portal for SMEs is https://openforbusiness.heartland.co.nz/

Current Gross Receivables: $942m, Average Loan Size $107k

Heartland vs Competitors:
1/ Heartland Business Funding rate 10%, Property and Business Services book: $405m
2/ ANZ Business Indicator rate 9.4% plus lending margin. Business and Property Services book: $14,275m
3/ ASB Business Lending fixed rate 10.15%. Property and Business Services: $7,439m
4/ Westpac Base rate of Interest + 'Customer margin.' (Indicative 13.95%) Property and Business Services book: $2,284m


Rural:

Livestock Finance, Farm transition loans, Intermediate Finance with partner PGG Wrightson, Term loans to farmers in the sheep beef and dairy sectors whose debt needs are modest (my emphasis). The web portal for livestock loans is https://openforlivestock.co.nz. However farm equipment funding is only accessible by dealers. https://ofb.heartland.co.nz/ofadapplication/Account/Login?ReturnUrl=%2Fofadapplication%2F

Current Gross Receivables: $619m, Average Loan Size $209k

Heartland vs Competitors:
1/ Heartland Livestock: 100% finance available (for sheep, cattle, deer) secured against livestock purchased (not other farm assets). On line approval up to $500,000.
2/ ANZ $19,787m on loan ( 32x larger than Heartland! ) Agri Current Account "7.60% + (Lending margin)"
3/ Westpac $8,432m, Base rate of Interest + 'Customer margin.' (Indicative 13.95%)
4/ BNZ $2,210m on loan (includes fishing and forestry) Farm First rate 9.2%, secured over farm OR stock OR farming assets


Conclusion: Yes (see neighbouring discussions for reasoning)

SNOOPY

PS Base borrowing rates for various lenders can be found here

http://www.interest.co.nz/print/69150

on a page that appears to be regularly updated.

At the FY2018 AGM, the soon to be 'Heartland Group' articulated their vision: a core focus on markets where they have a 'best product' or the 'only product'. Three areas in particular that Heartland see their growth coming from are:

1/ Reverse mortgages,
2/ Small business lending, AND
3/ Motor vehicle finance.

The objective is to keep Heartland remote from big bank competition. A substantial sum has been invested in a new Oracle 'Flexcube' (cost $22m to be amortised over 10 years) computer platform over the last two years. The aim is to expand reach through this new digital platform and growing intermediary networks.

Reverse Mortgages

On 31st October 2018, Heartland Group is planning to de-consolidate the The Reverse Mortgages Australia business into a new subsidiary 'Heartland Australia'. The Australian REL business has had asset growth of 31% over FY18. The consolidation into an entity separate from the NZ registered 'Heartland Bank' is to allow for a more aggressive funding regime than would be allowed under NZ Reserve Bank oversight of 'NZ banks'. Heartland is continuing to broaden their intermediary network of brokers in Australia. The Australian Reverse Mortgage business receivables ledger totals $NZ677m (+31% yoy) on balance sheet date. The Australian subsidiary will also administer Personal lending and small business lending, through 'Harmony Australia and to SMEs through 'Spotcap Australia' and Heartland's own digital platform O4B (more details on this later in this post). Heartland is the third largest player in the Australian reverse mortgage market with a market share of 11.5% (researched by IBIS World).

Heartland make much of their 'Canstar' provider of the year win over all other Australian reverse mortgage providers. But what features allowed them to take out this award? In no particular order of importance canstar noted:

1/ The loan has no ongoing fees.
2/ Potential customers were offered an 8 hour approval turnaround (typical industry time 25 hours).
3/ Allow a partner who is not the lead person named in the loan to remain living in the property even if the property owner has passed away.
4/ Offer an 'equity protection option', where you could choose to protect a percentage of the eventual net sale proceeds of your home.

How does Heartland Seniors Finance in Australia compare with other reverse mortgage providers? An excellent overview of the Australian Reverse Mortgage market may be found here:

https://download.asic.gov.au/media/4851420/rep-586-published-28-august-2018.pdf



Percentage of House Value Available, age 60 Percentage of House Value Available, age 80 Maximum AvailableNew Loan Market Share (2013-2017)


Commonwealth Bank (var 6.37%)20%35%40%68%


P&N Bank (var 6.24%)20%35%35%small%


Heartland Seniors Finance (var 6.29%)15%35%45%12%





Westpac and Macquarie pulled out of the Australian reverse mortgage market in 2017. The total size of the reverse mortgage market in Australia (including legacy players with around 20% market share) was $2.5b (December 2017). There is further competition from the government operated 'Pension Loan Scheme'. From 1st July 2019, the scheme will be broadened to allow people to borrow to create an income stream 50 per cent higher than the full pension (including supplements). The advantages include the interest rate of 5.25 per cent (typically 1% lower than the private providers). Finally, income from the Pension Loans Scheme will not affect Centrelink benefits such as the age pension. Private reverse mortgages can affect the pension because of the income test from either an income stream or deeming rates applied to a lump sum.

Meanwhile back in New Zealand, the reverse mortgage business ledger in this country totalled $453m , up 12% year on year. Heartland is the largest reverse mortgage player in the NZ market (as researched by Cameron Partners). The only other bank player who advertises reverse mortgages is 'SBS Bank', with their 'SBS Advance' product. Reverse mortgage interest rates are variable, with Heartland currently charging 7.82%. (SBS are currently lower at 7.55%). There is a maximum percentage of the value of the house you can borrow.



Percentage of House Value Available, age 60 Percentage of House Value Available, age 80 Maximum Available


SBS Bank (var 7.55%)5%30%50%


Heartland Bank (var 7.82%)15%35%40%



We can see that Heartland's key advantage in NZ is 'more money available earlier'.

Small Business Lending

'Heartland Bank' will continue to operate as the other fully owned subsidiary of 'Heartland Group'. Heartland Bank claim to have NZ’s largest platform for small business lending. The on-line part of this customer focus is named 'Open for Business' or 'O4B' for short. Loan approvals may be given fast 'on line'. Asset growth on the 'O4B' business unit, loan book now $100m, was reportedly up 98% over FY18. $1,066m worth of 'business receivables' are on the balance sheet as at 30-06-2018 (EOFY2018), including working capital and plant and equipment financing outside of the O4B interface. Heartlands 'best rate' for unsecured small business loans is 9.5% per annum, but may be as high as 16% p.a. 'depending on a range of factors'. For comparison



Receivables BalanceBest Interest Rate


ANZ NZ Business Bank Business Services' Receivables 31-09-2017 0.1854 x $15,846m = $2,938m 9.5%


Westpac NZ Business Bank Property & Business Services' Receivables 31-09-2017$1,120m + $389m = $1,509m 13.95%


ASB NZ Business Bank 'Other Personal Loans' Receivables 31-09-2017 $1,719m 10.17%


Heartland Bank Balance Sheet 'Property & Business Services' Receivables 30-06-2018 $110.385m 9.5%



It is clear that Heartland are not a big three player in 'business lending'. But they are specialising in 'small business'. It is difficult to get total market figures for 'small business' funding, because so many small businesses are financed by mortgages on homes. It is possible to take out an ordinary mortgage on your house without telling the bank you are funding a business venture with it. Heartland are not concentrating on retail house mortgage funding business loans. But they are committed to the SME market. They also seem 'interest cost competitive'.

The other competitive advantage that Heartland tout is that loans can be rapidly approved (within minutes) over the net using their new banking software. Has anyone on this forum had a business loan approved in this way? I tried it myself, but they answer was 'we will get back to you'. And that sounds like the loan approval process of any other bank!

Motor Vehicle Finance

Motor vehicle financing is stronger, helped by Heartland's intermediated strategy and distribution relationships with Holden, Jaguar Land Rover and AA Finance. Motor vehicle financing sat at $955m as at FY2018 balance date. For comparison purposes:



Receivables BalanceChange Since FY2016


Heartland Bank Balance Sheet Receivables 30-06-2018 $955m +180%


MTF Balance Sheet Receivables 31-03-2018 $651.738m +22%


Turners Automotive Group Balance Sheet Receivables 31-03-2018 $289.799m +100%



As a specialist lender targeting the motor vehicle sector, the growth in Heartland loans to this sector has been astonishing. Their loan book is much larger than the long established MTF financing and they are growing much faster than 'fast growing leader' in the pre-owned vehicle market, Turners Automotive Group. Well done Heartland!

Other Sector Comment

In rural lending, Livestock financing is up 62% in FY2018. Larger rural relationship-managed lending, with the bigger banks increasingly moving into this end of the market
market. So total rural funding is down, the receivables book total being $656m at EOFY2018.

Conclusion:

Pass Test

SNOOPY

[winner69]

Skimmed through this book while at a friends house the other night. Very interesting

Hope Heartland guys have read and got some insights from it

Emotional Banking: Fixing Culture, Leveraging FinTech, and Transforming Retail Banks into Brands
By Duena Blomstrom

[Snoopy]

The trend below is required to track higher for five years with one setback allowed.




Financial YearNet Sustainable Profit (A)Shares on Issue EOFY (B)eps (A)/(B)


2012$26.606m + 0.72($5.642m + $3.900m) =$30.476m388.704m7.84c


2013$6.912m + 0.72($22.527m+ $5.101m)= $26.804m388.704m6.90c


2014$36.039m463.266m7.78c


2015$48.163m - 0.72(0.588m) = $47.743m469.980m10.2c


2016$54.164m - 0.72(1.136m) = $53.346m476.469m11.2c



Result: Pass Test

One necessary hurdle has been lept over in a quest to see if Heartland is a suitable candidate to apply the Buffet growth model, as espoused in "The Buffettology Workbook" by daughter in law Mary Buffett.


Eagle eyed readers will note that I have revised some of my assumptions on what one off items are taxable or not.



Financial YearNet Sustainable Profit (A)Shares on Issue EOFY (B)eps (A)/(B)


2014$36.039m + $0.056m = $36.095m463.266m7.8c


2015$48.163m - $0.588m - $0.098m = $47.477m469.980m10.1c


2016$54.164m - $1.136m - $0.322m = $52.706m476.469m11.1c


2017$60.808m - 0.72x$1.2m - $0.628m - $0m = $59.316m516.684m11.5c


2018$67.513m + 0.72x$1.3m - ($4.8m + $0.6m) -$0.156m - $0m = $62.893m560.587m11.2c




Notes

1/ Property plant and equipment sale loss of $56k added back into FY2014 result.
2/ Profit of $588k from investment sale and $98k from Property Plant and Equipment sales removed from FY2015 result
3/ Profit of $1.136m from investment sale and $322k from Property Plant and Equipment sales removed from FY2016 result
4/ Profit of $0.628m from investment sale removed from FY2017 result. A $1.2m insurance write back that made the impaired asset expense for FY2017 unusually low and hence artificially inflated profits has been removed from the FY2017 result (refer FY2018 annual report).
5/ Profit of $0.156m from investment sale removed from FY2018 result. The after tax effect of $1.3m in 'one off costs' (system integration $0.5m, legacy system write off $0.3m and corporate restructure $0.5m) have been added to the FY2018 profit. Profits from the sale of the 'bank invoice finance business' of $0.6m and $4.8m recovered from a legacy MARAC property loan have been removed from the FY2018 profit.
6/ I have been unable to locate property plant and equipment sales profits/losses for FY2017 and FY2018.

Result: Pass Test

SNOOPY

[Snoopy]

The table is required to have an ROE figure of >15% for five years in a row, with one setback allowed.




Financial YearNet Sustainable Profit (A)Shareholder Equity EOFY (B)ROE (A)/(B)


2012$26.606m + 0.72($5.642m + $3.900m) =$30.476m$374.798m8.1%


2013$6.912m + 0.72($22.527m+ $5.101m)= $26.804m$370.542m7.2%


2014$36.039m$452.622m8.0%


2015$48.163m - 0.72(0.588m) = $47.743m$480.125m9.9%


2016$54.164m - 0.72(1.136m) = $53.346m$498.341m10.7%



Result: Fail Test

Pre-empting the grizzlers, the thinking behind this test is that an ROE of 15% is well above the cost of capital of most firms. A lower ROE than this means that it is possible that some of the businesses under the Heartland umbrella are earning a return less than their cost of capital. This means that there is less certainty that capital in the future will be efficiently deployed, and consequently less certainty about the profit oulook. This doesn't mean that one should not invest in Heartland though. It just means that you should use a method other than the 'Buffett Growth Model' to evaluate the business.




Financial YearNet Sustainable Profit (A)Shareholder Equity EOFY (B)ROE (A)/(B)


2014$36.095m$452.622m8.0%


2015$47.477m$480.125m9.9%


2016$52.706m$498.341m10.6%


2017$59.316m$569.595m10.4%


2018$62.893m$664.160m9.5%



This shows a major weakness of Heartland, with return on Equity a long way short of target guidelines. The relatively low ROE is exaggerated by raising capital throughout the year, through the simplified calculation method I have used. But this is as it should be in my opinion, as constantly raising new capital from shareholders is another undesirable corporate trait.

Result: Fail Test

SNOOPY

[Snoopy]

What we are looking for here is the ability to raise margins at above the rate of inflation over some time period longer than two years back to back.



Financial YearNet Sustainable Profit (A)Gross Interest Revenue (B)Net Profit margin (A)/(B)


2012$26.606m + 0.72($5.642m + $3.900m) =$30.476m$205.142m14.9%


2013$6.912m + 0.72($22.527m+ $5.101m)= $26.804m$206.349m13.0%


2014$36.039m$210.297m17.2%


2015$48.163m - 0.72(0.588m) = $47.743m$260.488m18.3%


2016$54.164m - 0.72(1.136m) = $53.346m$265.475m20.1%



Result: Pass Test




Financial YearNet Sustainable Profit (A)Gross Interest Revenue (B)Net Profit margin (A)/(B)


2014$36.095m$210.297m17.2%


2015$47.477m$260.488m18.2%


2016 $52.706m$265.475m19.9%


2017 $59.316m$278.279m21.3%


2018 $62.893m$309.284m20.3%




Before the glitch this year it looks like a one way increasing trend. A very commendable result.

Result: Pass Test

SNOOPY

[Snoopy]

This is the summary for those millennials who are 'attention span challenged'. Warren Buffett's scanning of the 'growth potential' of a company can be summarized in four quick questions.

Q1/ Does Heartland Bank have a top three market position in the markets in which it chooses to operate? (Ref: my post 8523)
A1/ Yes

Q2/ Does Heartland Bank have a 'normalised profit' increasing 'earnings per share trend'? (Ref: my post 8493)
A2/ Yes

Q3/ Does Heartland Bank have a record of earning a superior ( >15% ) return on shareholder equity? (Ref: my post 8495)
A3/ No

Q4/ Does Heartland Bank have the capability of operating at increasing Net Profit margins? (Ref: my post 8510)
A4/ Yes

Overall Conclusion

Heartland is not able to satisfy all the requirements to apply Warren Buffett's compounding growth model. This does not mean that Heartland is necessarily a poor investment going forwards. It just means that Heartland must be analyzed in a different way.


The conclusion I have come to today mirrors my FY2016 perspective conclusion.

We have been here before, so I will repeat myself in response too.



Using ROE as a measure, Heartland is very definitely a below average business.

From my perspective as a potential 'growth' investor, this problem is serious. Part of the problem is regulatory. The reserve bank is requiring banks to back up their lending with more capital than has historically been required. Other banks address this hurdle by issuing such things as 'bank bonds', an alternative source of 'Tier 1' capital. Heartland has talked about doing this in the past, but so far has not issued "Heartland Bonds'. If they did, then return on shareholder equity could potentially be boosted. Yet with only a BBB credit rating, would there be enough corporate interest in Heartland Bank Bond to get an issue away?

If there is a case for investment in Heartland today, I feel as though it will be as a dividend play.


Contrary to two years ago Heartland does have a plan to issue Heartland Bonds mainly in Australia. This may drive ROE up for the overall Heartland Group in the future. However, today is today, and I feel it more conservative to consider Heartland as a pure 'dividend play'.

Heartland fails the 'Buffett Test' by virtue of falling at hurdle three. But it may yet prove a good investment from a dividend perspective. Let's see.

SNOOPY

[Snoopy]

YearDividends Paid 'per share'Significant Event During Year'


FY2013 1.5cps(sp) + 2.0cps17th December 2012: Heartland becomes a bank

[/TR]

FY2014 2.5cps + 2.5cps1st April 2014: Seniors 'Reverse Mortgage' Business Acquired


FY2015 3.5cps + 3.0cps10th September 2014: invests in Harmony P2P startup


28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)


FY20164.5cps + 3.5cps


FY20175.0cps + 3.5cps


FY20185.5cps + 3.5cps


Average FY2015 to FY2018 inclusive8.00cps




I have chosen to use the last four years of operation as indicative, as these years include the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.



YearDividends Paid 'per share'Significant Event During Year'


FY2013 1.5cps(sp) + 2.0cps17th December 2012: Heartland becomes a bank

[/TR]

FY2014 2.5cps + 2.5cps1st April 2014: Seniors 'Reverse Mortgage' Business Acquired








FY20153.5cps + 3.0cps10th September 2014: invests in Harmony P2P startup


28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)


FY20164.5cps + 3.5cps


FY20175.0cps + 3.5cps


FY20185.5cps + 3.5cps


FY20195.5cps + ?.?cps



Average FY2015 to FH2019 inclusive8.33cps




I have chosen to use the last four and one half years of operation as indicative, as these years include the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.

SNOOPY

[Snoopy]

Plugging in a representative yield, one that represents the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

8.0c / (0.72 x 0.075) = $1.48

A reminder here that NTA was

($569.595m - $71.237m) / 516.684m = 96 cps

at balance date. This means my fair valuation is at a good premium to net tangible asset value. This is a credit to management, working from the rag tag of assets that they started with.

This $1.48 valuation is measured at the average point in the business cycle. One might argue that we are now riding high in the business cycle and that this $1.48 valuation is consequently too low given today's circumstances. I wouldn't argue with that. But, ever the bargain hound, neither would I look at buying any shares myself until that share price drifts down to that $1.48 level.


Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

8.333c / (0.72 x 0.075) = $1.54

A reminder here that NTA was

($664.160m - $74.401m) / 560.587m = $1.05 cps

at balance date. This means my fair valuation is at a good premium (+46%) to asset value.

This $1.54 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target range of $1.23 to $1.85. Given where we are in the business cycle, $1.73 looks fair value today. Given the sweet spot in the business cycle today for shares, I think $1.85 over the next twelve months is a target that Heartland could get to. I don't see compelling value at $1.73 though. But if the share does drift back towards my fair value mid point of $1.54, that might be the time to -finally- add HBL to my portfolio.

SNOOPY

[winner69]

Tried to get a Heartland mistake fixed today.

Internet banking broken, the new App broken and the nice guy at the other end of phone has to write things down because the whole system broke ...and he promises to rectify the mistake when he can so I don’t gave to worry

The nice guy did let slip the system is a bit unreliable

Oh well .....Oracle works fine I’m told

[Marilyn Munroe]

Oh well .....Oracle works fine I’m told

Nothing wrong with Oracle as a relational database management system. It's the bits between you and the database that are likely the problem

I was trying to do online banking with Heartland this morning and got Apache error pages. Apache is is a widely used web server with a good reputation for reliability so it is unlikely that is the problem.

One of the problems dealing with Oracle is Larry. If he wants to buy another Hawaiian Island and decides you are the customer who is going to pay for it you are in trouble.

Boop boop de do
Marilyn

PS. Off topic ramble: The Coalition Government missed a golden opportunity with the Chief Technology Officer appointment omni-shambles. They should have used the salary to hire top relational database or system analyst talent with the remit to walk into development meetings with a baseball bat on their shoulder to discourage bureaucrats and suppliers from repeating c---k ups like Novapay or Incis.

[Beagle]

Tēnā koe,
Internet banking and the mobile app are currently unavailable while we resolve a technical issue.
We'll post updates here when we have them.
Thanks for your patience,
The Heartland Team.

Perhaps loading Maori as a tab at the top of the home page so the whole website can be viewed in Maori has blown Oracles systems lol.

Not sure why they can't actually give me a greeting in English that I understand...is that too much to ask ?

[Beagle]

Internet banking up and running again, that's good.

[minimoke]

Internet banking up and running again, that's good.
Shouldn't have gone down in the first place

[winner69]

Internet banking up and running again, that's good.

Sort of smiled about digital technology strategy when business is done over the phone with the banker writing the problem down in his pad with a pen

Problem not fixed so must have lost his pad

Oh well another call needed ...not cool

Original problem is a Heartland guy not doing what he said he would do

[trader_jackson]

$1.64, much cheaper than the start of the year when it was nearly 50 cents more expensive
Nearly cheap enough for me to consider jumping back in

[winner69]

$1.64, much cheaper than the start of the year when it was nearly 50 cents more expensive
Nearly cheap enough for me to consider jumping back in

Hoop would say well and truly in bear territory .....25% off its recent high and trading below 200MA. Quite a wealth destroyer of late eh

Like it or not Heartland have been tainted with the fall out from the Aussie banks fiasco and as such is going through ax rerating process. Probably about fair value at the moment but if Aussie banks continue to decline well you never know where Heartland might end up.

HBL almost as big an enigma as that great Australian finance company Flexigroup

[Beagle]

Hoop would say well and truly in bear territory .....25% off its recent high and trading below 200MA. Quite a wealth destroyer of late eh

Like it or not Heartland have been tainted with the fall out from the Aussie banks fiasco and as such is going through ax rerating process. Probably about fair value at the moment but if Aussie banks continue to decline well you never know where Heartland might end up.

HBL almost as big an enigma as that great Australian finance company Flexigroup

Looking at the big chart picture I must concede it still has a head and shoulders look to it and now looks like it might break down below the right shoulder. Hoop would probably say that happens far more often than not. I reduced last week at $1.73 having successfully stripped the dividend...playing "possum stuck in the headlights" with the rest and hoping its the light at the end of the tunnel I see not a train coming to run me over lol.
Financials worldwide under pressure at present plus the Aussie bank fiasco doesn't help that's for sure.

[Snoopy]

Industry Group Risk

From AR2017 note 18c, the greatest 'business group' risk in dollar terms is agriculture, with $757.004m worth of assets. This represents an increase of $129.334m over the previous year.

$757.004m/ $3,931.239m = 19% of all loans


Regional Risk

From AR2017 note 18b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $888.080m worth of assets. This represents:

$1.037.873m/ $3,931.239m = 26% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 18% in numerical terms over the year, outstripping the growth of the previous largest region Auckland which only grew by 11% in gross loan amounts (Auckland still covers 24.0% of all loans) .

Given 'Agriculture' loans have grown by 18% over the year, this 'growth' could reflect yet more compounding of agricultural interest charges into existing loans. According to the FY2017 Annual Results presentation (page 15), dairy represented 8% of Heartland's total loan book.

0.08 x $3,931.239m = $314m

At an interest rate of 8%, assuming no interest was actually paid, this would increase the value of the Heartland dairy industry loan book by:

$314m x 0.08 = $25.2m

Since the actual agricultural loan balance increased by $129.334m, we can assume that more net new agricultural loans were taken out, rather than just rolling over the dairy loan book. This is logical when by 30th June 2017, it was becoming clear the dairy crisis was past its worst.

This is very much a contrast to traditional market leader ANZ.NZ who kept their total rural loan book static over the similar period (for the second year in a row) ($NZ19.205m @ 30th September 2017 vs $NZ19.226m @ 30th September 2016). I think agricultural loans will remain the key sector to watch when trying to forecast potential Heartland loan problems for the future.

Looked at just in agricultural terms, you could say that Heartland are potentially compounding their own problems for the future. Or is it just a case a putting more emphasis on their rural roots? Yet because the loan book in total has grown, reducing Heartland's relative reliance on Auckland is probably a positive.

The multi-year picture is shown below:



2012201320142015
20162017


Largest Regional MarketAuckland (30%)Auckland (30%)Auckland (25%)Auckland (26%)
Rest of North Island (25%)Rest of North Island (26%)


Largest Industry Group MarketAgriculture (24%)Agriculture (21%)Agriculture (16%)Agriculture (17%)
Agriculture (18%)Agriculture (19%)





Industry Group Risk

From AR2018 note 19c, the greatest 'business group' risk in dollar terms is agriculture, with $740.798m worth of assets. This represents a decrease of $16.206m over the previous year.

$740.798m/ $4,390.423m = 17% of all loans

This decrease is possibly due to Heartland declaring that they are moving away from 'larger relationship managed lending' (code for 'lending on farms') to strengthening the livestock lending proposition.

Regional Risk

From AR2018 note 19b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $1,121.983m worth of assets. This represents:

$1,121.983.m/ $4,390.423m = 25.6% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 8.1% in numerical terms over the year, behind the growth of the previous largest region Auckland which grew by 13.6% in gross loan amounts (Auckland still covers 24.4% of all loans). The increase in regional lending in the NI is an interesting and surprising contrast given the consummate decrease in rural lending.

The multi-year picture is shown below:




2012201320142015
201620172018


Largest Regional MarketAuckland (30%)Auckland (30%)Auckland (25%)Auckland (26%)
Rest of NI (25%)Rest of NI (26%)Rest of NI (26%)


Largest Industry Group MarketAgriculture (24%)Agriculture (21%)Agriculture (16%)Agriculture (17%)
Agriculture (18%)Agriculture (19%)Agriculture (17%)



Overall Heartland looks less risky than at any time in its history (bar 2014) from a 'Customer Concentration Test' perspective.

SNOOPY

[winner69]

)
Peat - scary charts mate

The H&S pattern particulary scary ..... looks we heading to $1.40 or lower if it plays out and has a bit of bling added. That should send the shivers up Beagles spine

Beautiful eh

That H&S pattern does sort of say $1.40 is possible ...getting there

[Beagle]

)

That H&S pattern does sort of say $1.40 is possible ...getting there

LOL you ruffled my feathers, (opps sorry fur) last time you posted that mate for which I am in your debt because you scared me out of quite a bit of my holding at $1.73 ex divvy. Financials are vulnerable in a big market correction so maybe $1.40 is possible with a full blown overseas correction of circa 10- 15%.

[winner69]

LOL you ruffled my feathers, (opps sorry fur) last time you posted that mate for which I am in your debt because you scared me out of quite a bit of my holding at $1.73 ex divvy. Financials are vulnerable in a big market correction so maybe $1.40 is possible with a full blown overseas correction of circa 10- 15%.

It’s Peat’s chart. I just added the pendant (from Lovisa)

Hard to believe that such a great company with growing profits and steady dividends can see its share price fall by 24% in 9 months. Suppose that’s what happens when a stock goes from being outrageously overvalued to something closer to a reasonable value

And as often happens things often overshoot ....thats when you get your $1.40

[Beagle]

It’s Peat’s chart. I just added the pendant (from Lovisa)

Hard to believe that such a great company with growing profits and steady dividends can see its share price fall by 24% in 9 months. Suppose that’s what happens when a stock goes from being outrageously overvalued to something closer to a reasonable value

And as often happens things often overshoot ....thats when you get your $1.40

LOL thanks Peat, such a memorable pendant...looks like something KW would wear :) Yes mate as you suggest things do overshoot in both directions but I suspect if it does get down to $1.40 there will be plenty of other things to worry about as well so that's not something I want to see.