HGH - Heartland Group Holdings

[percy]

Almost as bad as those dastardly Aussie banks in calculating some ratios.

Looks as though ANZ taught Jeff and Chris too well...lol.

[Snoopy]

Article behind PAYWALL in the NBR reads
'HEARTLAND QUIETLY ADMITS CAPITAL MISHAP'.



Come in Snoopy.

The analysis of what is an appropriate level of capital for 'Heartland' to hold has become more complicated. In 'Heartland Bank' terms, it has become easier. That is because the reverse mortgage Australian loans have been hived off into a separate entity. But we shareholders can no longer buy shares in 'Heartland Bank' directly. We can only buy into a parent entity 'Heartland Group Holdings' that still includes those Australian Reverse Equity loans. A comparison of the 'Heartland Bank' end of year position and the 'Heartland Group Holdings' end of year position sheds further light on this matter.



Heartland Group Holdings

less Heartland Bank

equals Heartland Troublesome Holdings


Assets
$4,926.404m
(100.0%)
$4,138.735m
(100.0%)
$787.699m
(100.0%)


Liabilities
$4,250.736m
(86.3%)
$3,535.345m
(85.4%)
$715.391m
(90.8%)


Equity$675.668m
(13.7%)
$603.390m
(14.6%)
$72.278m
(9.2%)



These figures show that while the financial risk position of 'Heartland Bank' has been shored up, the financial position of HGH shareholders is going the other way. The above figures were taken as at the 30th June balance date. That is before the 2nd July announcement of an incremental $A250m of incremental reverse mortgage funding. That means the ceiling on the Australian Reverse mortgage business is now $A850m. Yet no more shareholder equity to back up this aggressive expansion into Australia has been raised. It is clear then that the equity ratio of 'Heartland Troublesome Holdings' will be considerably weakened at the next reporting date. And the consummate risk taken on by parent HGH holders has increased significantly.

The question for HGH shareholders is therefore no longer:

"What is the appropriate capital ratio for Heartland Bank?"

It is now:

"What is the appropriate capital ratio for Heartland Group Holdings?"

There is regulatory oversight to help us choose an answer to the former question. But there is no longer any regulatory oversight to help us answer the latter question. In this context, any revisionist minor adjustment to the appropriate capital position in 2015 being miscalculated at Heartland Bank seems trivial. What the appropriate capital position going forwards for Heartland Group Holdings is the real question that should concern HGH shareholders.

SNOOPY

[BlackPeter]

The analysis of what is an appropriate level of capital for 'Heartland' to hold has become more complicated. In 'Heartland Bank' terms, it has become easier. That is because the reverse mortgage Australian loans have been hived off into a separate entity. But we shareholders can no longer buy shares in 'Heartland Bank' directly. We can only buy into a parent entity 'Heartland Group Holdings' that still includes those Australian Reverse Equity loans. A comparison of the 'Heartland Bank' end of year position and the 'Heartland Group Holdings' end of year position sheds further light on this matter.



Heartland Group Holdings

less Heartland Bankequals Heartland Troublesome Holdings


Assets$4,926.404m(100.0%)
$4,138.735m$787.699m


Liabilities
$4,250.736m(86.3%)$3,535.345m$715.391m


Equity$675.668m
(13.7%)
$603.390m$72.278m



And why exactly would you call the REL's "troublesome"? They should be as safe as any other mortgaged loan with a quite small loan ratio ... I would be more concerned about some of the business loans HGH is making to small business in NZ ...

[Snoopy]

And why exactly would you call the REL's "troublesome"? They should be as safe as any other mortgaged loan with a quite small loan ratio ... I would be more concerned about some of the business loans HGH is making to small business in NZ ...


I did not wish to imply that all reverse mortgage loans are troublesome. Rather the point I was trying to make was that it is the overgearing of that Australian Reverse Mortgage Portfolio that is potentially troublesome. No matter how secure the underlying loan in market terms, the security of that loan from an investor perspective can be reduced as the lending entity borrows more and more. This is not just my view. It is the view of the NZ Reserve Bank which had placed restrictions on how much Heartland Bank could weaken their capital position by boosting their offshore exposure to Australian Reverse mortgage loans before the associated capital risk to shareholders funds became too great. Heartland's solution was to offload the Australian reverse mortgage assets into a separate investment vehicle. That greatly decreased the risk profile of Heartland Bank going forwards. But it made no difference whatsoever to the risk profile that will be experienced by Heartland Group Holdings shareholders. Indeed with the subsequent increase in Australian mortgage funding announced on 2nd July 2019, I would argue that the capital risk going forwards for HGH shareholders has substantially increased.

SNOOPY

[Beagle]

Nice summary, thanks Snoopy.

[BlackPeter]

I did not wish to imply that all reverse mortgage loans are troublesome. Rather the point I was trying to make was that it is the overgearing of that Australian Reverse Mortgage Portfolio that is potentially troublesome. No matter how secure the underlying loan in market terms, the security of that loan from an investor perspective can be reduced as the lending entity borrows more and more. This is not just my view. It is the view of the NZ Reserve Bank which had placed restrictions on how much Heartland Bank could weaken their capital position by boosting their offshore exposure to Australian Reverse mortgage loans before the associated capital risk to shareholders funds became too great. Heartland's solution was to offload the Australian reverse mortgage assets into a separate investment vehicle. That greatly decreased the risk profile of Heartland Bank going forwards. But it made no difference whatsoever to the risk profile that will be experienced by Heartland Group Holdings shareholders. Indeed with the subsequent increase in Australian mortgage funding announced on 2nd July 2019, I would argue that the capital risk going forwards for HGH shareholders has substantially increased.

SNOOPY

Fair enough ... though as long as they make sure that they have enough headroom in their loan to equity ratio (and it is my understanding they do), they should be fine. They do provide loans which are typically paid back within a decade (average remaining lifetime of mortgagees) and are secured by mortgages with quite significant headroom.

Sure - property prices can drop, but how likely is it that they drop long term (even a a short blip like 2008 would be quite immaterial for them) by a significant amount (say 30% plus)?

On a second thought - there is one big risk I could see, and this is that at least parts of Australia become an undesirable (or uninhabitable) destination due to climate change really starting to bite ... so, yes, if too many of their securities become e.g. uninhabitable due coastal erosion and floods insurance companies don't want to pay for anymore or if these properties are in soon to be ghost towns due to drought destroying the agricultural base, than yes, there would be a real issue.

It might be interesting to do some analysis based on the environmental risk profile of their securities ...

[Beagle]

HGH call account rate slashed to just 1.6%...ouch.

[justakiwi]

Dammit :(


HGH call account rate slashed to just 1.6%...ouch.

[RTM]

HGH call account rate slashed to just 1.6%...ouch.

That's a buggar. Its pretty hard to know where to stash spare money.
I've got some with KiwiBank as well. Haven't checked that recently.
Thx for letting me know....I seldom check.
And they don't seem to let me know...even tho Ive asked them to.

[Beagle]

That's a buggar. Its pretty hard to know where to stash spare money.
I've got some with KiwiBank as well. Haven't checked that recently.
Thx for letting me know....I seldom check.
And they don't seem to let me know...even tho Ive asked them to.
You're welcome mate. I have a strong dislike for major reductions in call account interest rates with no notification by the bank but Heartland are by no means the only offender. I just shifted $100K over to them the other day which is the only reason I looked afterwards to make sure the money had arrived. Might shift it back and buy some more yield stocks now as its getting close to the point where their call account is practically worthless, other than as a relatively safe place to store money.

[RTM]

You're welcome mate. I have a strong dislike for major reductions in call account interest rates with no notification by the bank but Heartland are by no means the only offender. I just shifted $100K over to them the other day which is the only reason I looked afterwards to make sure the money had arrived. Might shift it back and buy some more yield stocks now as its getting close to the point where their call account is practically worthless, other than as a relatively safe place to store money.

The reason the BNZ is no longer my first bank is that over and over again they simply rolled my money over at a poor interest rate. Without communication. I advised them multiple times. Then I transferred my banking elsewhere.

[Snoopy]

This is an assessment of Heartland's total liabilities/borrowings (including the accumulated funds looked after for Mum and Dad's known as term deposits) in relation to Heartland's own underlying assets.

In April 2017, Heartland had a subordinated capital note issue of $A20m. Approximately 72% of the face value of the Notes will be recognised as Tier 2 Capital by our banking regulators. So we must add the 'Tier 1 capital' (being shareholder equity) to 72% of the 'Tier 2 capital' to obtain the total recognised 'tier' capital for liquidity purposes



Total Heartland Equity at balance date was$664.160m, PLUS


Tier 2 capital as apportioned (NZD1 = AUD0.9138)$15.758m EQUALS


Total Tier Capital $679.918m



Total Heartland liabilities at balance date were $3,831.766m

So: Equity / Total Liabilities
= $679.918m / $3,831.766m = 17.7% > 17%

Result: PASS TEST

I have been a little generous compared to what the reserve bank might do, in including 'intangible assets' as 'underlying equity'. The Reserve bank effectively punishes a financial institution for spending on having up to date computer software (software is an intangible asset). Yet I see up to date software as a really good idea in keeping track of troublesome loans. Nevertheless, whether you agree with my reasoning or not, no one can dispute that Heartland was in a better loan security position at EOFY2018, than at the end of the previous three financial years.

{Note that I have changed my equity target for Heartland to the 17% equity (down from my 20% target) that Heartland had when former Reserve Bank Governor Wheeler originally approved Heartland as a bank. I had previously used 20% as the figure appropriate for a more marginal finance company without a strong history.}

The historical picture of this ratio is tabulated below.



FY2012FY2013FY2014FY2015FY2016
FY2017FY2018
Target

[
Total Tier Capital/ Loan Book19.3%17.7%17.6%16.6%16.4%
16.9%17.7%
>17%





Time to update the banking covenants for Heartland.

In a change of methodology from last year, I am going to consider 'Heartland Group Holdings' and not just 'Heartland Bank'. This is because the entity that shareholders can buy into is no longer just 'Heartland Bank'. We shareholders can only buy into 'Heartland Group Holdings' so it makes sense to only analyse that company.

What follows is an assessment of Heartland's total liabilities/borrowings (including the accumulated funds looked after for Mum and Dad's known as term deposits) in relation to Heartland's own underlying assets.

In March 2019, Heartland Australia had an unsubordinated capital note issue of $A50m. If this was still part of Heartland Bank, approximately 72% of the face value of the Notes would be recognised as Tier 2 Capital by our banking regulators. So we must add the 'Tier 1 capital' (being shareholder equity) to 72% of the 'Tier 2 capital' to obtain the total recognised 'tier' capital for liquidity purposes



Total 'Heartland Bank' Equity at balance date was$603.390m


plus Total 'Heartland Australia' Equity at balance date was$72.278m


plus Tier 2 capital as apportioned (NZD1 = AUD0.9566)$37.633m


equals Total Tier Capital $713.301m



Total Heartland liabilities at balance date were $4,250.736m

So: Equity / Total Liabilities
= $713.301m / $4,250.736m = 16.8% = 17% (with rounding)

Result: PASS TEST

I have been a little generous compared to what the Reserve Bank might do, in including 'intangible assets' as 'underlying equity'. The Reserve Bank effectively punishes a financial institution for spending on having up to date computer software (software is an intangible asset). Yet I see up to date software as a really good idea in keeping track of troublesome loans. The multi year picture is fairly steady with small deviations either side of my 17% equity ratio target.

{Note that I have changed my equity target for Heartland to the 17% equity (down from my 20% target) that Heartland had when former Reserve Bank Governor Wheeler originally approved Heartland as a bank. I had previously used 20% as the figure appropriate for a more marginal finance company without a strong history.}

The historical picture of this ratio is tabulated below.



FY2012FY2013FY2014FY2015FY2016FY2017FY2018FY2019
Target

[
Total Tier Capital/ Loan Book19.3%17.7%17.6%16.6%16.4%
16.9%
17.7%16.8%
>17%



SNOOPY

[Snoopy]

This is an assessment method of looking at the underlying earning power of Heartland, compared to the interest bill they face while making their earnings. Updating for the full year result FY2018:

The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

EBIT (high estimate) = $309.284m - $80.433m= $228.851m

Interest expense is listed as $125.483m.

So (EBIT)/(Interest Expense)= ($228.851m)/($125.483m)= 1.82 > 1.20

Result: PASS TEST

The historical picture of this ratio is tabulated below. It looks to be getting better and better.



FY2012FY2013FY2014FY2015FY2016
FY2017FY2018
Target

[
EBIT/ Interest Expense1.151.221.441.521.65
1.791.82
>1.2





This is an assessment method of looking at the underlying earning power of Heartland Group Holdings, compared to the interest bill they face while making their earnings. Updating for the full year result FY2019:

The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

EBIT (high estimate) = $334.330m - $85.589m= $248.741m

Interest expense is listed as $136.747m.

So (EBIT)/(Interest Expense)= ($248.741m)/($136.747m)= 1.82 > 1.20

Result: PASS TEST

The historical picture of this ratio is tabulated below. It looks to be getting better and better.


FY2012FY2013FY2014FY2015FY2016
FY2017
FY2018FY2019
Target

[
EBIT/ Interest Expense1.151.221.441.521.651.791.821.82
>1.2



SNOOPY

[Snoopy]

The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the receivables that are loaned ultimately sit.

According to the full year (FY2018) statement of financial position the debt excluding borrowings is:

$24.249m + $11.459m = $35.708m (1)

-----

To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:

$4,495.926m - ($3,984.941m +$9.196m + $340.546m) = $160.943m

We are then asked to remove the intangible assets from the equation as well:

$160.943m - $74.401m = $90.542m (2)

----


Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:

$35.708m/$90.542m= 39.4% < 90%

Result: PASS TEST

The historical picture of this ratio is tabulated below.



FY2012FY2013FY2014FY2015FY2016
FY2017FY2018Target

[
Underlying Gearing Ratio20.2%14.7%40.5%58.4%37.4%
37.6%39.4%
< 90%




The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the receivables that are loaned ultimately sit.

According to the full year (FY2019) statement of financial position the debt excluding borrowings is:

$22.498m + $7.532m + $10.372m = $40.402m (1)

-----

To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:

$4,926.404m - ($3,029.231m +$1,318.819m + $11.132m + $354.928m) = $212.294m

We are then asked to remove the intangible assets from the equation as well:

$212.294m - $72.679m = $139.615m (2)

----


Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:

$40.402m/$139.615m= 28.9% < 90%

Result: PASS TEST

The historical picture of this ratio is tabulated below.



FY2012FY2013FY2014FY2015FY2016FY2017FY2018FY2019Ta rget

[
Underlying Gearing Ratio20.2%14.7%40.5%58.4%37.4%37.6%39.4%28.9%
< 90%



SNOOPY

[Snoopy]

According to the full year (FY2019) statement of financial position the debt excluding borrowings is:

$22.498m + $7.532m + $10.372m = $40.402m (1)



The $10.372m figure I refer to above is a 'Derivative Financial Position'.

Something I look for in any set of annual accounts is when a change is presentation happens with no explanation. This year there is an entry for 'Derivative Financial Instruments' in both the asset and liability breakdown of the balance sheet. If you go back to the FY2018 account presentation these entries are not there, although they have been retrospectively written into the FY2018 accounts when the FY2018 balance sheet was restated for comparison purposes in the current year (FY2019).

'Derivative Financial Positions' have really jumped up in size too, and are now over ten times larger on the asset side and around five times larger on the liabilities side (FY2019 Balance Sheet vs FY2018 Balance Sheet). In the FY2019 accounts there is a comprehensive explanation of what these are under note 12. However there appears to be no information as to whether the corresponding numerical entries are 'Fair Value Hedges' or 'Cashflow Hedges'.

Why does this matter? Because when I calculated 'Banking Covenant 3', I feel that:

1/'cashflow hedges' are part of the 'interest rate cashflows' WHEREAS
2/ 'fair value hedges' are interim changes in capital valuations that should nevertheless all come out in the wash at the end of the life of the derivative.

This means that when I consider the capital position of the company I should probably consider type 2/ hedges but not type 1/ hedges. Or maybe my thinking is wrong on this? Can anyone offer some insight as to why these 'Derivative Financial Positions' have suddenly appeared on the balance sheet and what part of the Heartland business they relate to?

SNOOPY

[Snoopy]

With all the recent market upheavals, shareholders might like to know just how conservatively geared HBL is in an historical context.

Updating this number for the full year FY2018. The equity ratio is an assessment of the balance sheet risk of the total company, with all finance receivables and the supporting borrowings (whether they be from debenture holders or parent supporting banks) included.

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland AR2018

= $664.160m/ $4,495.926m = 14.8%

The customer loan base (finance receivables) growth year on year (+12.4%) has in relative terms reversed and is now growing more slowly that the company equity (+16.6%). This means the balance sheet has been made 'less stressed' over the year.

The significant increase in share capital over the year was therefore from (reference "Statement of Changes in Equity")



1/ Retained Earnings: $71.221m - $47.895m = $23.326m


2/ Dividend Reinvestment Plan: $12.745m


3/ Share Based Payments to staff: $0.666m


4/ Issue of Share Capital: $59.225m - $0.910m = $58.315m


Total $95.052m



This is a significant increase on the 'new capital generated' within the existing Heartland over FY2017 ($71.254m), with most of that increase accounted for in an even bigger capital raising undertaken over FY2018.

The historical picture of this ratio is tabulated below.




FY2012FY2013FY2014FY2015FY2016FY2017FY2018
Target

[
Equity Ratio16.0%14.6%15.0%14.3%14.1%14.1%14.8%
-



So Heartland is more conservatively geared than at any time in the last four years.


Updating this number for the full year FY2019 for 'Heartland Group Holdings'. The equity ratio is an assessment of the balance sheet risk of the total company, with all finance receivables and the supporting borrowings (whether they be from debenture holders or parent supporting banks) included.

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland AR2019

= $675.668m/ $4,926.404m = 13.7%

The customer loan base (finance receivables) growth year on year (+9.1%) has in relative terms has reversed again and is now growing more rapidly that the company equity (+1.7%). This means the balance sheet has been made 'more stressed' over the year.

The historical picture of this ratio is tabulated below.




FY2012FY2013FY2014FY2015FY2016FY2017
FY2018FY2019
Target

[
Equity Ratio16.0%14.6%15.0%14.3%14.1%14.1%
14.8%13.7%
-



So Heartland is now more stressed, from an equity ratio perspective, than at any time in its history.

SNOOPY

[RTM]

Updating this number for the full year FY2019 for 'Heartland Group Holdings'. The equity ratio is an assessment of the balance sheet risk of the total company, with all finance receivables and the supporting borrowings (whether they be from debenture holders or parent supporting banks) included.

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland AR2019

= $675.668m/ $4,926.404m = 13.7%

The customer loan base (finance receivables) growth year on year (+9.1%) has in relative terms has reversed again and is now growing more rapidly that the company equity (+1.7%). This means the balance sheet has been made 'more stressed' over the year.

The historical picture of this ratio is tabulated below.




FY2012FY2013FY2014FY2015FY2016FY2017
FY2018FY2019
Target

[
Equity Ratio16.0%14.6%15.0%14.3%14.1%14.1%
14.8%13.7%
-



So Heartland is now more stressed, from an equity ratio perspective, than at any time in its history.

SNOOPY

Is that a good or bad thing Snoopy ? Does it make Heartland more profitable for its shareholders ?
At what point should shareholders become concerned ?

[Snoopy]

Does it make Heartland more profitable for its shareholders ?


Since Heartland is using relatively less underlying equity to generate their profits, or alternatively the same amount of equity to generate more business, I would expect Heartland to be more profitable as a result



Is that a good or bad thing Snoopy ?


If nothing goes wrong in the loan portfolio, it is a good thing. But the more leveraged the total business, it will take a lesser downturn in the quality of the underlying loan assets to cause Heartland to need to raise more capital to shore up their capital base. That is a bad thing. Whether the net effect is 'good' or 'bad' will depend on how likely it is that you see the loan portfolio will deteriorate to an extent that more shareholder capital will need to be raised at a discount. That factor is not entirely under the control of Heartland. It also depends on 'market forces'.

An alternative way of looking at this figure could be to say that because the underlying quality of the ever expanding portfolio of 'reverse mortgage' loans are very high, less equity capital is needed to support them.



At what point shareholders become concerned ?


I wouldn't be concerned about a single 'Banking Covenant' statistic on its own. Best to look at them all together to get a feel for the overall picture. You will notice that unlike the other covenants, BC1 to BC3, there is no 'target' figure for BC4. The statistic thrown up for FY2019 may be the worst ever, but it is not so different to FY2016 and FY2017. I am not selling any of my own HGH shares because of this. You may need to keep an eye out for other signals. For example, if you heard that Jeff had taken a one way dive off the harbour bridge, that could be a sell signal? If it was the Sydney Harbour Bridge, that would be a definite worry!

SNOOPY

[RTM]

Thanks Snoopy.
I’ll sleep well then.

[BlackPeter]

Thanks Snoopy.
I’ll sleep well then.

Assuming HGH's equity ratio is the biggest of your concerns, I think you can.

Snoopy's numbers just demonstrate that they are doing a good job in increasing their REL business in Australia, which is a good thing, looking at the earnings.

As discussed earlier - these loans should be pretty safe ... unless HGH manages to overvalue the securities they held (like TRA did with their car loans ;)), underestimate the mortality rates (people living much longer than they statistically ought to) or unless the value of these securities takes a material plunge - like parts of Australia which are inhabited now becoming due to climate change (or other reasons) uninhabitable or at least undesirable to live in.

Not sure we or anybody can at this stage fully appreciate the last of these points ... so, yes, there will be risks related to climate change, which may or may not eventuate, but if they do they might be BIG and destroy property values big time. Might be sensible to put not all eggs into the HGH basket.

[Snoopy]

The $10.372m figure I refer to above is a 'Derivative Financial Position'.

Something I look for in any set of annual accounts is when a change is presentation happens with no explanation. This year there is an entry for 'Derivative Financial Instruments' in both the asset and liability breakdown of the balance sheet. If you go back to the FY2018 account presentation these entries are not there, although they have been retrospectively written into the FY2018 accounts when the FY2018 balance sheet was restated for comparison purposes in the current year (FY2019).

'Derivative Financial Positions' have really jumped up in size too, and are now over ten times larger on the asset side and around five times larger on the liabilities side (FY2019 Balance Sheet vs FY2018 Balance Sheet). In the FY2019 accounts there is a comprehensive explanation of what these are under note 12. However there appears to be no information as to whether the corresponding numerical entries are 'Fair Value Hedges' or 'Cashflow Hedges'.


To try and unravel my own mystery, I have just re-read note 12 on 'Derivative financial Instruments' in the HGH annual accounts.

At the bottom of the explanatory notes there is this key sentence.

"A fair value gain or loss associated with the effective portion of a derivative designated as a cash flow hedge is recognised initially in the hedging reserve. The ineffective portion of a fair gain or loss is recognised immediately in the Consolidated Statement of Comprehensive Income."

If we now go to the 'Statement of Comprehensive Income', the following entry appears under 'Other Comprehensive Income'.

Effective portion of change in the fair value of derivative financial instruments, net of income tax ($4.762m)

That should translate to a pre income tax figure of: ($4.762m)/(1-0.28) = ($6.614m)

From the previous explanatory quote, this $4.762m must be the ineffective portion of the cash flow hedge. But the total 'Derivative Financial Liability' is listed in the balance sheet valued at $10.372m (presumably after tax is paid?).

So by a process of elimination, the remaining 'Derivative Financial Liability' must be 'fair value asset related'.

This amounts to: $10.372m - $4.762m = $5.610m

Have I got that right?

SNOOPY

[percy]

What a total disgrace.
Geoff and Jeff you really have let us shareholders down.
10am start for a HGH agm is totally unacceptable.
4pm Friday is the only time for a HGH agm.
No way can I get stuck into the fine wines at 10 am.

[Beagle]

:lol: I'm sure that won't stop you :lol:

[winner69]

What a total disgrace.
Geoff and Jeff you really have let us shareholders down.
10am start for a HGH agm is totally unacceptable.
4pm Friday is the only time for a HGH agm.
No way can I get stuck into the fine wines at 10 am.

Told you it would be an early start

They off to the Addington trots afterwards - NZ Cup day - biggest day on the Christchurch racing week

First race usually midday so should make it in time

[RTM]

Assuming HGH's equity ratio is the biggest of your concerns, I think you can.

Snoopy's numbers just demonstrate that they are doing a good job in increasing their REL business in Australia, which is a good thing, looking at the earnings.

As discussed earlier - these loans should be pretty safe ... unless HGH manages to overvalue the securities they held (like TRA did with their car loans ;)), underestimate the mortality rates (people living much longer than they statistically ought to) or unless the value of these securities takes a material plunge - like parts of Australia which are inhabited now becoming due to climate change (or other reasons) uninhabitable or at least undesirable to live in.

Not sure we or anybody can at this stage fully appreciate the last of these points ... so, yes, there will be risks related to climate change, which may or may not eventuate, but if they do they might be BIG and destroy property values big time. Might be sensible to put not all eggs into the HGH basket.

Agreed BlackPeter…..remember...I am one of the punters who has an extremely diversified portfolio. HGH 9.2% of portfolio. Top holding.

[percy]

Agreed BlackPeter…..remember...I am one of the punters who has an extremely diversified portfolio. HGH 9.2% of portfolio. Top holding.

I very much doubt Australians will all of a sudden start living to 110 ,or Australia will become uninhabitable.
Do not think all the population of Brisbane,Sydney and Melbourne would want to move to NZ.
The Tasmanians would n't want them either.
ps.I am getting bored.Wish the Aussie market would hurry up and open.The hour delay thankfully is only for this week.!

[BlackPeter]

I very much doubt Australians will all of a sudden start living to 110 ,or Australia will become uninhabitable.
Do not think all the population of Brisbane,Sydney and Melbourne would want to move to NZ.
The Tasmanians would n't want them either.
ps.I am getting bored.Wish the Aussie market would hurry up and open.The hour delay thankfully is only for this week.!

Well, a scenario of e.g. Melbourne or Sydney running out of drinking water isn't that far fetched, is it? Would you think this would depress local property prices? What percentage of HGH's REL's would be effected?

Here are some articles to combat your boredom ;);

https://www.abc.net.au/news/2017-07-23/melbourne-water-supply-could-be-under-threat-within-a-decade/8735400

https://www.abc.net.au/news/2019-09-17/longwall-mining-impact-on-drinking-water/11519970


Similar - hope HGH does not sell too many REL's into the smaller towns in the rural East - many of these small townships are dying and nobody might want to buy the houses when the current occupiers left and the drought killed the economical base for the agriculture.

https://www.theguardian.com/environment/2019/sep/14/i-dont-know-how-we-come-back-from-this-australias-big-dry-sucks-life-from-once-proud-towns

https://www.theguardian.com/australia-news/2019/sep/15/parts-of-regional-nsw-set-to-run-out-of-water-by-november

And sea levels are rising - I probably don't need to explain what happens to the value of a REL mortgaged house after the sea took it (or the ground below it) over.

https://www.environment.gov.au/climate-change/adaptation/publications/climate-change-risks-australias-coasts

[peat]

if all these worst case scenarios go down it aint gonna be HGH that gets in the poo.
I reckon CBA Suncorp ANZ, would explode pretty quickly if all that **** goes down with property in Aussie.

[BlackPeter]

if all these worst case scenarios go down it aint gonna be HGH that gets in the poo.
I reckon CBA Suncorp ANZ, would explode pretty quickly if all that **** goes down with property in Aussie.

Sure - HGH wouldn't be the only one in trouble assuming the impacts of climate change continues in Australia as it started ... but in which way would this be a relief to HGH shareholders?

Just one other thing to keep in mind for investors ...

[RTM]

Well, a scenario of e.g. Melbourne or Sydney running out of drinking water isn't that far fetched, is it? Would you think this would depress local property prices? What percentage of HGH's REL's would be effected?

Here are some articles to combat your boredom ;);

https://www.abc.net.au/news/2017-07-23/melbourne-water-supply-could-be-under-threat-within-a-decade/8735400

https://www.abc.net.au/news/2019-09-17/longwall-mining-impact-on-drinking-water/11519970


Similar - hope HGH does not sell too many REL's into the smaller towns in the rural East - many of these small townships are dying and nobody might want to buy the houses when the current occupiers left and the drought killed the economical base for the agriculture.

https://www.theguardian.com/environment/2019/sep/14/i-dont-know-how-we-come-back-from-this-australias-big-dry-sucks-life-from-once-proud-towns

https://www.theguardian.com/australia-news/2019/sep/15/parts-of-regional-nsw-set-to-run-out-of-water-by-november

And sea levels are rising - I probably don't need to explain what happens to the value of a REL mortgaged house after the sea took it (or the ground below it) over.

https://www.environment.gov.au/climate-change/adaptation/publications/climate-change-risks-australias-coasts

Great links BP, Thanks.
One hopes that Heartland are taking all these things into consideration when lending the money.
They are professional bankers...right...so should be assessing risk really carefully. Your links should all be factors.
The relatively short term of RE loans should help.....the stuff in these links is going to happen over years....not instantaneously. Hopefully.
Even so...maybe my portfolio 9% is a bit high. Hope I can fix this by other stuff growing...don't really want to sell as I do like the dividend cheque. Also don't like another potential fix.....HGH share price dropping !

[winner69]

BlackPeter

And sea levels are rising - I probably don't need to explain what happens to the value of a REL mortgaged house after the sea took it (or the ground below it) over.


I etched a line on the big rock down on the beach which I use to assess how much the sea level is rising ......measurements suggest sea levels aren’t rising

Just casual observations of a constant over a few decades

[RTM]

I etched a line on the big rock down on the beach which I use to assess how much the sea level is rising ......measurements suggest sea levels aren’t rising

Just casual observations of a constant over a few decades

Perhaps you could drop these guys a note and provide them with some guidance.
https://science.howstuffworks.com/environmental/earth/oceanography/question356.htm

[winner69]

Perhaps you could drop these guys a note and provide them with some guidance.
https://science.howstuffworks.com/environmental/earth/oceanography/question356.htm

Seems like it all a big guess eh

Mind you storm surges seem to be more common and often surge stronger and higher than they used to ....suppose that is because of climate change ....but when peace returns every returns to normal and the sea level is about where it was years ago.

[BlackPeter]

I etched a line on the big rock down on the beach which I use to assess how much the sea level is rising ......measurements suggest sea levels aren’t rising

Just casual observations of a constant over a few decades

Glad we sorted this issue - and I am sure your local and time-boxed data collection can be extrapolated globally to all shorelines. As we all know - one data point makes an excellent trend :p;

But wait - how come the National Ocean Service is contradicting your observation?

https://oceanservice.noaa.gov/facts/sealevel.html


Global sea level has been rising over the past century, and the rate has increased in recent decades. In 2014, global sea level was 2.6 inches above the 1993 average—the highest annual average in the satellite record (1993-present). Sea level continues to rise at a rate of about one-eighth of an inch per year.

Must be time for Trump to hire you and sort these stupid scientists out ...

[percy]

What a total disgrace.
Geoff and Jeff you really have let us shareholders down.
10am start for a HGH agm is totally unacceptable.
4pm Friday is the only time for a HGH agm.
No way can I get stuck into the fine wines at 10 am.

The market has voiced its disgust.
Share price down 2 cents today.

[percy]

I etched a line on the big rock down on the beach which I use to assess how much the sea level is rising ......measurements suggest sea levels aren’t rising

Just casual observations of a constant over a few decades

Just been for a drive and walk around Sumner.
Beach and houses are the same as they were 60 years ago.
Just a lot more houses on the hills.

[peat]

Eminently pragmatic percy
but the South Island is rising.
So your watermark isnt a constant level.

[dabsman]

I go into the water by my house up to my ankles - usually to rescue my bulldog who cant swim and forgets. Still comes up to my ankles so I don't see any global warming. It was also very cold so I'm quite looking forward to the warming

I'm thinking of putting more money into HGH but I'm just holding off - not sure why. I'd like to see more history in the REL business but I know when they prove how profitable they are over the longer term the share price will be double...

[Felonius]

The market has voiced its disgust.
Share price down 2 cents today.

Same as with sharemarkets Percy, you need to be flexible with AGMs.
That will enable you to get stuck into the fine wines BEFORE lunch.

Cheers !!

[ziggy415]

Same as with sharemarkets Percy, you need to be flexible with AGMs.
That will enable you to get stuck into the fine wines BEFORE lunch.

Cheers !!
Percy hasn't,t realised but with daylight saving he,s got to start at 9,o'clock old time

[percy]

MMmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm?
I don't think I have the fortitude to start at 9am,however I will give it my very best effort.
How will I manage to get on my ear on Devonshire teas?
Brings back rather fond memories of a bookshop owner who offered me a cup of coffee, when I was selling him books.
Half a cup of coffee topped up with Kahlua.!.
Like another?
Yes please.!

[Snoopy]

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.


Industry Group Risk

From AR2019 note 22, the greatest 'business group' risk in dollar terms is agriculture, with $741.947m worth of assets. This represents an increase of just $0.281m over the previous year.

$741.947m/ $4,845.570m = 15.3% of all loans

While the size of the agricultural portfolio has barely changed, this significant percentage decrease of the total is due to many more reverse mortgage loans and finance and insurance loans being written.

Indeed reverse mortgage loans, for the first time, are being declared separately as an asset class. $1,318.819m of Reverse Mortgages are declared on the HGH balance sheet. Subsidiary 'Heartland Bank' declares $561.211m of NZ based Reverse Mortgages on the books. That means we can find the size of Heartland's Australian Reverse Mortgage book by simple subtraction:

$1,318.819m - $561.211m = $757.608m

This means that 'Australian Reverse Equity Mortgages' (Aussie REM), if you regard that as a credible loan category, can be thought of as the largest category of 'Account Receivables'

$757.608m/ $4,845.570m = 15.6% of all loans



Regional Risk

From AR2019 note 22, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $1,214.744m worth of assets. This represents:

$1,214.744.m/ $4,845.570m = 25.1% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 8.1% in numerical terms over the year for the second year in a row. (Auckland still covers 23.3% of all loans).

The multi-year picture is shown below:




2012201320142015
2016201720182019


Largest Regional MarketAuckland (30%)Auckland (30%)Auckland (25%)Auckland (26%)
Rest of NI (25%)Rest of NI (26%)
Rest of NI (26%)Rest of NI (25%)


Largest Industry Group MarketAgriculture (24%)Agriculture (21%)Agriculture (16%)Agriculture (17%)
Agriculture (18%)Agriculture (19%)
Agriculture (17%)Aussie REM (16%)



Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.

SNOOPY

[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
FY2018 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.



Loan-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....


The objective of this post is to consider cash flow, 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 FY2019 is derived from note 23 in AR2019 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 Maturity
Expected Behaviour Multiple
FY2014 Financial Receivables Maturity: Contracted/ Expected
FY2015 Financial Receivables Maturity: Contracted/ Expected
FY2016 Financial Receivables Maturity: Contracted/ Expected
FY2017 Financial Receivables Maturity: Contracted/ Expected
FY2018 Financial Receivables Maturity: Contracted/ Expected
FY2019 Financial Receivables Maturity: Contracted/ Expected


On Demand
100%
$50.254m / $50.254m
$37.012m / $37.012m
$84.154m / $84.154m
$57.040m / $57.040m
$49.588m / $49.588m
$80.584m / $80.584m


0-6 months
132%
$477.190m / $629.445m
$664.557m / $877.215m
$743.389m / $961.274m
$618.271m / $816.118m
$609.268m / $804.234m
$1,020.160m / $1,346.611m


6-12 months
132%
$367.564m / $483.727m
$450.638m / $594.842m
$484.420m / $639.962m
$521.215m / $688.004m
$469.632m / $619.914m
$646.123m / $852.882m



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



Deposit Maturity
Expected Behaviour Multiple
FY2014 Financial Liabilities Maturity: Contracted/ Expected
FY2015 Financial Liabilities Maturity: Contracted/ Expected
FY2016 Financial Liabilities Maturity: Contracted/ Expected
FY2017 Financial Liabilities Maturity: Contracted/ Expected
FY2018 Financial Liabilities Maturity: Contracted/ Expected
FY2019 Financial Liabilities Maturity: Contracted/ Expected


On Demand
3.01%
$629.125m / $18.922m
$748.332m / $22.450m
$718.587m / $21.630m
$836.829m / $25.189m
$924.072m / $27.815m
$895.210m / $26.946m


0-6 months
32.4%
$748.129m / $242.431m
$1,213.450m / $395.102m
$892.944m / $289.314m
$1,191.957m / $386.194m
$1,345.316m / $435.882m
$1,531.594m / $496.236m


6-12 months
36.4%
$538.050m / $195.682m
$686.159m / $249.762m
$837.844m / $304.975m
$729.145m / $265.409m
$572.731m / $208.474m
$620.836m / $225.984m



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.



Loan-Deposit Maturity
FY2014: 'Expected' combined Loan and Deposit Cashflow
FY2015: 'Expected' combined Loan and Deposit Cashflow
FY2016: 'Expected' combined Loan and Deposit Cashflow
FY2017: 'Expected' combined Loan and Deposit Cashflow
FY2018: 'Expected' combined Loan and Deposit Cashflow
FY2019: 'Expected' combined Loan and Deposit Cashflow


On Demand
$31.332m
$14.562m
$62.524m
$31.851m
$21.765m
$53.620m


0-6 months
$387.014m
$482.113m
$691.960m
$429.924m
$368.352m
$850.375m


6-12 months
$288.045m
$345.080m
$334.987m
$422.595m
$411.440m
$626.898m


Total
$706.391m
$841.755m
$1,089.471m
$884.370m
$801.557m
$1,530.893m



Once again lots of numbers here. Now there are six 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 has strengthened considerably, only being bettered by FY2016. This signalled a likely reduction in Heartland's 'on call' account holder interest rates (a drop which has subsequently happened). Depositors looking to invest with Heartland for up to six months are likely to be similarly disappointed.

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



Heartland 'Direct Call' ($1 minimum)1.60%


Co-Operative bank ($100,000 minimum)0.75%


SBS bank ($100,000 minimum)0.75%


TSB Horizon Savings ($1 minimum)0.90%



Heartland's call rate has dropped from 2.75% to 1.6% over the year. Other comparable deposit takers have dropped their rates too, albeit not as much in percentage terms. This is exactly what I predicted last year, when more outsourcing of debt via Australian bond issues was mooted. Cash fund depositors may think they have taken a 'hit' already. With more alternative Australian bond issues confirmed to fund the Australian expansion, I predict Heartland's on call rate to be significantly lower again in twelve month's time.

Expected cashflow for the 0-6 months has turned right around with Heartland now expecting an avalanche of cash to come due. This indicates we can expect Heartland's rates offered for six month term deposits to be toward the bottom end of their comparative peer group.



Heartland ($1,000 minimum)2.80%


Co-Operative bank ($5,000 minimum)2.80%


SBS bank ($5,000 minimum)2.80%


ANZ bank ($10,000 minimum)2.80%



There seems to be a 'consensus at the bottom'. Maybe the other BBB rated banks are also suffering from an excess of short term 'term deposit money'? If you have just $1,000 to invest then Heartland is competitive. But more than that and you would have to look very closely at investing in those lesser tier banks. I have thrown ANZ , a AA- rated bank, in there and can confirm that BNZ, ASB, Westpac and Kiwibank also offer a 2.8% return on a $10,000 investment over six months. If you have that $10,000 to invest, and there is no interest premium price to be paid by loaning your money to a lower credit rated BBB rated bank, why do it? And if Heartland doesn't really want to attract short term deposit money anymore, what does that say for their lending outlook going forwards?

SNOOPY

[percy]

[QUOTE=Snoopy;

Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.

Correct.
Adding to "less risk" has been HGH's strategy of replacing large Rural loans [mortgages] with a lot more smaller loans [livestock].Not only do they reduce HGH's risk, they have a better margin and a shorter loan term.
Loan book improvement has also been part of their strategy with motor vehicle lending,and their business lending, has like Rural lending, seen large loans replaced by a greater number of smaller loans.
RELs.HGH have looked to "spread" their sources of funding,and also sought longer terms.As the REL business is growing so rapidly, this is a very much ongoing work in progress.
The growth in RELs [together with generally tighter lending criteria]will see HGH's net interest margin reduce slighty,however it will still remain at twice other banks'.
Quality rather than quantity,means we remain "well positioned."

[ziggy415]

[QUOTE=Snoopy;

Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.

Correct.
Adding to "less risk" has been HGH's strategy of replacing large Rural loans [mortgages] with a lot more smaller loans [livestock].Not only do they reduce HGH's risk, they have a better margin and a shorter loan term.
Loan book improvement has also been part of their strategy with motor vehicle lending,and their business lending, has like Rural lending, seen large loans replaced by a greater number of smaller loans.
RELs.HGH have looked to "spread" their sources of funding,and also sought longer terms.As the REL business is growing so rapidly, this is a very much ongoing work in progress.
The growth in RELs [together with generally tighter lending criteria]will see HGH's net interest margin reduce slighty,however it will still remain at twice other banks'.
Quality rather than quantity,means we remain "well positioned."
Did I read somewhere or did I imagine that heartland were going to securitise their rel,s.....I,m sure it was in one of their update but I can't find it....maybe too tired..night shift..off to bed..zzzzzzzz

[Snoopy]

Did I read somewhere or did I imagine that heartland were going to securitise their rel,s.....I,m sure it was in one of their update but I can't find it....maybe too tired..night shift..off to bed..zzzzzzzz


I think you read right Ziggy. The current information on 'Securitized Loans' can be found under Note 15 of AR2019, headed 'Borrowings'. In fact Heartland have been securitising their 'Australian Seniors Finance' 'Reverse Equity Loans' from day 1. The securitisation facility has a lid of $650m on it, and it was already drawn to $631m. The whole facility currently expires on 30th September 2022, which means the supporting bank has given their blessing to this arrangement for a further three years.

Heartland Group Holdings has issued $A50m in two year unsubordinated notes. That money can go towards supporting Australian REL loans. Then on 2nd July, Heartland announced the completion of an A$250 million committed reverse mortgage funding facility and said:

"Heartland now has access to committed Australian reverse mortgage loan funding of A$850 million in aggregate."

According to my maths $A650m + $A250m = $A900m

So it looks like, since balance date, the previous bank securitisation facility must have been reduced by $50m, back down to the $A600m figure from 2018. Heartland also state that the new facility provides:

"provides additional diversification of funding"

This would indicate the new facility must be with a different supporting bank in Australia. Did the original supporting bank reducing their level exposure force Heartland to go elsewhere for their new securitization facilities?

SNOOPY

[percy]

An additional bank.

[trader_jackson]

http://www.equity.co.nz/files/SKL_CMO_ABA_HGH.pdf

They say HGH really bad apparently...

[100101]

Lest we forget where the old ticker share price got to. Presumably as its the same company still it will return to the previous levels

http://chart.findata.co.nz/?e=NZX&s=HBL&d=0&n=180&i=MACD-&ma=5-20-&mat=SMA-SMA-&b=BB&w=940&h=480

http://chart.findata.co.nz/?e=NZX&s=HBL&d=0&n=180&i=MACD-&ma=5-20-&mat=SMA-SMA-&b=BB&w=940&h=480

[percy]

http://www.equity.co.nz/files/SKL_CMO_ABA_HGH.pdf

They say HGH really bad apparently...

If that is from Simply Wall Street,all I can say is their research remains really bad.

[RTM]

If that is from Simply Wall Street,all I can say is their research remains really bad.

So should we therefore sell SKL and ABA ?:)

[percy]

So should we therefore sell SKL and ABA ?:)

You can buy/sell whatever you want.
I myself am happy to hold a modest holding in SKL,and a large holding in HGH,
ABA I do not have an opinion on,while CMO has been a great performer for those who hold,however I hold TRA,which I expect will be a great performer over the next few years..

[Snoopy]

The objective of this post is to consider cash flow, 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 FY2019 is derived from note 23 in AR2019 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 Maturity
Expected Behaviour Multiple
FY2014 Financial Receivables Maturity: Contracted/ Expected
FY2015 Financial Receivables Maturity: Contracted/ Expected
FY2016 Financial Receivables Maturity: Contracted/ Expected
FY2017 Financial Receivables Maturity: Contracted/ Expected
FY2018 Financial Receivables Maturity: Contracted/ Expected
FY2019 Financial Receivables Maturity: Contracted/ Expected


On Demand
100%
$50.254m / $50.254m
$37.012m / $37.012m
$84.154m / $84.154m
$57.040m / $57.040m
$49.588m / $49.588m
$80.584m / $80.584m


0-6 months
132%
$477.190m / $629.445m
$664.557m / $877.215m
$743.389m / $961.274m
$618.271m / $816.118m
$609.268m / $804.234m
$1,020.160m / $1,346.611m


6-12 months
132%
$367.564m / $483.727m
$450.638m / $594.842m
$484.420m / $639.962m
$521.215m / $688.004m
$469.632m / $619.914m
$646.123m / $852.882m



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



Deposit Maturity
Expected Behaviour Multiple
FY2014 Financial Liabilities Maturity: Contracted/ Expected
FY2015 Financial Liabilities Maturity: Contracted/ Expected
FY2016 Financial Liabilities Maturity: Contracted/ Expected
FY2017 Financial Liabilities Maturity: Contracted/ Expected
FY2018 Financial Liabilities Maturity: Contracted/ Expected
FY2019 Financial Liabilities Maturity: Contracted/ Expected


On Demand
3.01%
$629.125m / $18.922m
$748.332m / $22.450m
$718.587m / $21.630m
$836.829m / $25.189m
$924.072m / $27.815m
$895.210m / $26.946m


0-6 months
32.4%
$748.129m / $242.431m
$1,213.450m / $395.102m
$892.944m / $289.314m
$1,191.957m / $386.194m
$1,345.316m / $435.882m
$1,531.594m / $496.236m


6-12 months
36.4%
$538.050m / $195.682m
$686.159m / $249.762m
$837.844m / $304.975m
$729.145m / $265.409m
$572.731m / $208.474m
$620.836m / $225.984m



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 Maturity
FY2014: 'Expected' combined Loan and Deposit Cashflow
FY2015: 'Expected' combined Loan and Deposit Cashflow
FY2016: 'Expected' combined Loan and Deposit Cashflow
FY2017: 'Expected' combined Loan and Deposit Cashflow
FY2018: 'Expected' combined Loan and Deposit Cashflow
FY2019: 'Expected' combined Loan and Deposit Cashflow


On Demand
$31.332m
$14.562m
$62.524m
$31.851m
$21.765m
$53.620m


0-6 months
$387.014m
$482.113m
$691.960m
$429.924m
$368.352m
$850.375m


6-12 months
$288.045m
$345.080m
$334.987m
$422.595m
$411.440m
$626.898m


Total
$706.391m
$841.755m
$1,089.471m
$884.370m
$801.557m
$1,530.893m




Time to update the "Liquidity Buffer ratio" for FY2019.

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.

HGH Borrowings



1/ Term deposits lodged with Heartland.$3,153.681m


2/ Bank Borrowings$25.002m


3/ Securitized Borrowings total$659.135m


4/ Certificate of Deposit$34.836m


5/ Unsubordinated Notes$337.681m


Total Borrowings of (see note 13) $4,210.334m



Note 15 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

Banking facilities are provided by CBA Australia, and another unnamed supporting bank, 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 2022. That means they are classed as ‘long term’ for accounting purposes (talking from a 1st July 2019 looking forwards perspective). And that means Heartland can’t rely on CBA Australia as a source of short-term funds.

The information given in note 15 on the securitized borrowing facilities is as follows:



Securitized bank facilities total all in relation to the Heartland ABCP Trust 1:$nildissolved on on 29th August 2018


plus Securitized bank facilities total all in relation to the Heartland Auto Receivables Warehouse Trust 2018:$NZ150m(undrawn)


plus Senior Warehouse Trust Securitisation Facility 2018:$A650mmaturing 30th September 2022


less Current level of drawings against these facilities$A631m


equals Borrowing Headroom $NZ150m + $NZ20m (1) = $NZ170m {A}



(1) Using 30th June exchange rate NZD1 = AUD0.95639


HGH Lendings vs HGH Borrowings

Customers owe HGH 'Finance Receivables' of $4,348.050m There is no breakdown in AR2019 (note 15) as to what loans are current or longer terms. However, if we look at note 23 '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$80.584m+ $1,020.160m+$646.123m= $1,746.867m


less Expected Deposits for Repayment$26.946m+ $435.882m+ $225.984m= $688.812m


equals Net Expected Cash Into Business$53.638m$584.278m $420.139m$1,058.055m {B}



If more money is expected to be coming in from customer loans being repaid, than is expected to be 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})
= $170m / $1,058.055m
= 16.1% > 10%

=> Pass 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, that Heartland now has enough borrowing headroom in reserve. That should give HGH shareholders confidence as we move into an era of lesser business confidence in general.

SNOOPY

[stoploss]

Heartland just reduced the rate on its reverse rate mortgage to 6.95 % fyg.

[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








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 + 3.5cps 1st November 2018, Heartland Group Holdings restructure set up


Average FY2015 to FY2019 inclusive8.20cps




I have chosen to use the last five 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 + 3.5cps1st November 2018: Heartland Group Holdings restructure set up


FY20206.5cps + ?.?cps


Average FY2015.5 to FY2019.5 inclusive8.80cps




I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.

SNOOPY

[Snoopy]

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 )

8.2c / (0.72 x 0.075) = $1.52

A reminder here that NTA was

($654.150m - $73.085m) / 565.430m = $1.03 cps

at the half year FY2019 balance date. This means my fair valuation is at a good premium (+48%) to asset value.

This $1.52 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 $1.22 to $1.82. $1.41, where the share is trading today, looks a little below fair value. Take off the upcoming 3.5c dividend and we get down to an equivalent $1.375. That is a 10% discount to fair value. I therefore see HGH as worth accumulating at $1.41.

discl: New shareholder, in at $1.38


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 )

8.8c / (0.72 x 0.075) = $1.63

A reminder here that NTA was

($675.668m - $72.679m) / 569.338m = $1.06 cps

at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+54%) to net tangible asset value.

This $1.63 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 $1.30 to $1.96. $1.59, where the share is trading today, looks a few cents below fair value. My target accumulation price (10% below fair value) is now $1.47.

SNOOPY

[Beagle]

https://www.goodreturns.co.nz/article/976515694/heartland-hails-reverse-mortgage-growth.html?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Saturday+5+ October+2019

In other news, gosh, term deposit rates have really hits the skids. Nothing over 2.90% even if you invest for several years !
Don't bother shopping the other banks for term desposits, all the well recognised ones are all under 3%
https://www.heartland.co.nz/savings-and-deposits/interest-rates#term-deposits-interest-rates
Rates at Heartland are negotiable for amounts of $250K or more.

[Beagle]

Read through the Heartland Annual review today.
My mate Crackity reckons you should read annual reports from the back these days. He's more cunning than a hungry Beagle. Doing so would save the reader 39 pages of seriously OTT ESG caproate spiel. If you must read from the front, just start at page 40 and save yourself a ton of pc rubbish.

[RTM]

Read through the Heartland Annual review today.
My mate Crackity reckons you should read annual reports from the back these days. He's more cunning than a hungry Beagle. Doing so would save the reader 39 pages of seriously OTT ESG caproate spiel. If you must read from the front, just start at page 40 and save yourself a ton of pc rubbish.

Yes....it sounded like a Social Services Company....not a bank making money for shareholders.
Is that what you meant ?

[Beagle]

Yes it was nauseating to say the very least.

[horus1]

Just bought more based on reverse mortgages pick up/.

[davflaws]

Yes it was nauseating to say the very least.

My white liberal heart bleeds for you both. The world keeps changing.

But perhaps even a couple of ageing reactionaries and a tree hugging pakeha liberal can all take comfort from the financial performance of the organisation, even if we disagree about the contribution of the "social services" rhetoric.

[RTM]

My white liberal heart bleeds for you both. The world keeps changing.

But perhaps even a couple of ageing reactionaries and a tree hugging pakeha liberal can all take comfort from the financial performance of the organisation, even if we disagree about the contribution of the "social services" rhetoric.

Well I feel better now. Thanks.
And I agree....more than happy with my Heartland shares. The only thing that really annoys me is that at ~10% of my portfolio....I really can't justify any more. Even using Horus's trick of using the cost price instead of the current price.
Cheers
RTM

[ziggy415]

Just bought more based on reverse mortgages pick up/.
Come on horus, don't leave us hanging....where did this info come from, or pure speculation on your part...hgh had $ 250 million facility but dished out $124 million in Australia last year but only received $24 mill back so will there come a tipping point ot does reverse portfolio just keep getting bigger

[Beagle]

My white liberal heart bleeds for you both. The world keeps changing.

But perhaps even a couple of ageing reactionaries and a tree hugging pakeha liberal can all take comfort from the financial performance of the organisation, even if we disagree about the contribution of the "social services" rhetoric.

There's normal inclusivity in this heightened ESG world we live in and then there's Heartland.
I am not so naïve as to think there is not commercial purpose behind it. To the best of my knowledge Heartland are alone on the NZX in terms of wanting to be seen as the Maori employer of choice and the frequency of the Te Reo lessons distributed throughout the annual review suggests there is serious Iwi money invested in Heartland and they have told the directors what they expect in return.
I was going to add to my 5% portfolio position in HGH but after reading the annual review, I'm not.

[King1212]

https://tmmonline.nz/article/976515694/heartland-hails-reverse-mortgage-growth?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Tuesday+8+O ctober+2019

[winner69]

With heaps of iwi money invested with them can’t see Heartland sponsoring the replica of the Endeavour

[percy]

With heaps of iwi money invested with them can’t see Heartland sponsoring the replica of the Endeavour

Via what name or holding/s is all this supposed iwi money invested.?

[RTM]

Via what name or holding/s is all this supposed iwi money invested.?

Well....what a great place for iwi to invest. Support it entirely.

[Beagle]

With heaps of iwi money invested with them can’t see Heartland sponsoring the replica of the Endeavour

What a noble cause that would be. Really embracing our cultural heritage. I nominate Percy to bring this idea up at the annual meeting :)

[winner69]

Via what name or holding/s is all this supposed iwi money invested.?

Some on here (not me) say that ishappening

No shareholding’s - I think as a customer.

Aboutthe only thing Snoopy hasn’t worked out is the ethnicity of borrowers and depositors

[horus1]

It was in a paper, forget which one about NZ reverse mortgages picking up.

[Snoopy]

Some on here (not me) say that ishappening

No shareholding’s - I think as a customer.

About the only thing Snoopy hasn’t worked out is the ethnicity of borrowers and depositors


Don't worry Winner I am onto it! I have just got hold of the share register and as we speak I am systematically combing it for 'maori sounding names' :-P

SNOOPY

[janner]

Don't worry Winner I am onto it! I have just got hold of the share register and as we speak I am systematically combing it for 'maori sounding names' :-P

SNOOPY

Such Maori names as Shane Jones ?. I hear he has a billion or more left to invest..

Seriously Snoopy.. Thank you for the posts..

For percy.. Hmmmmmm..

[Beagle]

Winner has been a tremendous advocate for encouraging diversity and inclusiveness within companies and helped us understand the benefits of same and that is fine and I appreciate him sharing his experience and wisdom. All that is fine but to be clear, what makes me very uncomfortable with HGH is that they single one particular ethnicity out for very special treatment, that's something quite different.
Perhaps someone who lives in Christchurch could take the board to task over this at the annual meeting ?

[justakiwi]

I have read their annual report/review documents, and while they have obviously done a great deal of work on the Māori side of things, that doesn’t mean they are excluding other cultures. I have no doubt whatsoever that they employee people from many different cultures. They are thinking outside the square and aim to create a culturally diverse workforce/team, which they are to be commended for. I particularly like the fact that they employ many young people. Heartland seems to be a genuine and passionate employer and are doing much more than most businesses whose cultural inclusiveness is often nothing more than lip service.


Winner has been a tremendous advocate for encouraging diversity and inclusiveness within companies and helped us understand the benefits of same and that is fine and I appreciate him sharing his experience and wisdom. All that is fine but to be clear, what makes me very uncomfortable with HGH is that they single one particular ethnicity out for very special treatment, that's something quite different.
Perhaps someone who lives in Christchurch could take the board to task over this at the annual meeting ?

[suse]

Winner has been a tremendous advocate for encouraging diversity and inclusiveness within companies and helped us understand the benefits of same and that is fine and I appreciate him sharing his experience and wisdom. All that is fine but to be clear, what makes me very uncomfortable with HGH is that they single one particular ethnicity out for very special treatment, that's something quite different.
Perhaps someone who lives in Christchurch could take the board to task over this at the annual meeting ?
I'm all for them encouraging young (or any age) maori into jobs. Stop the treadmill to the dole office.

[davflaws]

to be clear, what makes me very uncomfortable with HGH is that they single one particular ethnicity out for very special treatment,

For us liberal pakehas, we are a bicultural country before we are a multicultural one. In that regard, te reo is one of the country's official languages, and it is perfectly appropriate to recognise the status of tangata whenua as an important part of New Zealand's unique identity.

[IAK]

For us liberal pakehas, we are a bicultural country before we are a multicultural one. In that regard, te reo is one of the country's official languages, and it is perfectly appropriate to recognise the status of tangata whenua as an important part of New Zealand's unique identity.

Tautoko e hoa!

[Beagle]

Era cualquier cosa. We should get back to discussing investment fundamental's.

[Snoopy]

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 PaidROE


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 six 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.



Time to review one of the least popular overviews among Heartland's loyal shareholders: Heartlands hunger for stakeholders 'capital in' verses their generosity in paying stakeholders out.



Financial Year
Capital Notes Issued during FYCapital Notes Gross Interest to Bondholders
New Shares Issued during FYTotal Shares on the Books EOFYNet Money Raised During FY (excl. Capital Notes)
Dividends PaidROE


2013
0 m0 m
0 m388.704m$0m$13.951m7.2%


20140 m0 m
75,562 m463.266m$64.774m$19.930m8.0%


20150 m0 m
6,624 m469.980m$9.163m$30.188m10.2%


20160 m0 m
6,579 m476.469m$6.798m$37.690m10.8%


2017$22m$0.253m
40.215m516.684m$50.991m$41.977m11.1%


2018$150.000m$1.100m + $5.289m
43.904m560.588m$71.726m$47.895m10.2%


2019$125.000m + ($22m) + $52m $0.3767m + $6.750m + $1.082m
8.750m569.338m$16.655m$50.599m11.1%


Total Cash Raised$327.000m
$220.107m


Total Cash Returned$14.851m
$242.930m



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. It was repaid in October 2018 (FY2019).
1b/ On September 17th 2017 (during FY2018), $150m of unsubordinated notes were issued.
1c/ On 12th April 2019 (during FY2019) a further parcel of $125m of unsubordinated notes were issued.
1d/ On 8th March 2019 (during FY2019) $A50m of unsubordinated notes were issued by Heartland Australia at $NZ1 = $A0.960, and is equivalent to $NZ52m of funding at issue date.

2a/ $A20m of Australian Subordinated Capital Notes were issued at a gross coupon rate of 4.15%. This implies a gross annual interest bill of: $A20m x 0.0415 = $A0.9130m. I am guessing this will have been hedged back to an equivalent $NZ amount at the bond establishment date. This implies an annual NZD payment of: $A0.9130m/0.909= $NZ1.100m. In the first year this bond was established (FY2017) it was active for only 84 days of that year. That means for FY2017, the gross interest payment associated with this bond would be: $NZ1.100m x (84/365) = $NZ0.2531m. This bond was repaid by the end of October 2018. This means the gross interest bill over 2019 was: $NZ1.100m x (123/365)= $NZ0.3767m.
2b/ $150m of HBL010 bonds were issued at a 4.5% coupon rate. This implies a gross annual interest bill of: $150m x 0.045 = $6.750m. However during the year the bond was issued (FY2018), the bond was only on issue for 286 days of the year. This means the implied gross interest bill for that year was: $6.750m x (286/365) = $5.289m
2c/ $125m of HBL020 bonds were issued at a 3.55% coupon rate. This implies a gross annual interest bill of: $125m x 0.0355 = $4.438m. However during the year the bond was issued (FY2019), the bond was only on issue for 89 days of the year. This means the implied gross interest bill for that year was: $4.438m x (89/365) = $1.082m.
2d/ The $A50m fixed note offer was established on 15th March 2019 "with a key Australian institutional fixed income investor". The investor was not identified and neither was the interest rate disclosed. Given this new bond was only issued 3.5 months from the end of the financial year the interest due in dollar terms would be small. Rather than guess, I am going to leave this new bond interest out of my cash flow picture for now.

3/ ROE figures calculated using normalized 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 seven years, it exceeds the total dividend and interest flow that Heartland has paid out over that same time period by $289m. Some might consider that the bonds I have mentioned here are an equivalent of debt rather than equity and so shouldn't be included in this calculation. But these bonds are non bank funding from stakeholders (who could also be shareholders) and, in that sense, they are an alternative to shareholder equity. They are also listed as a 'funding source' in AR2019 note 28 'Concentrations of Funding', whereas banking arrangements are not.

(Note that the seven year time period I have chosen deliberately excludes the establishment capital raising that was used to create Heartland in the first place.)

As the table shows, Heartland have been quite adept at raising new equity capital to the extent that of the capital paid out as dividends over the last seven years, all but $22.823m has been 'reclaimed'. If we add the bond money net of interest returned from non-bank funders, then the net cash non bank stakeholder position changes dramatically to the net $289m that I previously stated was 'sucked up'!

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. Most of the rest has been taken back via cash issues. The table shows, Heartland have been quite adept at raising new equity capital to the extent that of the capital paid out as dividends over the last seven years, all but $22.823m has been 'reclaimed'.

If we add the bond money net of interest returned from non-bank funders, then the net cash non bank stakeholder position changes dramatically to the net $289m that I previously stated was 'sucked up'! later (not necessarily from the same individuals it was paid to) via a combination of share cash issues and bond issues. The net effect is that in the seven years ended June 30th 2019, 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. A great business will generate lots of cash. Heartland (still) generates none in my view.

SNOOPY

[Chinesekiwi]

Agree with your sentiments.


For us liberal pakehas, we are a bicultural country before we are a multicultural one. In that regard, te reo is one of the country's official languages, and it is perfectly appropriate to recognise the status of tangata whenua as an important part of New Zealand's unique identity.

[winner69]

snoop

A great business will generate lots of cash. Heartland (still) generates none

a t

Can’t be right Snoops ..... but seeing shareholders have pumped in $220m of new capital to get divies of $242m it must be

[BlackPeter]

Time to review one of the least popular overviews among Heartland's loyal shareholders: Heartlands hunger for stakeholders 'capital in' verses their generosity in paying stakeholders out.

...

A great business will generate lots of cash. Heartland (still) generates none in my view.

SNOOPY

Hmm - based on your criteria do I assume you consider Berkshire Hathaway as a terrible company as well? They only took shareholders money and never returned anything ...

Why do you think that companies assets do not count ...?

[winner69]

Hmm - based on your criteria do I assume you consider Berkshire Hathaway as a terrible company as well? They only took shareholders money and never returned anything ...

Why do you think that companies assets do not count ...?

I think you have misunderstood what Snoops is trying to say but i’ll leave it to him to explain

[percy]

Posters should google "How banks create money."

[Snoopy]

Hmm - based on your criteria do I assume you consider Berkshire Hathaway as a terrible company as well? They only took shareholders money and never returned anything ...


Berkshire Hathaway doesn't pay any dividends. But they don't come back to shareholders multiple times asking for new capital either. It is the ability to generate cash internally so that a business can fund their own business expansion that I look for. Berkshire Hathaway has a track record of doing that. Heartland does not. To fix this situation Heartland could stop paying dividends. It does look like the amount of money they pay out in dividends would be enough to fund their expansion plans. But Heartland choose not to do this.

I don't see Heartland paying dividends as a problem necessarily. With our imputation credit system, it is tax efficient for Heartland to pay dividends. Whereas with Berkshire Hathaway in the US, if they did the same then their US shareholders would be 'double taxed'. But it does look like Heartland are trying to have their cake and eat it with the current dividend and capital raising policy. They are stringing investors along with the illusion that they have a sustainable dividend payout. But this is only true if they can raise the capital they need for expansion in other ways. And that will only be possible if capital markets are supportive. Right now capital markets are supportive. But cut off the capital funding tap and the sustainability of that dividend must come into question.



Why do you think that companies assets do not count ...?


Not quite sure where you are going with this. Hasn't the NTA per share growth of Heartland effectively stalled?

SNOOPY

PS I don't consider Heartland a 'terrible company'. If I thought, that I wouldn't have bought my Heartland shares earlier this year! But my purchase was on a modest PE multiple of nearer 10 than 15. The purchase price really does matter with Heartland IMO. The lower the purchase price the less the investment risk going forwards.

What I am saying is that there is an underlying cash flow risk for the business going forwards. That risk can be fixed by shareholders putting their hands in their pockets and answering a rights issue call. I am saying that shareholders holding now should be prepared for a rights issue if capital market conditions change.

[Beagle]

HGH are doing a good job of feeding the dividend hounds that like to eat and those that like to bury their bones for consumption later can elect the dividend reinvestment scheme.

[Snoopy]

HGH are doing a good job of feeding the dividend hounds that like to eat and those that like to bury their bones for consumption later can elect the dividend reinvestment scheme.


FWIW I agree. I am not suggesting that Heartland change their business model. But if capital market conditions change, then it could be that the dividend has to be cut, annoying the dividend hounds. And it could be Heartland have a discounted rights issue that devalues the worth of those 'buried Heartland bones', annoying the DRP brigade. After further thinking this through, I would say that if dividend payments were stopped then the business model would be more robust. But doing that would really annoy the dividend hounds and cause the share price to plunge. So there is no clear better way forwards. Maybe it would have been better with hindsight if Heartland had never paid a dividend. In that situation, the dividend hounds wouldn't be able to complain about losing something they never had. But managing a business with hindsight is always easier. If only it were possible!

SNOOPY

[Snoopy]

Posters should google "How banks create money."


If you go to the 'Heartland Bank Disclosure Statement for 30th June 2019' , note 33 gives a detailed explanation of 'Capital Adequacy'. There is a table in there on 'balance sheet exposures'. This has a breakdown of all the receivables assets on the bank books, the average risk weighting of those assets and a 'risk weighted exposure'. From that Heartland calculates the minimum Common Equity Tier 1 capital required to support the loan book.

But here is the rub. Subordinated capital notes can be recognized at tier 2 capital that can improve the overall capital ratio of the bank. Yet none of the unsubordinated notes that exist today support the capital ratio of Heartland at all. These unsubordinated notes leverage the debt risk of Heartland, but do not increase the size of the finance receivables book that Heartland can support. At least that is how I see things. Have I got it wrong?

SNOOPY

[winner69]

HGH are doing a good job of feeding the dividend hounds that like to eat and those that like to bury their bones for consumption later can elect the dividend reinvestment scheme.

What Snoopy was essentially saying that having a high payout ratio as well as raising new share capital (not counting the bonds) affects the value of the company on book value per share basis ....and therefore the share price

Heartlands Book Value (Net Assets) per share has increased from 99 cents in 2014 to $1.187 in 2019 - ie at a rate of 3.7% pa (in raw $ terms the increase is from $452m to $676m)

Of that increase in Book Value per share about 70% has come from New share capital and the other 30% from Retained Earnings

A lower payout ratio over the years would probably have seen a much higher share price than it is today (beause its Book Value would have been higher from higher level of retained earnings)

[BlackPeter]

...

What I am saying is that there is an underlying cash flow risk for the business going forwards. That risk can be fixed by shareholders putting their hands in their pockets and answering a rights issue call. I am saying that shareholders holding now should be prepared for a rights issue if capital market conditions change.

Fair enough, though you could say that about a lot of "growth" companies. Heartland is currently growing their REL portfolio, and yes, this will require additional capital - though not ad infinitum. I think the average duration of a REL is something like 8 to 10 years - i.e. give it another 6 years or so and they should get enough capital back through REL which they can recycle.

Obviously - they might find by then something else they want to grow ;):

Given that the HGH share price does not really price in growth (at a forward PE of 11.5 based on analyst forecasts) am I not concerned, if shareholders are paying for this extra growth through CR / DRP or similar. On top of that - their forward earnings CAGR is 6 (backwards 11.7), which makes them really cheap ...

Still - you are obviously right - there might be as well a time when HGH is too dear (as it used to be last year), and then it is a good time to sell, but in my view this is not now :):

Referring to asset value: NTA was rising consistently from 86 cents in 2014 to $1.04 now. That's a CAGR of 4 - not too bad. On top of that they do have as well more shares on issue - i.e. I don't think that net assets / market cap did drop in average (but I admittedly didn't check the latter).

[Beagle]

What Snoopy was essentially saying that having a high payout ratio as well as raising new share capital (not counting the bonds) affects the value of the company on book value per share basis ....and therefore the share price

Heartlands Book Value (Net Assets) per share has increased from 99 cents in 2014 to $1.187 in 2019 - ie at a rate of 3.7% pa (in raw $ terms the increase is from $452m to $676m)

Of that increase in Book Value per share about 70% has come from New share capital and the other 30% from Retained Earnings

A lower payout ratio over the years would probably have seen a much higher share price than it is today (beause its Book Value would have been higher from higher level of retained earnings)

People who don't want the divvy can participate in the DRIP and grow their wealth that way.

[Snoopy]

Heartland is currently growing their REL portfolio, and yes, this will require additional capital - though not ad infinitum. I think the average duration of a REL is something like 8 to 10 years - i.e. give it another 6 years or so and they should get enough capital back through REL which they can recycle.


I have heard this 'recycling capital' for reverse mortgages argument before. My answer I have recycled below



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.

'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 cash flow situation will resolve itself. If Heartland were to decide to wind down their reverse mortgage portfolio in the future it would then become a cash flow 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.


Then Jantar tried to put me straight.



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, if 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.


i don't think I commented at the time because i am not sure I fully understood what Jantar was getting at. What Jantar is saying is that the compounding cashflow from the reverse mortgage interest is what is really driving the profits.



Seniors interest rate is 7.82%. It is variable but since we don't know how it will vary in the future I will keep it fixed for the purpose of this exercise. To keep the figures easy, Mr & Mrs Crusty will look to take out a $100,000 reverse mortgage loan.



Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Total


Interest Payable$7,820$8,432$9,091$9,802$10,568$11,395$12,2 86$13,247$14,282$15,399$112,332


Time Discount FactorFace Value7.4%7.4%^27,4%^37,4%^47.4%^57.4%^67.4%^77.4%^ 87.4%^9


Time Discounted Interest$7,820$7,851$7,881$7,912$7,935$7,974$8,005 $8,037$8,068$8,099$79,582



Here is a graphic demonstration of compound interest. Mr & Mrs Crusty end up paying back $112k interest on top of the $100k that they borrowed! Or put another way each dollar they spend in their ten years of retirement costs them $2.12.


Using the above model, Heartland could double their Seniors investment capital in dollar terms on each $100,000 loaned over ten years. (I note the Seniors interest rate has reduced a bit since I went through my above example.) So the corollary is that if Heartland retain all their 'reverse mortgage capital' inside their 'reverse mortgage business unit' then the size of the reverse mortgage portfolio can double in ten years. Doubling in ten years is equivalent to an annual compounding growth rate of:

$100,000 x (1+g)^10 = $200,000 => (1+g) = 2^0.1 => g=7.2%

On average if Heartland want to grow their reverse mortgage portfolio faster than this 7.2%, then they need more capital. But if they want to take money out of the reverse mortgage portfolio (to go towards paying a dividend for example) they will have to be content with a growth rate of rather less than 7.2%.

Over FY2018, Australian reverse mortgages in gross receivable terms, grew by 31% and the NZ reverse mortgages receivables grew by 12%. This was followed up by more compounding REL receivables growth of 24% for Australia and 11.4% for New Zealand over FY2019. So the Seniors portfolio is growing way faster than its own self funding underlying organic rate of around 7%. But how long will this growth continue? As at EOFY2019 the Australian Reverse Mortgage market share that Heartland has is 24% of all REL loans. Given no other major player is active in recruiting new business for lump sums in Australia, I think we could see Heartland's REL market share double to near 50% in Australia. At the underlying organic growth rate, that means Heartland will have to continue to raise new capital if they want to take less than ten years to reach that 50% market share target. Consequently I don't see any free cashflow coming out of the reverse mortgage business for many years. In fact I see a cash issue (or an Australian bond issue?) on the horizon as being the more likely way to speed up growth.

SNOOPY

[Snoopy]

Snoopy wrote:
"What I am saying is that there is an underlying cash flow risk for the business going forwards. That risk can be fixed by shareholders putting their hands in their pockets and answering a rights issue call. I am saying that shareholders holding now should be prepared for a rights issue if capital market conditions change"

Fair enough, though you could say that about a lot of "growth" companies.


I think the potential situation is rather worse than putting Heartland into the same growth bucket as other growth companies.

Let's say you have a property worth $1m and take out what ends up being a a ten year reverse mortgage for $100,000. The bill at the end of ten years is $200,000, with all the compounding interest rolled up. But as a long term property owner, you might be expecting your property might have appreciated to be worth $1.2m over ten years. So in headline dollar terms you still have your $1m nest egg intact to pass on to your children. You feel good, and your children can't feel hard done by, as your very generous nest egg to them is intact.

Now let's look at an alternative property market scenario where property prices flat line for ten years. In that case your nest egg drops to $800,000. The wider economy is much cooler under this scenario, so your children are not getting ahead as much. Such a scenario might make you think twice about taking out that reverse mortgage in the first place. Do you really need that world cruise? Why not hang onto your old car rather than upgrade to a new one? So demand for reverse mortgages could drop. But the value of the underlying asset on which the reverse mortgage is based also drops in relative terms. So the existing reverse mortgages become more risky.

What I am saying here is that in a recession the reverse mortgage gets a double whammy. The first hit being a drop in demand for new reverse mortgages. The second hit being a new capital risk to the existing REL portfolio. I don't think most growth companies would face a 'double hit' like that in a recession.

SNOOPY

[BlackPeter]

Hmm - but didn't you say before that the biggest risk for REL's might be in the unconstrained growth (creating cash flow issues for Heartland)?

If the problem is now that maybe some potential customers might be a bit more careful in drawing on REL's to prevent the nest egg to shrink, than this just means that the REL market might grow a bit slower mitigating the cash flow issues you predicted for Heartland.

Sound like a "double whammy" Heartland shareholders should find it easy to live with ;).

As indicated earlier - I do see risks (as in any other business) and I could imagine that some of the more significant issues for them could be the potential reduction of the value of their securities through climate change issues.

However - any other bank lending money secured with mortgages is carrying exactly the same risk, so it is hard to avoid unless you remove banking from your portfolio.

The time frame and cash flow of REL's should not be an issues at all as long as Heartland makes sure they know how to use the death tables and there is enough headroom between maximum loan and security valuation for potential property slumps. So far I have not seen evidence for that not being the case.

In other parts of the world (e.g. Germany) it is quite usual for banks to give you e.g. mortgages with a 30 year time frame up to 60% of the property value, and while the banking industry used to have their issues over time, I never heard that any bank got into trouble because of this particular policy.

I think you are chasing a red herring :).

[Snoopy]

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


I am not going to go through a full Buffett review this year, because I know that Heartland will not pass the return on equity requirement. Notwithstanding this, that doesn't mean that Heartland is not a worthwhile investment according to other criteria. And it is always interesting to look at the trend of what I deem to be 'normalised profit'. See if you agree with the various adjustments I have made.



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


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


2019$73.617m + 0.72x($1.8m + $1.3m + $1.1m) -$1.936m -$0.173m - $0m = $74.532m569.338m13.1c


Notes

1/ Profit of $588k from investment sale and $98k from Property Plant and Equipment sales removed from FY2015 result
2/ Profit of $1.136m from investment sale and $322k from Property Plant and Equipment sales removed from FY2016 result
3/ 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).
4/ 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.
5/ Profit of $0.173m from investment sale removed from FY2019 result. The after tax effect of $4.2m in 'one off costs' (corporate and ASX listing $1.8m, one off currency costs of $1.3m and the Australian bond break fee of $1.1m) have been added back to the FY2019 profit. Lastly i have removed the $1.936m book gain on the fair valuation of an investment property.
6/ I have been unable to locate property plant and equipment sales profits/losses for FY2017 and FY2018 and FY2019.

Result: Pass Test

SNOOPY

[winner69]

I have read their annual report/review documents, and while they have obviously done a great deal of work on the Māori side of things, that doesn’t mean they are excluding other cultures. I have no doubt whatsoever that they employee people from many different cultures. They are thinking outside the square and aim to create a culturally diverse workforce/team, which they are to be commended for. I particularly like the fact that they employ many young people. Heartland seems to be a genuine and passionate employer and are doing much more than most businesses whose cultural inclusiveness is often nothing more than lip service.

There are two ways of thinking about inclusiveness and diversity, positive and negative.

The negative way is the “woke”, campus radical, activist, no-justice-no-peace sort of way that just leads to resentment, anger and a view it is really, really bad for business.

The positive way is that the more ideas and perspectives we have coming in from all over, the more likely we are to think of things nobody else has, walk down paths nobody else has trod. In other words it gives you a competitive advantage.

[Snoopy]

http://www.equity.co.nz/files/SKL_CMO_ABA_HGH.pdf

They say HGH really bad apparently...


If that is from Simply Wall Street,all I can say is their research remains really bad.

Rather than shoot the messenger, could I suggest looking at the message?

"HGH –OVER-PRICED! Tougher times ahead and NEGATIVE NET OPERATING CASHFLOWS OVER THE PAST 3 YEARS IS A CONCERN! Times could get tougher, making net negative operating cashflows a likely continuing trend,until such time as the NZ and Australian economies get back on a relatively strong growth trend. "

It is rather a shallow and rather odd analysis. A lot of the negative cashflows must be from the growth of the reverse mortgage business which requires cash to be shelled out up front, with repayment only at the end of the contract. The analysis then goes on to say fair value based on future cashflows is $1.54, based on 2018 results. So with the share price trading at around $1.60 after 2019 results, they would have to deem today's price fair. So what they are saying is that, despite trading at fair value, the 'shock risk' is too great.

The average duration of Heartland's REL book is 6.6 years in Australia and 7.5 years in New Zealand. Heartland fund this with two issues of NZ five year bonds, $125m maturing on 12th April 2024 and $150m maturing on 23rd September 2022. There is a two year $A50m Australian bond maturing on 8th March 2021. But all these funding arrangements are on average too short to match the average loan term. I wonder why the Australian bond was for such a short duration and for such a small amount? $A756.7m was the balance date size of the Australian REL portfolio at balance date. The balance date securitization arrangements that further support the Australian REL portfolio expire in just three years (30th September 2022).


Heartland admit their funding program is a work in progress

"Long term reverse mortgage-backed structure being developed."

We also learn of a change in the way the risk of a reverse mortgage is assessed:

-----

IFRS9 also introduced a change in the way Reverse Mortgages are valued.

o Under IFRS they are classified as ‘fair value through profit or loss’.
o Currently, it has been determined that fair value equals current carrying value. However, should consistent evidence of a market value emerge, this may result in a revaluation.

-------

Generally IFRS9 has resulted in a more conservative treatment of bad debts. But in the case of reverse mortgages, it would seem that all provisions for bad debts have been abolished until markets change. Yet when markets change it will be too late! What sort of new risk policy is this?

What will happen in three years time if market conditions change and the supporting bank arrangements that allow these reverse mortgages to continue are pulled back? How will Heartland continue in business? I think there is a real 'risk question' with serious consequences, albeit an unlikely 'risk question', to answer here.

SNOOPY

[percy]

Rather than shoot the messenger, could I suggest looking at the message?

"HGH –OVER-PRICED! Tougher times ahead and NEGATIVE NET OPERATING CASHFLOWS OVER THE PAST 3 YEARS IS A CONCERN! Times could get tougher, making net negative operating cashflows a likely continuing trend,until such time as the NZ and Australian economies get back on a relatively strong growth trend. "

It is rather a shallow and rather odd analysis. A lot of the negative cashflows must be from the growth of the reverse mortgage business which requires cash to be shelled out up front, with repayment only at the end of the contract. The analysis then goes on to say fair value based on future cashflows is $1.54, based on 2018 results. So with the share price trading at around $1.60 after 2019 results, they would have to deem today's price fair. So what they are saying is that, despite trading at fair value, the 'shock risk' is too great.

The average duration of Heartland's REL book is 6.6 years in Australia and 7.5 years in New Zealand. Heartland fund this with two issues of five year bonds, $125m maturing on 12th April 2014

As I correctly pointed out,really bad research.

[winner69]

Dairy prices flat of late (GDT results) - just like the Heartland share price

[JohnnyTheHorse]

Price breaking through some resistances. Those dairy futures must be moving up are they winner?

[bull....]

this might not be good for heartland

Treasurer Josh Frydenberg to review Pensions Loan Scheme interest rate after 'gouging' allegations
Treasurer Josh Frydenberg will review the Government's reverse mortgage scheme to reflect Reserve Bank interest rates in the face of "gouging" claims from retirees.

https://www.abc.net.au/news/2019-10-24/reverse-mortgage-gouging/11634684?section=business

if the govt scheme drops rates due to political pressure hgh probably be forced to match or they run the risk of losing business

[percy]

this might not be good for heartland

Treasurer Josh Frydenberg to review Pensions Loan Scheme interest rate after 'gouging' allegations
Treasurer Josh Frydenberg will review the Government's reverse mortgage scheme to reflect Reserve Bank interest rates in the face of "gouging" claims from retirees.

https://www.abc.net.au/news/2019-10-24/reverse-mortgage-gouging/11634684?section=business

if the govt scheme drops rates due to political pressure hgh probably be forced to match or they run the risk of losing business

Not so.
HGH's REL is not a pension top up.

[Beagle]

https://www.heartland.co.nz/savings-and-deposits/interest-rates#term-deposits-interest-rates
Gross yield on shares 9% at $1.62 assuming 10.5 cps fully imputed dividends for FY20. Important to invest on the right side of the ledger.

[percy]

https://www.heartland.co.nz/savings-and-deposits/interest-rates#term-deposits-interest-rates
Gross yield on shares 9% at $1.62 assuming 10.5 cps fully imputed dividends for FY20. Important to invest on the right side of the ledger.

"Better to own the bank, than have money in the bank."

[value_investor]

"Better to own the bank, than have money in the bank."

A little bit annoyed I didn't follow my gut and back the truck up when this hit $1.30 earlier this year like I had intended. Haven't owned a bank stock so would be good to get someones opinion on what would happen to a small bank in a recession.

[percy]

A little bit annoyed I didn't follow my gut and back the truck up when this hit $1.30 earlier this year like I had intended. Haven't owned a bank stock so would be good to get someones opinion on what would happen to a small bank in a recession.

Strong spread of lending and funding.
Fast growing Reverse Equity Lending helps reduce risks, as does better quality motor vehicle lending,together with generally shorter lending terms.ie seasonal and livestock rural lending rather than rural mortgages.
Equity ratio is very close to The Reserve Bank of NZ's new proposed level.

[Beagle]

Had a quick look at the comparative group I follow in Australia.
BEN, BOQ, NAB, ANZ, WBC and ANZ. Many of these banks have issues arising from the Australian banking enquiry and are inadequately capitalised for the pending RBNZ capital requirements.
HGH are much better capitalised, do not face any issues arising from said review, are growing faster and yet has a lower forward 2020 PE at 11.9 than any of them and is significantly cheaper than some. Forward PE of 11.9 is right toward the bottom end of its range in recent years of 11.0 - 17.0 and yet we have the lowest interest rates in 100 years which implies another 1 or 2 PE above the medium should apply.

My sense is HGH has been languishing below fair value pending clarification of the RBNZ's capital requirements which if I recall correctly are due to be announced some time next month ? Maybe there is some worry some of the Australian banks will list their NZ subsidiaries here ?

[Bobdn]

A little bit annoyed I didn't follow my gut and back the truck up when this hit $1.30 earlier this year like I had intended. Haven't owned a bank stock so would be good to get someones opinion on what would happen to a small bank in a recession.

I don't think banks do well in a recession. The slightest sniff of trouble and the share price plummets, at least that's what happened last time. I guess no two recessions are the same and the last crisis was all about banks and liquidy. Still, I'm guessing that when a recession comes, banks will do a lot worse than other assets like dividend paying utilities for example.

I still hold HGH and some Australian banks directly for a grand total of 4% of my total financial assets. For me that's enough just at this stage.

HGH has been close to dead money over the last 12 months.

I very much enjoyed this presentation by David Rosenberg about how to be positioned during a recession and what gets hit and what does ok. You can cut straight to the 21 minute mark for the punchline but its worth watching the whole thing.

https://www.youtube.com/watch?v=afgvcwp__DY

Just for balance, I should also add that this excellent presentation, from Josh Brown, who you sometimes see on CNBC, which notes that more money is lost in trying to prepare for a recession than is actually lost in a recession. So that's why I still hold banks and some big cap miners directly and even drip feed into the Smartshares S&P US Growth Fund every week. It feels dirty and uncomfortable but this circus could still last for years so who knows. For the most part however, I'm going the David Rosenberg way.

https://www.youtube.com/watch?v=IQqw1S2U1yM

[Beagle]

It has underperformed the NZX50 index by about 10% over the last year. Lot of value in the company at the current price and the gross yield is 8.5% - 9.0% depending upon one's assumptions of either 10 cps in annual fully imputed dividends or 10.5 cps. Interesting for medium term holders to note that the average analyst view is for 11 cps in fully imputed dividends in FY21 which put them on a gross prospective forward yield of 11 / 0.72 = 15.28 / 162 = 9.4%.

We might find out how safe and sustainable the utility yields are if Rio pulls the pin. Nothing is risk free and I believe Rio's announcement this week effectively blindsided the market and the gentailiers are in the process of being repriced after enjoying an exceptional run. My view is people have been busy preparing for a pending recession for most of 2019 and many REIT's and utility companies are priced like one is highly likely in 2020.

What if it doesn't happen, the US and China agree to some form of trade deal and its risk on and growth again ? Perhaps an overlooked and cheap stock like HGH enjoys a very good run in 2020 ? $1.90 - $2.00 a year from now not out of the question and would represent a PE of about 13.5 - 14.0 times FY21's forecast eps which is the middle of the PE range over the last 5 years or so.

[winner69]

Once HGH breaks through 170 it’ll be over 200 before we realise what’s happened

Then the smart ones can think about selling again

[Beagle]

Did get overcooked on a forward PE of about 17.5 a few years back at the peak when it was $2.14.
17.5 times FY21's prospective earnings would see it at $2.45. Don't think its going that high anytime soon.
I don't think $2.00 is going to be overcooked this time round.

[winner69]

A 10.5 cent divie on earnings of 12.8 seems OK

At 2 bucks that’s still a awesome 7.3% gross yield ....better owning the bank than putting money in the bank eh, esp when interest rates are at 100 year lows

[Beagle]

My sense is after a poor 2019, 2020 could be a "jack-a-box" 30-50% total shareholder return year for HGH.
Don't think anyone would have picked MEL to be up over 60% in the last year inclusive of dividends, (about 80% TSR if you take a reference point from a week ago before Rio went feral). Its been a wonderful performer but that's history now and all the risk appears to be to the downside. Got to find what's next, that's going to do a MEL. :)

[winner69]

Things building up nicely for NZ Cup Day at Addington. Looks like the All Stars team will again be dominant in NZ’s biggest race.

Exciting times

And on same day Jeff will say Heartland heading to $80m profit for the year ....before many will shoot off to Addington

[Beagle]

No sure thing at Addington mate...but HGH on the other hand...

[BlackPeter]

AGM in 2 weeks (November 12th, 10 am, Chateau on the Park) in Christchurch.

I don't see currently a lot of controversial issues, but plan to attend. If you can't make it yourself but have a burning question for board or management - let me know, happy to ask ...

[Beagle]

AGM in 2 weeks (November 12th, 10 am, Chateau on the Park) in Christchurch.

I don't see currently a lot of controversial issues, but plan to attend. If you can't make it yourself but have a burning question for board or management - let me know, happy to ask ...

I have some but we better not go there as the PC police would be all over me. I'll send my questions by PM to you.

[winner69]

AGM in 2 weeks (November 12th, 10 am, Chateau on the Park) in Christchurch.

I don't see currently a lot of controversial issues, but plan to attend. If you can't make it yourself but have a burning question for board or management - let me know, happy to ask ...

Could ask them whose going to win the NZ Trotting Cup being held later in the day just of the road.

[BlackPeter]

Could ask them whose going to win the NZ Trotting Cup being held later in the day just of the road.

I could, but they might deem this question as irrelevant for the HGH AGM ...

[winner69]

I could, but they might deem this question as irrelevant for the HGH AGM ...

Like they’ll deem Beagles questions irrelevant

Anyway can submit his questions in writing

Shareholder questions prior to the annual meeting

Shareholders present at the annual meeting will have the opportunity to ask questions during the meeting. If you cannot attend the annual meeting but would like to ask a question, you can submit a question by emailing shareholders@heartland.co.nz. Shareholder questions will need to be submittedby 5 November 2019.

Questions should relate to matters being addressed at the annual meeting.

[winner69]

And if Beagle really PC he’ll be asking in Te Reo

[RTM]

I have some but we better not go there as the PC police would be all over me. I'll send my questions by PM to you.

Was good to hear Hosking this morning say "just hire the best person for the job, irrespective of sex, race, age etc"
Not his exact words.

[Beagle]

Was good to hear Hosking this morning say "just hire the best person for the job, irrespective of sex, race, age etc"
Not his exact words.

He's like a breath of fresh air sometimes !

[Brain]

Was good to hear Hosking this morning say "just hire the best person for the job, irrespective of sex, race, age etc"
Not his exact words.

There was a time when common sense was just that - common. Now a days it seems to be extraordinary.

[BlackPeter]

There was a time when common sense was just that - common. Now a days it seems to be extraordinary.

I would agree with your second statement, but am not so sure about your first ;);

[Beagle]

In an annual report (to shareholders I might add) of over 40 pages you know the culture is very strange when the financial review is confined to just 2 pages right down the back of the report like its some inconsequential matter. I think there's some overpaid executives with not enough to do other than to ram all things PC down everyone's throat. Its refreshing to read other annual reports and realise that other companies have a VASTLY more balanced, rational and objective view towards what it means to be inclusive.

[RTM]

In an annual report (to shareholders I might add) of over 40 pages you know the culture is very strange when the financial review is confined to just 2 pages right down the back of the report like its some inconsequential matter. I think there's some overpaid executives with not enough to do other than to ram all things PC down everyone's throat.

You just couldn't hold back...could you ? I think I commented at the time that it read like a social welfare report...or something like that. Agreed.

[Beagle]

Okay, I'll get off my soapbox now..its not good for my blood pressure anyway lol

[davflaws]

Okay, I'll get off my soapbox now..its not good for my blood pressure anyway lol

You need to get out wide mate. I prescribe a day on the water.

[Brain]

I would agree with your second statement, but am not so sure about your first ;);

Yes I agree that does need to be rephrased.

[Beagle]

You need to get out wide mate. I prescribe a day on the water.

Just one day ? Skim read HLG's annual report released today. It was like a breath of fresh air and feeling much better now.
HGH gets noticeably worse every year so next year's one is going straight in the bin after I have skim read the financial results.

[percy]

Save the environment,read it online.

[couta1]

Just one day ? Skim read HLG's annual report released today. It was like a breath of fresh air and feeling much better now.
HGH gets noticeably worse every year so next year's one is going straight in the bin after I have skim read the financial results. Yeah well the one report is as PC as it comes and the other one is shall we say sticking with the basics. Lol

[Beagle]

Save the environment,read it online.
Good idea as all I want to read is the financial results.

[Snow Leopard]

In an annual report (to shareholders I might add) of over 40 pages you know the culture is very strange when the financial review is confined to just 2 pages right down the back of the report like its some inconsequential matter. I think there's some overpaid executives with not enough to do other than to ram all things PC down everyone's throat. Its refreshing to read other annual reports and realise that other companies have a VASTLY more balanced, rational and objective view towards what it means to be inclusive.

Heartland are one amongst several companies who split their annual reporting into 2 parts these days.

The Financials (http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/341843/308801.pdf) come in a 82 page package for Snoopy to misinterpret

and

the Review (http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/341843/308781.pdf) covers 48 page and is especially designed to give the likes of Beagle something to whinge about.

[Beagle]

Dog's bark, its in their nature :p

[Snoopy]

Heartland are one amongst several companies who split their annual reporting into 2 parts these days.

The Financials (http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/341843/308801.pdf) come in a 82 page package for Snoopy to misinterpret

and

the Review (http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/341843/308781.pdf) covers 48 page and is especially designed to give the likes of Beagle something to whinge about.

Hey not fair or balanced Snow Leopard! I can assure you I am equally adept at misinterpreting the 'Annual Review' as well :-P

SNOOPY

[percy]

Agreed.................................lol.

[winner69]

WOW ...good stuff

Kia Konfidence has a nice ring to it


http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/343777/311205.pdf

[percy]

WOW ...good stuff

Kia Konfidence has a nice ring to it


http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/343777/311205.pdf

Yes,positive.

[justakiwi]

It does but I wish they would drop the “K” and spell it the correct way. It wouldn’t change the impact or the “nice ring” but it would seem a heck of a lot more professional. I don’t understand why marketing companies feel the need to come up with gimmicky spelling.


WOW ...good stuff

Kia Konfidence has a nice ring to it


http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/343777/311205.pdf

[Beagle]

They're into it with Holden too with Holden financial services, a division of, you guessed it, Heartland. https://www.heartland.co.nz/docs/holden/Holden_Consumer_SmartBuy_Agreement.pdf?63708543505 7238592

[Balance]

It does but I wish they would drop the “K” and spell it the correct way. It wouldn’t change the impact or the “nice ring” but it would seem a heck of a lot more professional. I don’t understand why marketing companies feel the need to come up with gimmicky spelling.

Many New Zealanders thought 'Zespri' was gimmicky and an insult to marketing when the Kiwifruit industry relaunched itself.

It's now one of the most valuable brand in NZ and the world.

[percy]

They're into it with Holden too with Holden financial services, a division of, you guessed it, Heartland. https://www.heartland.co.nz/docs/holden/Holden_Consumer_SmartBuy_Agreement.pdf?63708543505 7238592

Also with Jaguar/LandRover.
They like new car dealers,even for their second hand cars.

[justakiwi]

Yes but that’s completely different. “Zespri” isn’t a real word - they created it.
“Confidence” is a real word and “Kia Confidence” would work just as well (better actually) in my opinion. Spelling it correctly doesn’t change the sentiment at all.


Many New Zealanders thought 'Zespri' was gimmicky and an insult to marketing when the Kiwifruit industry relaunched itself.

It's now one of the most valuable brand in NZ and the world.

[Snow Leopard]

Yes but that’s completely different. “Zespri” isn’t a real word - they created it.
“Confidence” is a real word and “Kia Confidence” would work just as well (better actually) in my opinion. Spelling it correctly doesn’t change the sentiment at all.

English uses the letter 'c' in a completely illogical way.
soft 'c' which would be better spelt with an 's' and hard 'c' which would be better spelt with a 'k'.

You only need a 'c' for words like church where the 'h' is then redundant.

And why, oh why, oh why must a 'q' be followed by 'u'?

Why does a 'g' appear where it is a 'j' sound so often?

Cough, though, thorough, same four letter ending but different sounds!

The ENGLISH KAN NOT SPELL !

As a shareholder in Heartland Bank and a supporter of the Kia Tigers baseball team, if this makes money they can spell it how they want as far as I am konserned.

[kiwico]

Hence "ghoti" is pronounced "fish".....

"gh" as in rough, "o" as in women and "ti" as in station.

[Beagle]

Fo-nettical spelling ov wordz iz kool. Nuff said. Is it any wonder kids find the English language difficult to learn, for example there's so many different ways to spell a simple word like paw. (poor, pour, pore).

Enny way...(sorry couldn't resist, back to normal spelling now), I hope HGH are pretty conservative with their residual value assumptions on European vehicles and / or are not wearing the risk of the residual guaranteed future value. Its hard enough to predict such things on value brands like Kia and Holden and near impossible with Eurpoean vehicles unless of course you use the value of 0 after 4 years (which won't in my experience be all that far from the truth) :)

[winner69]

Dairy prices up overnight

Heartland day at the races next Tuesday and good news of course (even if it’s just warm fuzzy stuff)

All looking good for share price in lead up to Xmas


they should’ve just hired a room at Addington for the ASM - logistically more efficient

[Beagle]

Dairy prices and HGH share price inextricably linked eh mate :)

[winner69]

Time to find a big screen

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/343993/311467.pdf

Look forward to -

1) the response to Beagles written question
2) the embarrassed look of the the Directors when a shareholder thanks them for being Awesome

[Beagle]

No point barking into a typhoon.

[Snoopy]

Time to find a big screen

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/343993/311467.pdf

Look forward to -

1) the response to Beagles written question
2) the embarrassed look of the the Directors when a shareholder thanks them for being Awesome


Well, I will be looking for an encouraging outlook from our great leader, the one I have pre-knighted as 'Sir Jeffrey Greenslade' (because all the heads of banks end up with that title anyway).

Many years into the future, when the history of this great country is rewritten, and when the stories of great New Zealanders of the past are retold, I expect one light that will shine brighter than most will be 'Sir Jeffrey'. There have been many New Zealanders who have taken on the world and won, but the first to stand at the top of the world - literally- was Sir Edmund Hillary.

No one can take away the achievements of Sir Ed. But greater than his ascent of Everest, was what he achieved for the Nepalese people. In particular there was the building of schools and hospitals, bringing standards of education and healthcare that otherwise were absent in this mountain country, which, up until then, had been seen as a playground for western adventurers. Yet underlying these achievements there were constant rumours of violence, not quelled by Sir Ed himself, when he hinted that on the way to the top he had "knocked some b*stard off".

Sir Jeffrey is not a mountaineer in the conventional sense. But there is no doubt he has helped hundreds of New Zealanders 'conquer their own Everests' by lending them money at critical stages while they developed their business ideas.

So when the Everest tally is done to enter the 'great gig in the sky', it will read 'Sir Jeffrey' - 'many' and Sir Ed 'one'. At the risk of Sir Ed choking on his Nepalese hot pot in the sky, there is no doubt whose contribution will be remembered as greater: Sir Jeffrey the multiple mountaineer, a modern hero who achieved without the violence of past eras.

Sir Jeffrey I salute you and look forward to your address on Tuesday. But in the meantime just keep on running Heartland the way you are doing it now: O.K?

SNOOPY

...whose real appreciation of Sir Jeffrey's achievements has only become clear since I have been a Heartland Group Holdings shareholder!

[percy]

I never cease to wonder how you continue to get things wrong on this thread.
Wrong Jeff/Geoff.!
Be years away before Jeffery receives his knighthood,however Chairman Geoffrey's should not be too far away...lol.

[winner69]

Behind every great man is a woman or two

A few years ago Jeff was pretty awesome but he’s he’s got even more awesome since Ellie and Vanessa came on board to support him....to give him added inspiration and guide him through the path from being just awesome to even more awesome.

[percy]

Behind every great man is a woman or two

A few years ago Jeff was pretty awesome but he’s he’s got even more awesome since Ellie and Vanessa came on board to support him....to give him added inspiration and guide him through the path from being just awesome to even more awesome.

You may well think that,however the biggest influence has been noticeable since Gregg Tomlinson joined the board.

[Beagle]

Interesting that both the Beagle's are shareholders but I think talk of tribute's is more than a little OTT since real eps growth in the last 2 years has been pretty muted.
I have noted many of the other Australian banks recently reporting have increased their provisioning for dairy farmers. This and the interesting culture I have previously commented on several times as well as the pending RBNZ capital requirements keeps my enthusiasm in check. I accordingly have a moderate sized holding that I am disinclined towards increasing and my rating is Hold.

[percy]

With their agm on Tuesday, I will leave making any comments to after the agm,as HGH have a history of giving clear projections of where they see the year ahead, at these meetings.

[winner69]

With their agm on Tuesday, I will leave making any comments to after the agm,as HGH have a history of giving clear projections of where they see the year ahead, at these meetings.

You know Earnings to be around $80m and would be higher if they didn’t spend more on growing the loan book.

I can feel the excitement mounting already

Hope Geoff is all bright eyed and bushy tailed so early in the day ...if not he’d make me even more restless than usual

[Beagle]

I'll leave it to others to enjoy their long Te Reo lesson by attending or watching the annual meeting online commencing at 10.00 a.m this morning.
I will skip to the outlook section of the shortly to be released meeting narrative...hopefully that's in a language I can understand.

[winner69]

I'll leave it to others to enjoy their long Te Reo lesson by attending or watching the annual meeting online commencing at 10.00 a.m this morning.
I will skip to the outlook section of the shortly to be released meeting narrative...hopefully that's in a language I can understand.

No moving pictures ...been short changed

[Beagle]

No change in forecast... YAWN. Can't be bothered reading through the rest of it but did note that they are trying to boost return on equity so that's good.
One other point noted in my super brief skim read.... $617,000 on social welfare payments...hmmmmm

[winner69]

No change in forecast... YAWN. Can't be bothered reading through the rest of it but did note that they are trying to boost return on equity so that's good.
One other point noted in my super brief skim read.... $617,000 on social welfare payments...hmmmmm

To be fair that Heartland Trust has been around for a while and is a shareholder in HGH

More value than sponsoring racing cars I reckon

[winner69]

A 10 am start not for Geoff ...or his always this boring

[Beagle]

To be fair that Heartland Trust has been around for a while and is a shareholder in HGH

More value than sponsoring racing cars I reckon

Agree 100%. A lot of money gets wasted by young men in cars engaged in contests to prove their prowess.
Geoff pretty keen to talk up the size of the market opportunity in Australia isn't he. Makes you wonder if he's been reading my comments on Glassons :)

[RTM]

A 10 am start not for Geoff ...or his always this boring

I guess banking is a pretty boring business....unlike drilling for oil or gas. Or building a new port.
And the more boring they keep it...the better I like it !

[winner69]

Slightly disappointed they didn’t announce that Heartland Bank wasn’t being renamed Bank of Aotearoa

Would still fit well with HEARTLAND GROUP

[winner69]

Jeff gave a good talk on digital, CX and UX and things

If you haven’t already shouted yourself a mobile phone now could be a good time to start finding out how these things work.

[winner69]

All other in just over an hour ...quick chat to annoying shareholders and then off to thevreal business of the day

Geoff did mention ‘horses for courses’ so that’s a hint.

[Beagle]

Overdue for a peer group comparison. I think we all know the Australian banks are grappling with issues and don't need to regurgitate all of them.
FY20 forwards PE's
BEN 13.9 Comment a no growth bank with eps in FY17 and FY18 higher than either the forecast for FY20 or FY21 !
BOQ 12.7 - Comment - same as above
ANZ 12.2 Comment - Crikey do they have issues on both sides of the Tasman or what !...which probably explains their low PE
NAB 13.4
WBC 13.1
CBA 16.2
Australian sector average 13.6

How does HGH compare. Has been growing eps steadily but somewhat frustratingly more slowly in recent years. Mid point of FY20 forecast is 78.5m which gives forcast eps of 13.59 cos and a forward FY20 PE of just 12.2.

I think their generally better track record of eps growth, better capital ratio and better earnings prospects should accord them a PE at least the same as the sector average in Australia, 13.6 which could see a rerating to 13.6 x 13.59 = $1.85 in early 2020.

Gross yield assuming 10.5 cos in fully imputed annual dividends for FY20 is 10.5 / 0.72 = 14.583 / 166 = 8.8%.

I think eps growth in FY21 will be stronger than FY20. Disc 5.3% portfolio allocation.

[percy]

Another very positive agm .
Interesting to learn from HBL CEO, Chris Flood, after the meeting,how big, and how fast Kia NZ is growing.
REL's in Australia were 100% originated by brokers.Now down to 70% and expected to fall further as more people deal direct with HGH.
HGH/HBL are currently trading well.
Also positive is HGH's capacity to "adjust" HBL's equity ratio "at will" to suit The Reserve Bank of NZ's capital requirements.

[Beagle]

Thanks for your feedback Percy. yes Kia as a value brand is growing very strongly in N.Z. See above PE comparison.
Where do you see a fair forward PE for HGH ? (Range has been 11-17.5 in recent years)

[percy]

The Australian "Big Four" Banks remain pillars of the Australasian economy,and therefore have a greater acceptance from investors.
A friend of mine has had Westpac for years,and has decided to go out of his way to find funds for their capital raising.I am sure ANZ,and NAB will have the same support from their shareholders too.
This means the Australian Banks will trade at a higher PE ratio than small NZ Bank Group HGH.
So if you can buy HGH on the same sort of PE ratio as The Australian Banks,you can be assured you are finding excellent value.
I think a lot of retired investors are more interested in HGH's high fully imputed dividend.Earnings growth means HGH will be able to keep paying them,and will have the capacity to increase them.
Thinking years ahead,the huge growth HGH are achieving in Australia, may mean HGH will not be able to pay 100% fully imputed divies,however this will be off set by big increases in their SP.Australian investors will drive it looking for franking credits.

[Beagle]

Thanks Percy. My observations over the years are that at times HGH has traded on metrics materially above the Aussie banks. That marks it out as reduce / sell. When its materially below like it is now I think its accumulate / buy. Only HGH gives full imputation credits. Once RBNZ clarifies their capital requirements I think that unless there is something in there that's commercially untenable this is due for a 10-15% jump. If I'm wrong and it stays where it is for the next year and we just get an 8.8% gross dividend yield that's not too harsh to endure is it :)

[Snoopy]

A 10 am start not for Geoff ...or is he always this boring


Nothing wrong with a banker being boring. In fact if you wanted to unseat Geoff from the board, your best chance would be to put up a candidate against him who is even more boring, and that would probably be a good thing! At least *I* was excited, getting to attend my first Heartland AGM. And for those of you who want the real oil, I won't keep you hanging until the report end. The club sammies, freshly baked scones and fruit sticks tasted really good.

I won't go over the actual results, all those graphs and things. You shareholders all know what the forecasts are. I could probably save the Heartland presentation team quite a bit of money by drawing up next years presentation slides right now. A simple linear extrapolation from this years slides should do it.

Jeff put in a good effort answering shareholders written questions, which were intelligently formulated. Australia was a big theme from the shareholder quizzers. The tide of baby boomers retiring is too hard to resist as a business opportunity. Jeff announced that Heartland's securitization facility was now up to a potential total of $1.05billion, which is quite a lift from the $650m maximum headroom at balance date. We were told the board just yesterday on top of this approved the issue of another $A100m of Aussie wholesale bonds, bringing potential funding from that source up to a total of $A150m. Plenty of capital available in the meantime for Australia, but will it last?

One shareholder noted that the Commonwealth Bank of Australia, a big funder of reverse mortgages in Australia stopped writing any new business at the start of 2019. (Following the exit from the reverse mortgage market by MacQuarie Bank and Westpac in 2017, this means there are no big Aussie player left doing reverse mortgages.) So how could Heartland be supported doing reverse mortgages as a customer going forwards, when their supporting bank, that underwrote most of the securitization, had pulled the plug on their own reverse mortgage product? Jeff replied that the regulatory requirements for Reverse Mortgages had tightened in Australia and it was no longer realistic for the big banks to have Reverse Mortgages as an 'add on' product at the branches. Heartland's more focussed approach of having reverse mortgage specialists at a call centre who only dealt with reverse mortgages and knew all the legal boxes to tick was the way forwards. He also added when prompted that the new wholesale securitized banking arrangements in Australia at Seniors Finance were CBA (as before) , Westpac and ME Bank (a branch-less digital bank owned by 26 of Australia's superannuation funds).

There was a question from the floor on climate change and whether fires, floods and the ocean re-grabbing the coastline could 'claim back' any of the equity that was underwriting the Reverse Mortgage loans. Jeff replied that all properties that had reverse mortgages taken out against them were require to be insured. He added that when writing Reverse Mortgages, they had largely stuck to the bigger cities in New South Wales, Victoria and South Queensland which had higher capital growth and didn't have the rural fire risk or coastal erosion risk.

There were questions from shareholders on the sub par return on equity (11.1% over FY2019) when compared with a benchmark return for Aussie listed banks of 11% to 15%. Jeff noted that excluding one offs the ROE for FY2019 was 11.7% and underlying ROE was up to 12.2% for the second half. Jeff said that one way to raise this ROE figure was to have a 'just in time' capital raising, as opposed to the old system of raising capital in one lump, then having to wait months or even years before it was fully deployed. Jeff said the new group structure allowed 'just in time capital raising' to happen. I am not sure I fully understand this comment. As Heartland Group Holdings shareholders, we still have to hold onto the capital until the subsidiary we call 'Heartland Bank' needs it. So although the ROE at Heartland Bank goes up, the ROE at Heartland Group Holdings, the compnay we hold shares in, does not under that scenario. Perhaps another shareholder who was there at he AGM can better interpret what Jeff said that I did?

Next Jeff produced an an ROE bar graph showing ROE on the different classes of loans. This showed car loans had by far the greatest return on equity. A question from the floor revealed that the delinquency rate for these loans was just 70 basis points or 0,7%. That low figure is probably explained by the fact that most of these loans were to new car buyers (JLR, Holden and Kia in particular). However there were no plans to extend this business category of loan into Australia. Jeff made a perhaps telling remark that car loans in Australia are 'different'.

Big Geoff pronounced Heartland well placed to meet any further Reserve Bank capital adequacy moves. Heartland already have a capital to loan ratio of 13.5% on the books. And the rumoured 15% requirement that may or may not be confirmed by the Reserve Bank in December would not be too difficult a stretch task to meet. A shareholder asked what the prospects were for 'credit upgrade'. Jeff said he was happy with the BBB rating they had and that there was no firm path to follow, as laid out by the rating agencies, to go to BBB+. He thought the best way to do this, comparing Heartland with financial institutions with higher ratings would probably be to just get bigger!

A shareholder complained that they had to go to Westpac to get out and deposit cash. Jeff explained that Heartland did not have the scale to process cash transactions at their own branches. He said that cash handling had been outsourced and that Heartland current account holders were actually now customers of Westpac. These Heartland cash accounts even had Westpac account codes!

Jeff's big push for the future will be in the digital space. In Heartland terms 'digital' is not about devices, even though millenials aged 17 to 36 now largely regard mobile devices as their sole tool with which to transact. Even Internet banking is old school' for this group. Digital in Heartland terms means being flexible.and it means being fast. This is where Heartland has an advantage. Their leaner meaner structure makes it easier for them to adapt. Today's big thing is tomorrow's old thing. Heartland must keep moving forwards. In this regard don't be surprised if Jeff is not at the lectern at AGM2020. What you will be seeing is a real world manifestation of the quantum theory based Heisenberg Uncertainty Principle. Just when you have located Jeff blink and he will suddenly vanish, having moved on to the next project.


SNOOPY

[Beagle]

Good write up Snoopy, thanks mate.

[peat]

In this regard don't be surprised if Jeff is not at the lectern at AGM2020. What you will be seeing is a real world manifestation of the quantum theory based Heisenberg Uncertainty Principle. Just when you have located Jeff blink and he will suddenly vanish, having moved on to the next project.


SNOOPY
Yes thanks Snoops
That sure is a trippy ending to the story.

[BlackPeter]

Oustanding notes from Snoopy! Cheers ... saves me the job to try and decipher my handwritten notes ;);



...

There were questions from shareholders on the sub par return on equity (11.1% over FY2019) when compared with a benchmark return for Aussie listed banks of 11% to 15%. Jeff noted that excluding one offs the ROE for FY2019 was 11.7% and underlying ROE was up to 12.2% for the second half. Jeff said that one way to raise this ROE figure was to have a 'just in time' capital raising, as opposed to the old system of raising capital in one lump, then having to wait months or even years before it was fully deployed. Jeff said the new group structure allowed 'just in time capital raising' to happen. I am not sure I fully understand this comment. As Heartland Group Holdings shareholders, we still have to hold onto the capital until the subsidiary we call 'Heartland Bank' needs it. So although the ROE at Heartland Bank goes up, the ROE at Heartland Group Holdings, the compnay we hold shares in, does not under that scenario. Perhaps another shareholder who was there at he AGM can better interpret what Jeff said that I did?

...
SNOOPY

Related to the funding of the Australian REL -

I thought Geoff was referring to the quite different funding model in Australia where they basically get their money by issuing capital notes to institutions and bundeling
securitisation of mortgages instead of increasing their capital by issuing shares or bonds through the stock market ...

This is something they can do quite flexible (on a monthly or even weekly schedule) and without the need to park any equity in the Heartland Group Holding.

[BlackPeter]

One thing which sort of dawned to me during this AGM is that whenever they talk about "customer" they think about quite different and non overlapping customer groups. I suppose that their typical recipient of an Australian reverse mortgage (elderly, not digitally fluent and the process will take months and requires lots of legal advise) might have quite different needs and views related to a great "digital" experience" than e.g. the typical small business loan recipient (3 minutes at the mobile phone and you have your loan) or the typical Harmoney customer - or the B to B customer they talk with when providing their car loans. This makes the job of the people defining this experience quite challenging.

[BlackPeter]

Ah yes - and one more impression from the AGM: I don't think I have ever seen an AGM with that many board members and senior managers sitting in a row (16 altogether). The fact that they did seat boys and girls alternating was probably not an accident ;); I noticed as well lots of younger faces (and not all "white"). This leadership team is clearly a great example for diversity.

If this company is at some stage not successful (which heaven might forbid - I am holding), than it certainly is not due to its lack of diversity of board and SMT.

[pierre]

Thanks Snoopy for a great report.

HGH is 17% of my portfolio so I must make a point of getting to the AGM next year - that's if Im not once again swanning around the world somewhere spending my lovely divvies.

[winner69]

Actually very good reports from you guys

Market listening ....share price on verge of getting into the 170s

[Beagle]

Actually very good reports from you guys

Market listening ....share price on verge of getting into the 170s

The more I think about it a forward FY20 PE of 12.2 is cheap and I think earnings growth is going to be stronger in FY21 and FY22 than FY20. Need to think ahead eh mate :)

[percy]

The more I think about it a forward FY20 PE of 12.2 is cheap and I think earnings growth is going to be stronger in FY21 and FY22 than FY20. Need to think ahead eh mate :)

Just spend time on page 16 of today's presentation.
Total Assets add up to 5.014 billion.
Superior assets ie ROE above 15% make up approx 28.5% of total assets.Growth rates between 13.3% and 48.2%
In line assets ie ROE between 11-15% make up approx 37.2% of total assets.Growth rates between 11.4% and 31.4%
Inferior assets ie ROE between 0 -11% make up approx 34.7% of total assets.Minus growth rates.
What this tells us is HGH are working hard to recycle inferior assets into either Superior assets, or In line assets.The amount involved is 1.740 billion.
This is where the improving ROE rate will come from.

[Snoopy]

Related to the funding of the Australian REL -

I thought Geoff was referring to the quite different funding model in Australia where they basically get their money by issuing capital notes to institutions and bundling
securitisation of mortgages instead of increasing their capital by issuing shares or bonds through the stock market ...

This is something they can do quite flexible (on a monthly or even weekly schedule) and without the need to park any equity in the Heartland Group Holding.


Thanks BP, perhaps you are right and this is what Jeff was getting at. There are a couple of issues with your theory though.

1/ The first note issue to institutions by HGH in Australia raised $A50m in FY2019. Yet if you look at the share capital raised over FY2017 (being share issues plus the dividend plan reinvestment) it came to $50.991m and for FY2018 it was $71.726m (again shares). So the quantum of the main 'capital raising' (which were notes in FY2019) was actually very similar over the last three years. Furthermore the amount of capital notes approved for FY2020 is $100m. So that means the capital raising going forwards looks to be getting more lumpy, not less lumpy.

2/ As for the securitisation of loans, the dollar ceiling has certainly gone up and Heartland are now using three different banks for securitisung their loans, not just one. But in the annual report, we are only given the current total with no idea of how big the bundles that make up the total are, or what the timetable of their collection was. It could be that Heartland will in the future be using smaller loan bundles to securitise, consistent with smaller amounts of capital being raised to support those loans. That would certainly be more 'capital efficient'. But there is no reason that Heartland could not have done this from day 1. of securitisation. There is nothing new here that could not have been done originally that would necessarily affect capital efficiency in the updated securitisation arrangements.

The objective of the exercise is to make Heartland more capital efficient in line with other comparable listed banks. But rejigging of the capital used in Australia is now outside of the 'Heartland Bank' structure. IOW the bit being rejigged is no longer included within Heartland Bank, but is being used to make the return of Heartland more 'bank like', as it lines up with other banks. It seems to me to be that this 'adjustment of equity used' outside of bank structure is a disingenuous or even a dishonest adjustment to make in that comparative context.

SNOOPY

[percy]

...............................................

[winner69]

...............................................

Agree 100% percy

[winner69]

Somebody offered you 20% pa guaranteed return forever you’d ask ‘sounds too good to be true, what’s the catch’

That’s what Heartland Group is offering

[BlackPeter]

Somebody offered you 20% pa guaranteed return forever you’d ask ‘what’s the catch’

That’s what Heartland Group is offering

So - what's the catch?

[winner69]

So - what's the catch?

Maybe because it’s too good to be true

[BlackPeter]

Maybe because it’s too good to be true

I guess the trick is to get out before the story stops to be true ;);

[percy]

Like buying any asset the skill is in the buying.
That's where the big money is made.
Those of us who brought into HGH between 60 cents and a $1, are enjoying our successful investment,and our dividend yield on purchase price is outstanding.
"Time is the friend of any good investment".In HGH's case ,time is proving a great friend.

[BlackPeter]

Like buying any asset the skill is in the buying.
That's where the big money is made.
Those of us who brought into HGH between 60 cents and a $1, are enjoying our successful investment,and our dividend yield on purchase price is outstanding.
"Time is the friend of any good investment".In HGH's case ,HGH is proving a great friend.

While it is true that well timed buying is crucial - it is only half of the story.

Buy and hold might be a valid strategy for some shares for certain time periods ... but there are not too many shares I can think about where it would have been a great strategy for ever ... and even "ever" would be only limited to the current date. Who knows what the future brings for these companies.

It is always a good idea to know when to get out as well.

Just check how many of the companies listed 25 years ago on the NZX are still around ... for all the others there would have been a good time to leave instead of waiting for their demise ;);

Didn't you own at some stage EVO - are you still holding? And one could argue that with TRA there would have been an amazing opportunity to sell well north of $3 ...

Ah well, we all make mistakes - but this is probably for a different thread - and just for clarity: I don't think that now would be a good idea to get out of HGH (though ... last year there was, even if it had at that stage still a different ticker).

[percy]

While it is true that well timed buying is crucial - it is only half of the story.

Buy and hold might be a valid strategy for some shares for certain time periods ... but there are not too many shares I can think about where it would have been a great strategy for ever ... and even "ever" would be only limited to the current date. Who knows what the future brings for these companies.

It is always a good idea to know when to get out as well.

Just check how many of the companies listed 25 years ago on the NZX are still around ... for all the others there would have been a good time to leave instead of waiting for their demise ;);

Didn't you own at some stage EVO - are you still holding? And one could argue that with TRA there would have been an amazing opportunity to sell well north of $3 ...

Ah well, we all make mistakes - but this is probably for a different thread - and just for clarity: I don't think that now would be a good idea to get out of HGH (though ... last year there was, even if it had at that stage still a different ticker).

Sell your losers,hang on and add to your winners.
Works just fine for me.

ps.Yes held EVO and MCK.No longer hold either.
pps.Even held some Mad Butcher.[for a week before I saw sense].

[Bjauck]

Sell your losers,hang on and add to your winners.
Works just fine for me. A key is also to know when the winners have suddenly become losers too - and to follow what are the company insiders are doing.

[percy]

A key is also to know when the winners have suddenly become losers too - and to follow what are the company insiders are doing.

Agreed.
If the reason you brought in no longer applies,be gone.
Yet with the big winners the "story" just keeps on getting better,as we are seeing with HGH..

[Snoopy]

Jeff put in a good effort answering shareholders written questions, which were intelligently formulated. Australia was a big theme from the shareholder quizzers. The tide of baby boomers retiring is too hard to resist as a business opportunity. Jeff announced that Heartland's securitization facility was now up to a potential total of $1.05billion, which is quite a lift from the $650m maximum headroom at balance date. We were told the board just yesterday on top of this approved the issue of another $A100m of Aussie wholesale bonds, bringing potential funding from that source up to a total of $A150m. Plenty of capital available in the meantime for Australia, but will it last?

Jeff's big push for the future will be in the digital space. Digital in Heartland terms means being flexible and fast. What you will be seeing is a real world manifestation of the quantum theory based Heisenberg Uncertainty Principle. Just when you have located Jeff, blink and he will suddenly vanish, having moved on to the next project.


https://stocknessmonster.com/announcements/hgh.nzx-344296/

I can't criticise Jeff for hanging about. On Tuesday at the AGM he announced an expansion of the $A bond program, with a proposal approved by the board to add an extra $100m. Less than 48 hours later the deal is done! I would like to shake Jeff's hand! But if I did that, I'd be fairly sure I would be left holding nothing but a glove and Jeff would have already disappeared on to his next appointment.

How does raising this new mortgage backing money in one huge lump tie in with the AGM assertion of 'just in time' financing though? Is Jeff really writing $A100m of new reverse mortgage business in Australia this week?

SNOOPY

[percy]

Just in time had a very different meaning when it was to meet The Reserve Bank of NZ requirements for Heartland Bank.Think months.
Just in time for Heartland Bank today can mean HGH top up the bank's requirements possibly overnight.........................Think hours.
Just in time for HGH to meet lenders capital requirements,may mean months or possibly years.Think plenty of time for a rights issue if needed.

ps.I thought you did shake Jeff's hand,I did not notice you losing any body parts.!

[winner69]

Overdue for a peer group comparison. I think we all know the Australian banks are grappling with issues and don't need to regurgitate all of them.
FY20 forwards PE's
BEN 13.9 Comment a no growth bank with eps in FY17 and FY18 higher than either the forecast for FY20 or FY21 !
BOQ 12.7 - Comment - same as above
ANZ 12.2 Comment - Crikey do they have issues on both sides of the Tasman or what !...which probably explains their low PE
NAB 13.4
WBC 13.1
CBA 16.2
Australian sector average 13.6

How does HGH compare. Has been growing eps steadily but somewhat frustratingly more slowly in recent years. Mid point of FY20 forecast is 78.5m which gives forcast eps of 13.59 cos and a forward FY20 PE of just 12.2.

I think their generally better track record of eps growth, better capital ratio and better earnings prospects should accord them a PE at least the same as the sector average in Australia, 13.6 which could see a rerating to 13.6 x 13.59 = $1.85 in early 2020.

Gross yield assuming 10.5 cos in fully imputed annual dividends for FY20 is 10.5 / 0.72 = 14.583 / 166 = 8.8%.

I think eps growth in FY21 will be stronger than FY20. Disc 5.3% portfolio allocation.

From Airedale on another thread. If this guy that his Aussie banks overvalued by 16% then maybe HGH is priced about ...or only slightly over valued




Further thoughts: Colin Twiggs estimates that the major Australian banks are over on average over valued by 16.5%. Taking Friday's closing SP of Au $26.63 minus 16.5% =Au $ 26.19. That indicates that the SPP price of Au$ 25.32 is at $0.87 discount to fair value.

[Beagle]

From Airedale on another thread. If this guy that his Aussie banks overvalued by 16% then maybe HGH is priced about ...or only slightly over valued

I'll just reiterate from my experience that in the last 5 years HGH has traded in a forward PE range of 11 - 17.5, average 14.25 and is presently 12.2. Funny how things usually revert to the mean isn't it which indicates 14.25 / 12.2 HGH is presently ~ 17% undervalued. $1.67 x 1.17 = $1.95 as a perfectly reasonable price target for late 2020.

[Snoopy]

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 )

8.8c / (0.72 x 0.075) = $1.63

A reminder here that NTA was

($675.668m - $72.679m) / 569.338m = $1.06 cps

at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+54%) to net tangible asset value.

This $1.63 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 $1.30 to $1.96. $1.59, where the share is trading today, looks a few cents below fair value. My target accumulation price (10% below fair value) is now $1.47.




I'll just reiterate from my experience that in the last 5 years HGH has traded in a forward PE range of 11 - 17.5, average 14.25 and is presently 12.2. Funny how things usually revert to the mean isn't it which indicates 14.25 / 12.2 HGH is presently ~ 17% undervalued. $1.67 x 1.17 = $1.95 as a perfectly reasonable price target for late 2020.


1/ New car market slowing (the biggest cash cow for Heartland).
2/ Timing mismatch between duration of typical reverse mortgages (7-8 years) and capital borrowed to fund those mortgages (Seniors debt facility to expire in under two years).
3/ Reserve bank set to raise capital requirement for Heartland Group Holdings subsidiary 'Heartland Bank. Heartland may be less affected that other banks by this but it will still be affected.
4/ Prospect of the next recession ( how long can Adrian Orr hold it off?) hitting second tier finance companies hard.

These four observations strike me as significant negative factors that mean potential shareholders should think long and hard about increasing their exposure at Heartland at today's lofty market prices ( $1.67 ). I am not saying the share price won't go higher in the short or long term. I just think HGH (not a bank remember, because Heartland management don't want Reserve Bank scrutiny of Heartland's Australian operations) is trading a little above fair value right now.

After attending the AGM, I see no reason to revise my $1.63 fair valuation.

SNOOPY

[winner69]

I'll just reiterate from my experience that in the last 5 years HGH has traded in a forward PE range of 11 - 17.5, average 14.25 and is presently 12.2. Funny how things usually revert to the mean isn't it which indicates 14.25 / 12.2 HGH is presently ~ 17% undervalued. $1.67 x 1.17 = $1.95 as a perfectly reasonable price target for late 2020.

Just as well you have that 17.2 in your calcs ...but you know full well that really is an outlier ...only got that high on the outrageous share price of 214 when you sold out. Well done on that

ASB Report has the PE at announcement dates for the last five years as 11.3 (in 2015), 10.3, 14.4, 12.3 and 11.3 (2019). Average last five years PE being 11.9 and that includes the impact of that period of outrageous exhuberance.

Those are trailing EPS but let’s assume that in 2020 EPS is your 13.6 cents then a share price of $1.63 seems about it ...isn’t it amazing how things seem to revert to Snoopy’s numbers


So current $1.67 is a bloody good price

[Beagle]

Difficult to argue with that logic and I accept your numbers to a point. With interest rates at 100 year lows you could argue the risk free rate is 2% lower than normal so a 2 higher PE than normal is acceptable so I raise your average PE of 11.9 to 13.9 and on 13.6 cents you could make the case that $1.89 is fair and reasonable.

In support of my thesis is a peer group comparison at present showing Australian banks at an average of 13.6. and don't forget HGH is growing eps not shrinking or flatlining like most of its peers. Further, HGH faces none of the issues the Aussie banks do from the Royal commission of enquiry into Australian banking and appears through its DRIP to be in good shape to meet proposed RBNZ capital requirements, unless they come out with something truly radical.

Before you roll out the ol Aussie banks have always traded at higher PE's that's not the case either and neither is it presently the case for that old chestnut of PE's comparisons of QAN v AIR. I don't think HGH is a screaming buy, far from it, but accumulating on any weakness for those that don't already have their desired portfolio weighting looks logical.

[percy]

Another very positive agm .

HGH/HBL are currently trading well.
Also positive is HGH's capacity to "adjust" HBL's equity ratio "at will" to suit The Reserve Bank of NZ's capital requirements.

Posters should note the "at will" in the above statement.

[Beagle]

Added more of these yesterday at $1.68. 6.4% position now. My granddaughter sung me happy birthday in Te Reo on the weekend. I took that as a sign to try and be more tolerant of all this politically correct stuff and buy more :D

[janner]

Added more of these yesterday at $1.68. 6.4% position now. My granddaughter sung me happy birthday in Te Reo on the weekend. I took that as a sign to try and be more tolerant of all this politically correct stuff and buy more :D


percy and I have been so tolerant... Buy and hold.. Tell us ( just me ) we have been wrong,

[winner69]

Global Dairy Prices up again overnight

Generally a positive for the Heartland share price bearing in mind the relationship between the two.

Good value here - whatever that means

[RTM]

Added more of these yesterday at $1.68. 6.4% position now. My granddaughter sung me happy birthday in Te Reo on the weekend. I took that as a sign to try and be more tolerant of all this politically correct stuff and buy more :D

Care Beagle...you know what happens when you go over 5% !

[horus1]

I have been adding at 1.65 or so . Think they are worth 1.75

[Beagle]

Care Beagle...you know what happens when you go over 5% !

LOL, my granddaughter said it was okay so I'm all good :)

[winner69]

LOL, my granddaughter said it was okay so I'm all good :)

Might even get a close above 170 today ....that’ll be good

[Joshuatree]

Added more of these yesterday at $1.68. 6.4% position now. My granddaughter sung me happy birthday in Te Reo on the weekend. I took that as a sign to try and be more tolerant of all this politically correct stuff and buy more :D

Good on ya mate.

[davflaws]

LOL, my granddaughter said it was okay so I'm all good :)

Kapai!!!!!

[Beagle]

Percy, you're pretty tight with the top brass at Heartland. Perhaps you wouldn't mind asking who wears the risk if the Jaguar is not worth $82,000 in 3 years time and the previous owner simply walks away at the end of the finance term ? https://archibaldandshorter.co.nz/i-pace-gfv/?utm_source=NZME&utm_medium=CPM&utm_campaign=I-PACE_GFV

[percy]

It is another Jaguar sales promotion.
So the answer is Jaguar.


ps.Should you note. in 3 years time, a fleet of Jaguars outside HGH's headquarters, you will know I was wrong.!.lol.

[CROESUS U.T.]

ps.Should you note. in 3 years time, a fleet of Jaguars outside HGH's headquarters, you will know I was wrong.!.lol.
And if the fleet isn't there youll know it has been from the oil marks:eek2:

[BlackPeter]

And if the fleet isn't there youll know it has been from the oil marks:eek2:

Sounds like you speak from experience? British engineering at its finest ...

[Snoopy]

Sounds like you speak from experience? British engineering at its finest ...

It would be quite an engineering feat to be able to create oil leaks from the motor of a Jaguar I-Pace though? I am sure even Croesus would agree!

SNOOPY

[BlackPeter]

It would be quite an engineering feat to be able to create oil leaks from the motor of a Jaguar I-Pace though? I am sure even Croesus would agree!

SNOOPY

You are probably right - less oil in these electric cars. On the other hand - I hear they tend to leave ugly soot stains on the ground after burn out due to battery shorts. From a personal perspective I think I would prefer the oil leaks ...

[Beagle]

It is another Jaguar sales promotion.
So the answer is Jaguar.


ps.Should you note. in 3 years time, a fleet of Jaguars outside HGH's headquarters, you will know I was wrong.!.lol.

It would be interesting to know for sure. Modelling on that deal projects 51.6% residual value after 3 years which I think is "brave". That sort of depreciation model generally works well for new Japanese cars sold at a fair retail price but the Jaguar I Pace is sold in N.Z. at quite a considerable premium to what appears to be reasonable from a review of pricing in the U.K. or Australia.
$159K new, compares with a quick look on Autotrader U.K. which showed 2019 Jaguar I Pace's as very low mileage demo's available in the U.K. for as little as 55,000 pounds asking price, probably 50,000 pounds buys it or about $100,000 Kiwi at today's exchange rate. I note concerning comments the other day from Colonial Motors chair at their annual meeting in regard to electric vehicle obsolescence when new model's come out. He essentially said old models become obsolete, (read, extremely serious depreciation rates and very low residual value).

I expect the depreciation rate on the I Pace to be very severe and there will be quite a few people walking away at the end of that contract term as some new whizz bang EV offers even more excitement and yesterday's I Pace is like yesterday's newspaper... I would think around 40% residual value after three years is more likely so someone may be risking possible negative equity at the end of the term of about $16,000, I hope its not HGH !

Put it another way, if I was buying said I Pace and silly enough to pay full retail, (I wouldn't), I would take advantage of the optionality that deal confers.
Therein probably lies the answer, people have to pay full retail to take advantage of the offer and there's an extra (at least $16,000) generated right there by the importer and I would hope the risk lies with them or with the Giltrap Group, who own Archibald and Shorter, the retailer.

[winner69]

Motley Fool on ‘greedy bankers’ And other stuff

https://us3.campaign-archive.com/?u=0d1d0582254b8399936e6130e&id=6b93f935aa&e=d42cc5cbdc

Wonder if the all the ‘free’ / LTI shares Heartland execs is a good thing

[Beagle]

Weak lead from offshore and slightly weaker market today but HGH doing well, (with report due on capital review by RBNZ at noon tomorrow).
Nobody in RBNZ would tell their mates early that the report is more moderate than originally drafted...Nah, leaky ships like that simply never happen ;)

[King1212]

All sweet as for HGH regarding RNBN capital revised

[winner69]

All sweet as for HGH regarding RNBN capital revised

Won’t have to shunt too much across the Tasman then

[Beagle]

Looks good for HGH. Easily capable of raising the extra capital through the dividend reinvestment scheme and with the opportunity to raise more funds through preference shares counting as tier one capital and the seven year transitional period starting from next July, (more than 7 1/2 years to total transition), it all looks quite satisfactory for HGH as confirmed by the company themselves :- http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/345500/313428.pdf

[percy]

All sweet as for HGH regarding RNBN capital revised

Certainly is.
We remain "well positioned."
However, another big headache for the big four Australian Banks.Tough.!..lol.

[Beagle]

Being viewed as a pragmatic decision and viewed reasonably favourably. https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12291289

[Beagle]

Would be good if HGH got out in front of this with say a $150m preference share issue. Heck if Synlait can raise deeply subordinated and unsecured 5 year debt at 3.7% then I don't see why HGH would need to pay any more than that for preference shares.

[RTM]

Would be good if HGH got out in front of this with say a $150m preference share issue. Heck if Synlait can raise deeply subordinated and unsecured 5 year debt at 3.7% then I don't see why HGH would need to pay any more than that for preference shares.

They seem to have it under control all by themselves Beagle. Amazing eh !
https://www.nzx.com/announcements/345500

[NADZAB]

Having trouble finding HGH ASX listing on Yahoo Finance, any ideas?

[percy]

Having trouble finding HGH ASX listing on Yahoo Finance, any ideas?

hgh.ax or HGH.AX works for me.

[winner69]

Having trouble finding HGH ASX listing on Yahoo Finance, any ideas?

Pays to keep track of HGH.AX

Been $1.46 since that transaction of 1 share in August this year

Just listed for window dressing eh percy

[percy]

Pays to keep track of HGH.AX

Been $1.46 since that transaction of 1 share in August this year

Just listed for window dressing eh percy

No so.
A very important listing for HGH, as it gives them access to Australian institutions, who otherwise would not be allowed to support HGH's funding requirements.Not only that, but any Australian fund can also invest in HGH,although most will be on NZ registry for liquidity reasons, they are still investing in an ASX listed company.
Whether any trade or not does not matter.

[winner69]

No so.
A very important listing for HGH as it gives them access to Australian institutions, who otherwise would not be allowed to support HGH's funding requirements.

That’s what I meant by window dressing

It’s not there for the likes of nadzab

[percy]

No so.
A very important listing for HGH, as it gives them access to Australian institutions, who otherwise would not be allowed to support HGH's funding requirements.Not only that, but any Australian fund can also invest in HGH,although most will be on NZ registry for liquidity reasons, they are still investing in an ASX listed company.
Whether any trade or not does not matter.

Well no reason NADZAB can't trade HGH on ASX.Liquidity would be a problem though.Could possibly be the odd chance of currency arbitrage.
Yes window dressing,but very important window dressing.

[NADZAB]

So Today - NZX 1.70NZD/ASX 1.46AUD thats roughly a 16% difference.
- AUD/NZD pair today 4% difference

- Am I missing something.....
- As of today 12% cheaper to buy on ASX
- Transaction cost cheaper on ASX
- Dividend payment 6.54% on ASX / 5.81% NZX (due to cheaper share price)
- If I am a non tax resident of AUZ&NZ the ASX would be the best exchange to buy on assuming I can buy them on ASX for this price.

[winner69]

So Today - NZX 1.70NZD/ASX 1.46AUD thats roughly a 16% difference.
- AUD/NZD pair today 4% difference

- Am I missing something.....
- As of today 12% cheaper to buy on ASX
- Transaction cost cheaper on ASX
- Dividend payment 6.54% on ASX / 5.81% NZX (due to cheaper share price)
- If I am a non tax resident of AUZ&NZ the ASX would be the best exchange to buy on assuming I can buy them on ASX for this price.

That $1.46 was the price for the last sale ....1 share on August 31st ......no sales since then

Today there are no sellers ...none whatsoever ...hasn’t been for zonks but somebody offering to buy at 154

As percy said no liquidity for Hgh on the ASX ...need that to do what you want to do

Put a bid in ...you never know

[mfd]

"ANZ NZ is staying mum on a report it may be again trying to sell finance company UDC. The Australian reports an ANZ sale of UDC could be on again with Morgan Stanley acting as an advisor. Asked about this an ANZ NZ spokeswoman told interest.co.nz; "We don’t comment on market speculation so won’t be making a comment here." In its annual results announcement in October ANZ said it was again exploring a range of strategic options, including divestment, for UDC."

I don't have a subscription to the Australian, but from the free sample at the top of the article, "All the parties lining up are understood to be private equity firms".

https://www.interest.co.nz/news/102943/review-things-you-need-know-you-go-home-tuesday-co-op-bank-trims-truckometer-trend-weak

https://www.theaustralian.com.au/business/dataroom/morgan-stanley-on-board-for-possible-udc-finance-deal/news-story/1399b2bbbf9a390c2b7a928b3c2872dc (for those with a subscription)

[RTM]

https://www.nzx.com/announcements/346068

Pretty short tenure.
I'll leave it at that.

[winner69]

https://www.nzx.com/announcements/346068

Pretty short tenure.
I'll leave it at that.

Chair says “her contribution throughout that period, particularly in relation to the people, culture and conduct areas.”

Job done ...Heartland a bit boring now ....move on to other companies that need help

I’ll leave it at that

Only a Director of Heartland Bank ..never made it to Heartland Group

[Beagle]

Maybe the company's culture will move towards a more commercial focus now, that would be a good thing in my opinion.

[winner69]

Maybe the company's culture will move towards a more commercial focus now, that would be a good thing in my opinion.

I think their commercial focus is already very strong

[blockhead]

Taken a while but @ 1.75 I am now break even again, now lets head off to 2.00 plus

[Beagle]

Taken a while but @ 1.75 I am now break even again, now lets head off to 2.00 plus

The shares have recently commenced a nice steady uptrend so the chart is highly supportive of further gains and I maintain fundamentally its very good value so I would think the chances of your wish coming true in 2020 are pretty good.

[percy]

I think HGH share price has been held back by all the "woes" of the Austrsalian banks .

[Beagle]

Agreed, that hasn't helped but obviously has nothing to do with HGH. Also the uncertainty of what the RBNZ was going to do has been removed so I think this has excellent prospects going forward notwithstanding today's solid gain.

[winner69]

New Director of the Bank has good credentials


Shelley’s governance experience includes businesses involved in fintech, large scale technology infrastructure and payments innovation, wealth management, venture capital and education based growth for SMEs and she is currently a non-executive director of The Icehouse Limited and 9 Spokes Limited. Shelley has extensive banking experience in the New Zealand market. Her last role as an executive was leading BNZ Partners, which spanned all aspects of business banking and wealth management for Bank of New Zealand.

[winner69]

Shelley Ruha a real champion for inclusion and diversity in the workplace as well