HGH - Heartland Group Holdings

[Snoopy]

I dont think HGH will be having too much trouble raking in the depositor gold at the moment with comparable tiny rates offered by their competitors for smaller terms and a system awash in Govt Loot, with limited avenues for spending aside from "the so called deemed Essentials"

Their deposit rates pages are only near Rabo - and as for the other players - HGH & Rabo now offer a very generous multiple of those on offer from many or bulk of the majors & other banks.

Hate to say it - Kiwibank (aka The People's Bank) now offer what seem to be the most miserable rates, after having been severely razored down in recent days


There is more than interest rates as an incentive to put your term deposit in Heartland bank at stake here. The big four banks have just had their credit ratings downgraded in NZ.

https://www.interest.co.nz/banking/104463/fitch-downgrades-anz-nz-asb-bnz-and-westpac-nz-credit-ratings-one-notch-alongside

There was a very ominous sentence right at the end of the Fitch press release.

"We will review the remaining Australian and New Zealand banks rated by Fitch in the near future."

Heartland bank is currently BBB. A downgrade to BBB- they could handle. But anything more than that Heartland is no longer an 'investment grade' deposit option. There are some entities that are only allowed to put their funds into bonds and banks with a BBB risk profile and nothing lower. IMO the deposit position at Heartland is now under threat in a way it was not a week ago.

SNOOPY

[Balance]

There was a very ominous sentence right at the end of the Fitch press release.

"We will review the remaining Australian and New Zealand banks rated by Fitch in the near future."

Heartland bank is currently BBB. A downgrade to BBB- they could handle. But anything more than that Heartland is no longer an 'investment grade' deposit option. There are some entities that are only allowed to put their funds into bonds and banks with a BBB risk profile and nothing lower. IMO the deposit position at Heartland is now under threat in a way it was not a week ago.

SNOOPY

Heartland needs to move fast and like AIA & KMD, raise capital while the market is still supportive of capital raisings at decent prices.

Don't wait for the sp to tank on a ratings downgrade and then, try and raise capital! :scared:

[winner69]

Heartland needs to move fast and like AIA & KMD, raise capital while the market is still supportive of capital raisings at decent prices.

Don't wait for the sp to tank on a ratings downgrade and then, try and raise capital! :scared:

For some likely cut in or no divies and a hand out for more cash will be painful.

But an opportunity to get even more cheap shares

[traineeinvestor]

For some likely cut in or no divies and a hand out for more cash will be painful.

But an opportunity to get even more cheap shares

I'm not sure if I would equate a lower price with "cheap" and I'd be very hesitant to put money into a company which is both highly leveraged (as are all banks) and needs to raise more capital than can be effectively procured from cancelling its dividends for the year.

While I'm too cheap to pay for the privilege of getting behind the paywall, seeing a headline like this so early in the cycle bodes ill for lenders in general: https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12323544

[winner69]

Think last cap raise (not counting drips) was at $1.70

How the mighty have fallen

[Balance]

I'm not sure if I would equate a lower price with "cheap" and I'd be very hesitant to put money into a company which is both highly leveraged (as are all banks) and needs to raise more capital than can be effectively procured from cancelling its dividends for the year.

While I'm too cheap to pay for the privilege of getting behind the paywall, seeing a headline like this so early in the cycle bodes ill for lenders in general: https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12323544

Times like this, a subscription to the NZ Herald, even for just one month or two, will be the cheapest investment you can make.

[clip]

I'm not sure if I would equate a lower price with "cheap" and I'd be very hesitant to put money into a company which is both highly leveraged (as are all banks) and needs to raise more capital than can be effectively procured from cancelling its dividends for the year.

While I'm too cheap to pay for the privilege of getting behind the paywall, seeing a headline like this so early in the cycle bodes ill for lenders in general: https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12323544

[edit] Removed full article. ASB received the most requests for interest only/mortgage holiday, followed by westpac, kiwibank, BNZ, TSB

[Cyclical]

Times like this, a subscription to the NZ Herald, even for just one month or two, will be the cheapest investment you can make.

Yep, $1 per week for the first 4 weeks.

Edit - Clip beat me to it.

[Balance]

Yep, $1 per week for the first 4 weeks.

Edit - Clip beat me to it.

More than ever, we need to support the media - especially when they are making a real effort at investigative and pro-active reporting and journalism.

There are some decent columnists and journalists at the Herald now, I must say.

[iceman]

We should remember and respect the expressed wishes (quite some time ago) of the owners of ST that we do not post articles from behind paywalls at other media. It is illegal.

[Balance]

We should remember and respect the expressed wishes (quite some time ago) of the owners of ST that we do not post articles from behind paywalls at other media. It is illegal.

References to the articles and a brief self-written synopsis are fine.

[clip]

We should remember and respect the expressed wishes (quite some time ago) of the owners of ST that we do not post articles from behind paywalls at other media. It is illegal.

Apologies and thanks for the heads up, I have edited my post and will not post full articles in future

[macduffy]

Times like this, a subscription to the NZ Herald, even for just one month or two, will be the cheapest investment you can make.

I had the same thought, Balance, and recently paid up!

[percy]

Free to ChCh library members using their "Press Reader."

[Onion]

Free to ChCh library members using their "Press Reader."

Wellington City Libraries too. Probably many other libraries.

[DoctorG]

Is a rights issue a good thing or a bad thing ?

[percy]

Is a rights issue a good thing or a bad thing ?

To expand a business...................Yes.
Just to stay in business.................No.


We are going to see a lot of capital raisings.Frightening was AIA's $1.2 billion just to stay in business,as was Kathmandu's.

[Balance]

To expand a business...................Yes.
Just to stay in business.................No.

Well articulated! Could not agree more!

But can be a good thing I guess if it’s like an AIA - to stay in business and expand again post the apocalypse!

[blockhead]

Wow, whats driving HGH today, up 6% for the day ?

[ScrappyO]

Wow, whats driving HGH today, up 6% for the day ?

Catch up time

[Longhaul]

I think it has something to do with the impending move to stage 3, single digit new cases in NZ today, positive news on trials of a new Covid-19 treatment and the US futures showing a 3% rise (at the time of this comment).

I sold 90% of my HGH before the market got really bad. Then tried to get back in too early and sold for a small loss, and am back in today (but not with terribly high conviction).

Only one thing I am certain of and that is the future is uncertain!

[peat]

I think it has something to do with the impending move to stage 3, single digit new cases in NZ today, positive news on trials of a new Covid-19 treatment and the US futures showing a 3% rise (at the time of this comment).



I cant fathom that such short term factors would affect the price of this stock so much. But thats the interesting thing about stock markets , not at all displeased that its having a belated renaissance compared to others.






Only one thing I am certain of and that is the future is uncertain!

You aint wrong there.

[Cyclical]

I sold most of my HGH for about a 10% profit earlier last week at 1.03, the rest of them today at 1.17...got it wrong on both counts...this market is crazy! Still, at least I'm in the green.

[Playa]

I see on the Reserve Bank website that Heartland Bank has a BBB credit rating.I wouldn't be putting my money with them.

[Ggcc]

Anyone else feel a capital raise coming anytime soon??

[Cyclical]

I see on the Reserve Bank website that Heartland Bank has a BBB credit rating.I wouldn't be putting my money with them.

See Snoopy's comment on the last page...it's only likely to get worse before it gets better...


There is more than interest rates as an incentive to put your term deposit in Heartland bank at stake here. The big four banks have just had their credit ratings downgraded in NZ.

https://www.interest.co.nz/banking/104463/fitch-downgrades-anz-nz-asb-bnz-and-westpac-nz-credit-ratings-one-notch-alongside

There was a very ominous sentence right at the end of the Fitch press release.

"We will review the remaining Australian and New Zealand banks rated by Fitch in the near future."

Heartland bank is currently BBB. A downgrade to BBB- they could handle. But anything more than that Heartland is no longer an 'investment grade' deposit option. There are some entities that are only allowed to put their funds into bonds and banks with a BBB risk profile and nothing lower. IMO the deposit position at Heartland is now under threat in a way it was not a week ago.

SNOOPY

[ScrappyO]

Credit ratings don't mean jack. Look what happened in the GFC.

[ScrappyO]

Anyone else feel a capital raise coming anytime soon??

I was thinking the same thing.

[BlackPeter]

Credit ratings don't mean jack. Look what happened in the GFC.

Yes and no.

A great credit rating can be pretty much meaningless - that's what the GFC taught us. So easy for money to disappear.

However a weak credit rating is always a red flag, and rightly so ... and BBB isn't too strong. Much easier for money to disappear into thin air than to appear from it (unless you are a reserve bank).

HGH better worries about their credit rating, and I am sure they do. Did I just hear the words "Capital raise"?

[iceman]

Anyone else feel a capital raise coming anytime soon??

I would say that is a very real possibility and I also think dividends will be suspended for a year or two.

Discl: For the first time since it was called BSH do I not hold any HGH

[Snoopy]

However a weak credit rating is always a red flag, and rightly so ... and BBB isn't too strong. Much easier for money to disappear into thin air than to appear from it (unless you are a reserve bank).

HGH better worries about their credit rating, and I am sure they do. Did I just hear the words "Capital raise"?


I would call 'BBB' a solid credit rating for a middle tier lender. It is still investment grade. I wouldn't call it 'weak', although others may disagree as 'weak' is a comparative term. A reduction to BBB- would not be catastrophic. Heartland has operated there before.

I remember Jeff being asked at the last AGM what the difference operationally was between 'his' bank and those higher credit rated larger banks, in relation to credit ratings. IIRC Jeff said something like: Very little except the bigger banks loaned on a larger scale. Before Covid-19, both GJe(o)ffs were confident of using retained earnings to fulfill -now delayed- new Reserve Bank capital reserve rules. The fact that Heartland Bank (although not Heartland Holdings) is now banned from paying dividends until this crisis resolves is a kind of enforced capital raising. Whether there will be yet another capital raising, more conventionally structured, is still open to question. Watch the share price rocket if it isn't needed!

Personally I am most worried about the very profitable motor industry loan book. It is true many need a car to get to work or look for a job. But do they need a new car to do this? In tough times it might make sense to get the new car repossessed and use what would have been your new car payments for a couple of months to buy something more modest. We may have to wait until the end of the twelve week wage subsidy to see what happens in this regard. But I think a path still exists for 'no cash issue' at Heartland even if it is IMO a less likely path.

SNOOPY

[Playa]

I read somewhere recently(correctly or incorrectly)that a BBB rating translates to a 1 in 30 chance the bank may run into problems with making a full repayment of interest and principal,and a AAA rating was from memory 1 in 600

[Snoopy]

I read somewhere recently(correctly or incorrectly)that a BBB rating translates to a 1 in 30 chance the bank may run into problems with making a full repayment of interest and principal,and a AAA rating was from memory 1 in 600


I think you might have read this on the RBNZ website. That is where I found it four years ago in 2016 when I had a discussion on this very thread on understanding this very issue with Axe.

http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2008/2008sep71-3widdowsonwood.pdf

"Ratings are by their nature probabilistic. For example, the
historical probability of default associated with a AAA-
rated entity, while small, is not zero. In a portfolio of 600
separate AAA entities, an investor could expect one to fail,
on average, every five years, based on the default histories
summarised in table 1. A failure of a highly rated entity
is therefore neither inconceivable, nor ruled out by a AAA
rating from a rating agency."

If I rewrote this paragraph for the Heartland situation it would go like this

Ratings are by their nature probabilistic. For example, the
historical probability of default associated with a BBB
rated entity, while small, is not zero. In a portfolio of 30
separate BBB entities, an investor could expect one to fail,
on average, every five years, based on the default histories
summarised in table 1. A failure of a medium rated entity
is therefore neither inconceivable, nor ruled out by a BBB
rating from a rating agency."

SNOOPY

[Snow Leopard]

...Ratings are by their nature probabilistic. For example, the
historical probability of default associated with a BBB
rated entity, while small, is not zero. In a portfolio of 30
separate BBB entities, an investor could expect one to fail,
on average, every five years, based on the default histories
summarised in table 1. A failure of a medium rated entity
is therefore neither inconceivable, nor ruled out by a BBB
rating from a rating agency."

SNOOPY

Probably pinged you at the time over that statement and just to be consistent I will do so again:
It is not fail, it is default and default means 'to not pay on time and in full'.

The difference between a bank failing and a bank defaulting is huge.


Hopefully the Heartland empire will do neither.

[Snoopy]

The 'one in whatever' ratio (1:30 for a BBB organization) interpretation that the reserve bank quotes in their explanatory notes is

"The approximate, median likelihood that an investor will not receive repayment on a five-year investment on time and in full, based upon historical default rates published by each agency."




Probably pinged you at the time over that statement and just to be consistent I will do so again:
It is not fail, it is default and default means 'to not pay on time and in full'.

The difference between a bank failing and a bank defaulting is huge.

Hopefully the Heartland empire will do neither.


The quote I have reproduced above, and the one you referred to, are both taken from the Reserve Bank website. So it seems even the Reserve Bank can be a little loose with using the terms 'failure' and 'default'.

I guess what you are saying, SN, is that a default can be a signpost on the road to failure. But just because a financial institution goes past the 'default' signpost on the road, that doesn't mean the journey will end in the town of 'failure'.

Nevertheless here is my question of the day.

South Canterbury Finance depositors got paid out in full with no default. So is it true to say that South Canterbury Finance did not fail?

SNOOPY

[BlackPeter]

I would call 'BBB' a solid credit rating for a middle tier lender. It is still investment grade. I wouldn't call it 'weak', although others may disagree as 'weak' is a comparative term. A reduction to BBB- would not be catastrophic. Heartland has operated there before.

...

SNOOPY

I would agree - in normal times. However, these are not normal times.

If we are moving towards a one in hundred years recession (or depression) as some analysts predict, then (based on the probabilities you cited above), a BBB rating (with an annual default rate of 1:150) would bring us close to a flip the coin chance of the entity getting in trouble this year.

And don't get me wrong - I don't expect HGH to go belly up if they play this right, but I think the board might be well advised to consider their capital requirements in these extraordinary times.

And yes, car finance is clearly one of their Achilles heels in troubled times. Existing loans will have significantly higher rates of stressed loans (two digit unemployment rates are bad for consumer loans) ... and new business is likely to shrink for some time. In both China as well as in Europe car sales numbers dropped drastically (i.e. more than 50%), meaning as well less need for car finance.

[Snoopy]

Heartland Receivables (Dec 2019)

$M


%



Reverse Mortgages

$ 1,424


31%



Motor Vehicle Finance

$ 1,124


25%



Harmoney & other consumer lending

$ 250


5%



Business Finance

$ 1,009


22%



Open for Business

$ 158


3%



Rural Finance

$ 621


14%




total


$ 4,586








11175



These are not normal times.

If we are moving towards a one in hundred years recession (or depression) as some analysts predict, then (based on the probabilities you cited above), a BBB rating (with an annual default rate of 1:150) would bring us close to a flip the coin chance of the entity getting in trouble this year.

And don't get me wrong - I don't expect HGH to go belly up if they play this right, but I think the board might be well advised to consider their capital requirements in these extraordinary times.

And yes, car finance is clearly one of their Achilles heels in troubled times. Existing loans will have significantly higher rates of stressed loans (two digit unemployment rates are bad for consumer loans) ... and new business is likely to shrink for some time. In both China as well as in Europe car sales numbers dropped drastically (i.e. more than 50%), meaning as well less need for car finance.


I get your 'top down' interpretation of looking at the situation BP. But if we carry on with that logic, what you are effectively saying is that approximately half of all BBB rated financial institutions will fail as a result of this Covid-19 crisis. The glass half full view of the situation is that half of all BBB rated financial institutions will not fail. So rather than not invest in any BBB rated financial institution (which I admit is a legitimate response to the situation we investors fine ourselves in), I prefer to ask a separate question:

"What are the characteristics of a BBB rated finance company that will lean it towards becoming one of the survivors?"

I think Reverse Mortgages as a loan category look sound. The big issue here is getting the cashflow to finance growth. But HGH seem to have no problem raising money from wholesale bonds and with interest rates even lower going forwards, I think there will be a scramble for any fixed interest return above junk bond level. The fact is that reverse mortgages tend to be leveraged less than conventional mortgages. On average this ups the safety factor for shareholders in this portion of the business.

Rural lending is still a 'bogey boy'. But, with the disruption in tourism, 'rural' is suddenly the primary export driver again. I don't believe that all of our rural commodities will have a great year going forwards and the climatic risks of rural lending remain. However the portfolio being steered towards 'short term funding' (like funding livestock fattening) is regarded by Basel 3 architects as being far less risky than funding capital projects. And the comparative risk against lending to the tourism sector means that bankers should look on 'Rural' more kindly going forwards. I don't see an excessive risk from lending to the rural community going forwards.

Business Finance is a big question mark for me. But we do have the government backstop of underwriting 80% of the value of new loans, and government wage subsidies. That adds up to quite a cushion of government support. The businesses that Heartland finance are unlikely to be 'too big to fail'. But the government certainly doesn't want too many of these businesses to fail. So the next few weeks will be very important for this part of the loan book.

Funding new vehicle sales I see as the troublesome part of the loan book going forwards. Nevertheless historically this has been the most profitable part of the business. Profits going forward may not be great. But if we can get away without making a big loss, then I don't think this branch of the business will bring Heartland down.

I am trying to be dispassionate about this, not always easy when you are a shareholder. But it does look to me as though Heartland will be a BBB survivor.

SNOOPY

[Balance]

NAB beating the field by reporting earlier (ahead of the three other Australian banks) to raise capital.

Almost a given that Heartland is going to have to raise additional capital as well to protect its BBB rating.

Question is when - in August when they announce the full year results or asap?

[traineeinvestor]

NAB beating the field by reporting earlier (ahead of the three other Australian banks) to raise capital.

Almost a given that Heartland is going to have to raise additional capital as well to protect its BBB rating.

Question is when - in August when they announce the full year results or asap?

If I was running HGH (or anyone else needing capital), I'd be doing it as early as possible – the market has rallied off it's lows, there's a sense of optimism with Covid-19 cases declining and lockdown rules being eased (only fractionally) but we've yet to see much of the economic damage and there's a question about whether the government will support business by reducing taxes or kick them when they're down with increases and new taxes. Then there's the "beat the rush" and "beat the rumour" aspects.

Disclosure: not held

[nztx]

I'd really laugh if HGH pulled a different deal out of the bag - like No Cap Raise needed & retained the Div,
when the Big Aussie Blanks are flying around trying to fill large imaginary holes in the deck ..

Will TSB, SBS, NZCU & Co-operative Bank all likely be scratching their heads wondering how & if - to raise some capital ?

[horus1]

When you read the NAB result BNZ did a lot better and with the restiction on div for the NZ banks I doubt whether there will be a capital raise . This type of drop happened about a year ago and I did well out of buying when they were down as now. Have a lot and will not sell.

[nevchev]

Could here a pin drop in here.Seems hgh will lag behind as it always has

[winner69]

Apparently the government a bit peeved at the banks not lending enough to SME (even with govt guranteeing a large part of any loan)

Suppose Heartland hasn’t done much ....but why lend to no hopers with the chance you will still end up with 20% of it as bad.

Government will find that out with that IRD Bank which is now open for business.

[ziggy415]

V

More seniors turn to reverse mortgages as a cash lifeline during the coronavirus pandemic.
A reverse mortgage can be used in correlation with other retirement income strategies to lessen what’s known as “sequence of return risk.”
Applications for reverse mortgages were up 15% in March, according to Reverse Mortgage Insight.
You must be 62 years old or older to qualify, and reverse

[ziggy415]

Article on cnbc

[nztx]

Apparently the government a bit peeved at the banks not lending enough to SME (even with govt guranteeing a large part of any loan)

Suppose Heartland hasn’t done much ....but why lend to no hopers with the chance you will still end up with 20% of it as bad.

Government will find that out with that IRD Bank which is now open for business.


That's okay -- with Govt's own IRD Loans - all the mickey mouse hooks in the Govt $10K Loan offerings probably
mean they will see even less uptake than they could have guessed, by only the then very stupid & blind desperate ..

The $10K offerings being effectively looking like they're on the same level as the $1 billion AIR Rip Off 9% Usery Loan job

It will likely work in any of the Banks favour..

and likely leave the Govt sitting looking fairly stupid on dreaming up yet another Failure of an unworkable excuse thrown out to look after broken businesses..

Add this to Govt's earlier Red Herrings - Roll back of Losses (likely participants - Very Few) - Hike up of Low cost Assets values for immediate write off (likely participants among affected businesses struggling to survive = Very Few)

[nevchev]

V

More seniors turn to reverse mortgages as a cash lifeline during the coronavirus pandemic.
A reverse mortgage can be used in correlation with other retirement income strategies to lessen what’s known as “sequence of return risk.”
Applications for reverse mortgages were up 15% in March, according to Reverse Mortgage Insight.
You must be 62 years old or older to qualify, and reverse


Some good news for a change!This cloud could have a silver lining

[Snoopy]

To expand a business...................Yes.
Just to stay in business.................No.

We are going to see a lot of capital raisings.Frightening was AIA's $1.2 billion just to stay in business,as was Kathmandu's.

The above was percy's last (ever?) post on the Heartland thread. Does he see a Heartland capital raising coming? What I have reproduced below is the most shocking revelation ever to be published on this thread and may rock long term Heartland shareholders to the core. WARNING: Grab hold of a stout whisky and a chair before reading further.

This transplanted from the Turners thread from Percy:

--------

Disc.I no longer hold in NZ any shares in the following sectors; Finance [including Banks] ,Property, Retail [including selling vehicles] , Retirement Villages,or Tourism.
I do hold shares in PGW which I classify as Rural Services,not a retailer.

-----

Percy GONE from the Heartland share register!

SNOOPY

[percy]

Until The Virus hit I had my portfolio as I wanted.
The world has now changed,therefore my portfolio has changed.
Some sectors will do well,while others will not..
The sectors that will do poorly,or that will take a long time to recover are best left to younger people than me,who have a longer investment time frame, than I have at my age.
The lock down has seen us spend more time doing business online.This will affect office space,as more people work from home.Retailers will loose trade to online retailers,this will affect the retail property owners.
Rising unemployment,together with large number of business failures, will affect lenders such as finance companies and banks.Property prices will come under pressure,which will carry over to the retirement village sector.
Some businesses such as power companies and phone companies will carry on.I hold GNE,MEL and SPK.
Rural/primary businesses, should do well such as PGW,SAN, SEK,SCL and possibly CVT,even NZK [although I have my doubts].I hold PGW.
My largest holding is PAZ on Unlisted.Pure ingredients from NZ raw materials.The right sector at the right time.
As I do not know the full affects,or how long the Corona Virus will last,I have have sold TRA, and HGH and have a rather large cash holding.I would expect we will find out how TRA are trading in their half year announcement in late November,while HGH should give some clarity in February next year..
I am a patient investor.I have other holdings in NZ and Aussie..Any holding with an earnings upgrade I am adding to my holding,such as AVA in Aussie.
I am prepared to sit on my cash pile forever, if I do not feel comfortable with the market.As it is I still have a good amount invested in the market, and have no need for more shares.
Opportunities have always seemed to come my way when ever I have held cash.

[Baa_Baa]

The above was percy's last (ever?) post on the Heartland thread. Does he see a Heartland capital raising coming? What I have reproduced below is the most shocking revelation ever to be published on this thread and may rock long term Heartland shareholders to the core. WARNING: Grab hold of a stout whisky and a chair before reading further.

This transplanted from the Turners thread from Percy:

--------

Disc.I no longer hold in NZ any shares in the following sectors; Finance [including Banks] ,Property, Retail [including selling vehicles] , Retirement Villages,or Tourism.
I do hold shares in PGW which I classify as Rural Services,not a retailer.

-----

Percy GONE from the Heartland share register!

SNOOPY

Sad, awkward as well. "Your honour, I never intended to sell when I bought, but circumstances changed so I sold." Like the IRD will give a flying fig about that. Hello tax time, when the accountant says, umm, "now, about those taxes Mr Trader".

Percy will have done very nicely out of HGH, having bought in well below $1, less trading (buy and sell ) fees and tax on capital gains, perhaps not so much on some others, some an outright loss after capital losses and trading fees. We can't beat-up folks who make their own decisions who cast themselves as traders and hopefully understand the fees and tax consequences. It is what it is.

Grandfather, who passed away over twenty, or was it thirty years ago surprised me when he said he hadn't lost a cent on his portfolio (as it turned out $million+ portfolio) when the market crashed in 1987. Turned out that he never sold a single share, ever! One year later he was square. Just kept on buying solid companies that weren't going out of business and enjoyed their dividends until dying at a ripe old age in his nineties.

Silly old bugger still complained about the price of a pound of butter. Like that mattered in the scheme of things. Lol.

[Snoopy]

Sad, awkward as well. "Your honour, I never intended to sell when I bought, but circumstances changed so I sold." Like the IRD will give a flying fig about that. Hello tax time, when the accountant says, umm, "now, about those taxes Mr Trader".

Percy will have done very nicely out of HGH, having bought in well below $1, less trading (buy and sell ) fees and tax on capital gains, perhaps not so much on some others, some an outright loss after capital losses and trading fees. We can't beat-up folks who make their own decisions who cast themselves as traders and hopefully understand the fees and tax consequences. It is what it is.


Percy purchased his Heartland shares with an eye on them giving him a solid dividend steam in his retirement and without any firm sell strategy in mind. The dividend stream has been stopped. So Percy has a very legitimate reason to sell. This is not a capital gain event for him in tax terms. It is a legitimate sale due to an unexpected change in circumstances from his genuine reason for buying in the first place. No tax on any capital gain from his Heartland sale would be expected in this instance. But then again he wouldn't be able to claim a capital loss on his escapade into TRA shares either!

SNOOPY

[Gerald]

https://www.youtube.com/embed/v1iYVfY_0Zs

[Cyclical]

Until The Virus hit I had my portfolio as I wanted.
The world has now changed,therefore my portfolio has changed.
Some sectors will do well,while others will not..
The sectors that will do poorly,or that will take a long time to recover are best left to younger people than me,who have a longer investment time frame, than I have at my age.
The lock down has seen us spend more time doing business online.This will affect office space,as more people work from home.Retailers will loose trade to online retailers,this will affect the retail property owners.
Rising unemployment,together with large number of business failures, will affect lenders such as finance companies and banks.Property prices will come under pressure,which will carry over to the retirement village sector.
Some businesses such as power companies and phone companies will carry on.I hold GNE,MEL and SPK.
Rural/primary businesses, should do well such as PGW,SAN, SEK,SCL and possibly CVT,even NZK [although I have my doubts].I hold PGW.
My largest holding is PAZ on Unlisted.Pure ingredients from NZ raw materials.The right sector at the right time.
As I do not know the full affects,or how long the Corona Virus will last,I have have sold TRA, and HGH and have a rather large cash holding.I would expect we will find out how TRA are trading in their half year announcement in late November,while HGH should give some clarity in February next year..
I am a patient investor.I have other holdings in NZ and Aussie..Any holding with an earnings upgrade I am adding to my holding,such as AVA in Aussie.
I am prepared to sit on my cash pile forever, if I do not feel comfortable with the market.As it is I still have a good amount invested in the market, and have no need for more shares.
Opportunities have always seemed to come my way when ever I have held cash.

Well, that's a very sobering voice of reason. Mr Market doesn't seem to agree with you in many respects, which I've been really struggling with, but I think the day of reckoning is coming...or an extended period of it, in which you'll be proven correct, and many of us will get burnt. Personally I'm exposed to at least 3 of those sectors you advise against...guess I'll be hunkering down for the long haul.

[horus1]

I have a lot of HBL shares , over 1M,.I added below a dollar. Am continuing to hold , with the amount being pumped into the economy I believe the forecasts are too bearish . Tourism and hotels and travel are in trouble but other sectors will recover. It is not like 87 or GFC as the govt has adopted a better response. PS I am over 70 and th portfolio is for the grand kids as my kids have done OK

[RTM]

Well, that's a very sobering voice of reason. Mr Market doesn't seem to agree with you in many respects, which I've been really struggling with, but I think the day of reckoning is coming...or an extended period of it, in which you'll be proven correct, and many of us will get burnt. Personally I'm exposed to at least 3 of those sectors you advise against...guess I'll be hunkering down for the long haul.

It is.
I also worry about holding cash. Its fine when inflation is benign as it is currently, other than interest rates being really low.....but I guess that is going to change at some point. Longer term I would see stocks revaluing to more or less match inflation ?

[Pricey]

As Snoopy predicted, Fitch has re-assessed Heartland Bank, and it's good news!


Fitch affirms long-term rating of Heartland

19 May 2020

Fitch Ratings (Fitch) has affirmed the Long-Term Issuer Default Ratings (IDR)
of Heartland Group Holdings Limited (NZX/ASX: HGH) (Heartland Group) and
Heartland Bank Limited (NZX: HBL) (Heartland Bank) at 'BBB' and the Long-Term
IDR of Heartland Australia Group Pty Ltd (Heartland Australia) at 'BBB-'. The
Outlooks remain Stable.

...

Fitch noted that "the ratings of [Heartland
Group] and [Heartland Bank] are driven by the group's consolidated risk
profile, which reflect its stronger-than-peer profitability"

[nevchev]

Thats great news.As stated in the release,not many have avoided some degree of negativity in their assessment

[sb9]

Thats great news.As stated in the release,not many have avoided some degree of negativity in their assessment

Pretty respectable for a local bank in our own backyard.

[Snoopy]

As Snoopy predicted, Fitch has re-assessed Heartland Bank, and it's good news!

Fitch affirms long-term rating of Heartland

19 May 2020

Fitch Ratings (Fitch) has affirmed the Long-Term Issuer Default Ratings (IDR)
of Heartland Group Holdings Limited (NZX/ASX: HGH) (Heartland Group) and
Heartland Bank Limited (NZX: HBL) (Heartland Bank) at 'BBB' and the Long-Term
IDR of Heartland Australia Group Pty Ltd (Heartland Australia) at 'BBB-'. The
Outlooks remain Stable.

...

Fitch noted that "the ratings of [Heartland
Group] and [Heartland Bank] are driven by the group's consolidated risk
profile, which reflect its stronger-than-peer profitability"


I found it most interesting that the "Heartland Australia Group Pty Ltd" retained its credit rating, given it is a vehicle for the Australian Reverse Mortgage market. There is no doubt that Heartland in New Zealand will suffer a downturn in some of their new loans related to new vehicle sales in particular. But Fitch are saying that other aspects of the business, specifically reverse mortgage (as evidenced by Fitch giving Heartland Australia Group Pty Ltd the big tick), will counter that. That should give HGH shareholders (both present and past ;-) ) good confidence that our Jeff is steering the HGH ship the right way.

The broad brush view of finance companies doing poorly during a downturn may hold ( I heard the Co-operative Bank had a credit downgrade today). But HGH has shown there may be firms that slip between the bristles of that broad brush. Remember BBB is investment grade, and that will allow a much wide range of organisations to continue to put their money with Heartland.

SNOOPY

discl: hold HGH

[peat]

https://www.youtube.com/embed/v1iYVfY_0Zs

haha that's funny

[nevchev]

Mr market is either unimpressed or slow to react.

[Beagle]

Very good result considering most of the Aussie banks got downgraded.

[nevchev]

What am i not seeing with this!!!Good news from Fitch,reasonable divy and good management but know market interest😕

[Beagle]

What am i not seeing with this!!!Good news from Fitch,reasonable divy and good management but know market interest��

Well seeing as you ask I will opine, (not facts, just my opinion). RBNZ has said they are not allowed to pay dividends until they get permission from them which may not be forthcoming for quite some time. Banks in Australia and the US as a group are down about 40% because basically banks are going to suffer a lot of loan defaults through this Covid 19 thing. HGH are down in line with other banks in terms of the percentage drop so they're not cheap per se, they just appear to be.
Another reason is we don't have Percy regularly "supporting" this stock any more and I'd wager a lot of other regulars on here are also out, including myself.
Many people own banks stocks for their reliable dividends...it turns out they're not reliable. My 2 cents.
Disc: Not holding.

[nevchev]

I thought Heartland group holdings could still pay a divy if they thought appropriate?

[Nasi Goreng]

They might be able to find a loophole to do so, but if they did pay divi, I imagine will get some bad press if they have had government support. I wonder how much of the old divi went back into the reinvestment plan, and in which case might not effect all shareholders as the net effect might be the same.

If they retain earnings and you need cashflow, simply sell 2% of your holdings every 6 months.

[ziggy415]

I thought Heartland group holdings could still pay a divy if they thought appropriate?

that's the way I read it too...only the bank part of hgh is constrained paying divvy

[Beagle]

Who can say for sure on the divvy front but the new IFRS reporting standard, sorry can't remember which number it is, requires them to book expected Covid 19 losses up front so you can expect substantial provisioning for this when they announce their year end result in August. Check out some of the provisioning the Australian banks have been doing !
I'm very cautious with this one as basically banks become a form of social welfare organisation for business in really tough times. They will be "supporting" a lot of business's at this point in time and many won't make it. A lot of the massive amount of finance company style unsecured lending through Harmoney is going to come unstuck with massive unemployment and a lot vehicle financing is going to be problematic too. We live in VERY interesting times !

Anyway, that's my 2 cents. I am not trying to talk it down and have learned not to be too dogmatic when it comes to expressing a negative opinion on a stock.
Disc: No holding, not short and don't want shares at a lower price either.

[ziggy415]

I completely forgot about harmoney lending....that maybe become a problem....not so sure about vehicle lending going bad but levels will be down for a while ..interesting times for sure

[Baa_Baa]

At only 5% of receivables $250m, Harmoney (including other consumer lending) is probably the lesser of their worries, with potential defaults in business and motor vehicle loans (representing a combined 47% $2133m receivables).



Heartland Receivables (Dec 2019)

$M


%



Reverse Mortgages

$ 1,424


31%



Motor Vehicle Finance

$ 1,124


25%



Harmoney & other consumer lending

$ 250


5%



Business Finance

$ 1,009


22%



Open for Business

$ 158


3%



Rural Finance

$ 621


14%




total


$ 4,586








11175


Thanks for putting things in proportion Baa baa. $250m is not a lot for Harmony in the big picture. Incidentally, I went over to the P to P forum and saw that Harmony P to P for most of us is closing down. You can still borrow as a 'P' but to get on the lending side you now require a minimum of $10m. There aren't too many, even on this forum, able or willing to splash out that much on lending via Harmony. Harmony losses may not be so bad because, as a part owner of Harmony, Heartland 'clips the ticket' on each loan they write by part owning the Harmony platform. That income stream is independent of what happens to the loan down the track.

'Business Finance' must be a worry. The problem here is that many of these loans would have been taken out in a business environment that could not have conceived of a business lock down such as we are in now. Having no revenue does not mean you are an incompetent business person today. For example, what would be the point in bankrupting a mall store owner, then on selling the bankrupt's assets to a new store owner who may be less competent? And who would take on a lease in a mall that is closed, and liable to be closed again at short notice anyway? The only solution I can see to this is a multi-party solution. Banks, premesis owners, and business operators will have to work together and take a 'joint hit'. If they don't then all three will lose, and lose big time. OK banks might get their money back, but then they will have no-one to lend to. I think we are going to have to move out of the lock down phase before anything can happen. 'And Grant Robertson has provided the liquidity to allow everyone to wait. And if there is no light after six weeks, Robertson will provide more liquidity. 'Liquidating at the bottom' would be three way commercial suicide for business owners and landlords and banks alike.

Motor vehicle loans is likely to be more of a slow moving problem. There will be no appetite to repossess a whole lot of vehicles en masse. In this environment there would be no-one to sell them to. Better to let things slow burn, and even put aside some car payments, deferring them to the end of the lease when a lump sum of capital becomes available. It is very hard to form a meaningful view of what happens to a motor loan that expires in 2-3 years. Kicking the loan down the road looks like the only short term solution.

Suddenly 'rural finance' looks relatively safe. Who would have picked that two or three years ago! Maybe time to return the HGH AGM to Ashburton?

SNOOPY

Recently we talked about 'exposure', and Harmoney will be the least of their worries.

[Beagle]

I maintain that $250m is a big worry and the reason is this is all totally unsecured lending. Increasing numbers of people who have taken out loans for spurious consumer spending like holidays and retail splurges will be looking to do a full reset under the no asset procedure (short form bankruptcy) while they're unemployed. The recovery in this type of situation will be zero.

Also a lot of consumer vehicle lending has been with minimum guaranteed buy-back provisions and with the vehicle market about to take a big dive I would think a lot of customers who are making payments will be walking away at the end of the term as the residual guaranteed values on Holden's for example exceed their realistic market value.

HGH are wide open to some big bad and doubtful debt provisioning with the type of lending they have been doing. They are however well capitalised as has been recently acknowledged by Fitch but a capital raise at some stage this year would not surprise me in the slightest.

[winner69]

I maintain that $250m is a big worry and the reason is this is all totally unsecured lending. Increasing numbers of people who have taken out loans for spurious consumer spending like holidays and retail splurges will be looking to do a full reset under the no asset procedure (short form bankruptcy) while they're unemployed. The recovery in this type of situation will be zero.

Maybe a fair chunk of it went to Air New Zealand ....do Harmoney take Air NZ credits as payments.

[nevchev]

Maybe a fair chunk of it went to Air New Zealand ....do Harmoney take Air NZ credits as payments.

Hahaha.Fly byes

[Baa_Baa]

I maintain that $250m is a big worry and the reason is this is all totally unsecured lending.

How much is HGH lending though, versus punters and other larger lenders using the platform? Can a case be made as to what % of the $250m receivables are at risk?

I'm sure they're more concerned about the $2b receivables for MV and business finance.

[nevchev]

With reducing interest rates and now an easing of building consent legislation i can see alot of small to medium size loans been applied for.
Time to get that sleepout and carport done

[Snoopy]

Motor vehicle loans is likely to be more of a slow moving problem. There will be no appetite to repossess a whole lot of vehicles en masse. In this environment there would be no-one to sell them to. Better to let things slow burn, and even put aside some car payments, deferring them to the end of the lease when a lump sum of capital becomes available. It is very hard to form a meaningful view of what happens to a motor loan that expires in 2-3 years. Kicking the loan down the road looks like the only short term solution.


I have been looking at some motor vehicle year to date sales figures.

https://www.mia.org.nz/Portals/0/MIA-Sales%20Data/Vehicle%20Sales/Monthly%20Sales%20Tables/2020/April%202020%20Sales%20Table.xls

Kia right on top in the lockdown month of April, even outselling perennial market leaders Toyota. And Heartland are the ones that finance Kia sales - wow! YTD Kia is in 5th place just behind Holden (also financed by Heartland). Kia being a 'budget' brand might grow. They seem to be having great success with the new Seltos small SUV. Let's say sales grow 10% in FY2021. Yet Holden is a zombie company now, so that part of the Heartland business will probably disappear altogether in three years as present day Holden loans unwind. Jaguar/Land Rover are the other brand financed by Heartland, as are Hino trucks. But they are both niche players and don't appear on the top 15 sales statistics.

Jaguar Land Rover are having some sales issues globally but seem to be running hot in New Zealand.

https://www.driven.co.nz/news/did-the-series-i-land-rover-kick-off-the-suv-segment-back-in-1948/

“For Jaguar, sales have experienced an increase of over 100 per cent since the launch of the F-Pace in 2017 and subsequent launches of the E-Pace and the EV I-Pace. Land Rover, too, has experienced double-digit percentage growth year on year thanks to the growth of the category but also having models with high-performance attributes."

Prestige brands generally slow in sales during a recession though. So I am picking JLR sales might halve this calendar year.

So what will all this do to Heartland's financing of new vehicles? Well, Heartland's financial year ends on 30th June. Only three months of the year will be 'post lockdown', so things might not be as ugly as some think. Particularly as dealers look to quit excess stock with sweet finance deals. Bad for motor dealers but ironically good for Heartland,

The market is always forward looking though. So the real interest is, what will motor vehicle finance look like in FY2021? If you are Heartland, don't look in the mirror. You will see 'ugly'. If the base case for funding new vehicles is split for FY2020 45:45:10 between Holden:Kia:JLR (an educated guess) then FY2021 is likely to look like 0:50:5 on the same scale. That means new car financing down 45%.

So what does this picture suggest for profitability in FY2021?

As at December 2019 the motor vehicle finance book at Heartland was $1,124m. Let's guess new vehicle sales were $500m of that. So a 45% reduction would see a loss of:

0.45 x $500m = $225m worth of finance business in turnover.

Motor vehicle finance has traditionally had some of the best margins at Heartland. Heartland's AGM presentation had an ROE north of 15%. In recessionary times I am going to stick to the 15% figure. This means the earnings that Heartland will miss out on due to plunging new car finance deals will be around:

0.15 x $225m = $34m

Of course the annual hit won't be this much, as finance typically has a three year cycle. So the FY2021 hit will be about 1/3 of that, $11.4m

I am guessing the FY2022 impact will be only half that in FY2021, $5.7m, but unfortunately the financing effect from FY2021 is cumulative into FY2022

Underlying profit was around $74m in FY2019 (a bit less in FY2020?). So it looks like new car financing alone will knock Heartland's profit down to just shy of $63m, or a 15% drop.

Lot's of figures pulled out of the air here.

Anyone like to comment if I am on the right track?

SNOOPY

[Beagle]

Guaranteed future minimum values are a product HGH has been offering on loans. Holden resale value is under intense pressure at present with GM's decision to cease manufacture in RHD.
Luxury car values could also come under serious pressure so the GFMV could see a fair percentage of Holden and JLR owners walking away from their vehicles at the end of the term and taking advantage of the guaranteed future minimum value which could exceed the resale value. Kia's should be okay.

[percy]

I think it will take some time for "issues" arising from the Corona Virus to work their way through.
Perhaps HGH's interim due February next year will give a full [fuller] picture.?
In the meantime TRA's interim report, due in late November this year ,may give us a better idea of how motor vehicle financing is tracking.

[Snoopy]

Guaranteed future minimum values are a product HGH has been offering on loans. Holden resale value is under intense pressure at present with GM's decision to cease manufacture in RHD.
Luxury car values could also come under serious pressure so the GFMV could see a fair percentage of Holden and JLR owners walking away from their vehicles at the end of the term and taking advantage of the guaranteed future minimum value which could exceed the resale value. Kia's should be okay.


I seem to recall on another thread you saying that you owned a 'newish Holden' Beagle, so I guess you have some personal interest in Holden residual values? Given what you have seen in the market, what value do you expect to see on your car when it is three years old? And how much lower will that be as a result of Holden becoming a 'zombie' brand?

I don't suppose you bought it on finance through Heartland? Although if you had been offered a guaranteed buyback price by doing so, perhaps you now feel you should have taken a Heartland finance deal!

SNOOPY

[Beagle]

I seem to recall on another thread you saying that you owned a 'newish Holden' Beagle, so I guess you have some personal interest in Holden residual values? Given what you have seen in the market, what value do you expect to see on your car when it is three years old? And how much lower will that be as a result of Holden becoming a 'zombie' brand?

I don't suppose you bought it on finance through Heartland? Although if you had been offered a guaranteed buyback price by doing so, perhaps you now feel you should have taken a Heartland finance deal!

SNOOPY

Yeap, I bought a Holden Calais V last year brand new.
3 year residuals are typically expressed as a percentage of the original retail prices I am sure you know. Some cars fare really well such as a Honda Civic which have their one fair price for all and don't do any discounting even for rental car firms and 3 year residuals can be as high as in the mid 60% range.

Residual value on Holdens are typically around 50% of original retail, (but nobody pays full retail for them), but will probably be less in the circumstances.

[Snoopy]

Yeap, I bought a Holden Calais V last year brand new.
3 year residuals are typically expressed as a percentage of the original retail prices I am sure you know. Some cars fare really well such as a Honda Civic which have their one fair price for all and don't do any discounting even for rental car firms and 3 year residuals can be as high as in the mid 60% range.

Residual value on Holdens are typically around 50% of original retail, (but nobody pays full retail for them), but will probably be less in the circumstances.


Thanks for the info. Let's say Holden's three year residuals work out at 45%, five percentage points less than budget. Why 45%?

The best selling Holden in NZ is the Colorado Ute.

https://www.stuff.co.nz/motoring/113716421/meet-new-zealands-top-10-vehicles

"Colorado is currently selling at rate at least twice that of any other Holden."
"sales, may pass the 5000 mark by the end of the year."

The Holden Colorado is nothing more than a re-badged Isuzu D-max. The Isuzu D Max continues to be sold in NZ. So it would be hard to argue that second hand ute buyers would not recognize a bargain when they see one. Utes have a pretty good record of retained value anyway, so I don't think 50% retained value for the Colorado is out of the question. If all other Holden's retain 40% of their value and the Colorado is at 50% (representing half of all Holden financed sales) , then that makes for a 45% vehicle portfolio retained value average.

Now, over three years lets say the Holdem loan book totals $225m. Let's say Heartland take a one off hit on the difference between the booked retained value (45% vs 50%) and the actual retained value.

0.05 x $225m = $11m

Not nice for shareholders, but a one off $11m write-down looks manageable. A withheld dividend should more than cover it.

SNOOPY

[Beagle]

To be honest Snoopy I don't think it will be that much. Guaranteed future minimum values are usually set at very conservative level's of around 40-45% anyway and come with strict conditions in regard to mileage and vehicle condition.

[Snoopy]

'Business Finance' must be a worry. The problem here is that many of these loans would have been taken out in a business environment that could not have conceived of a business lock down such as we are in now. Having no revenue does not mean you are an incompetent business person today. For example, what would be the point in bankrupting a mall store owner, then on selling the bankrupt's assets to a new store owner who may be less competent? And who would take on a lease in a mall that is closed, and liable to be closed again at short notice anyway? The only solution I can see to this is a multi-party solution. Banks, premesis owners, and business operators will have to work together and take a 'joint hit'. If they don't then all three will lose, and lose big time. OK banks might get their money back, but then they will have no-one to lend to. I think we are going to have to move out of the lock down phase before anything can happen. 'And Grant Robertson has provided the liquidity to allow everyone to wait. And if there is no light after six weeks, Robertson will provide more liquidity. 'Liquidating at the bottom' would be three way commercial suicide for business owners and landlords and banks alike.


The 19th March Heartland update didn't read well for business loans

https://www.nzx.com/announcements/350143

"Heartland expects that new lending levels in some portfolios, such as business intermediated and SME, will slow."

But things were a bit more cheerful with the 2nd April response to the government support measures for business,

https://www.nzx.com/announcements/351120

"Heartland Bank has been contacting its business lending customers that are most likely to be financially affected by COVID-19, to discuss their support options. To that end, Heartland Bank is pleased to support the New Zealand Government’s Business Finance Guarantee Scheme, the details of which were announced yesterday. The Scheme enables Heartland Bank, alongside other participating banks, to provide new and existing qualifying business customers with annual turnover of between $250k and $80m with business loans to meet their urgent liquidity and bridging finance requirements while they deal with the disruption to their businesses caused by COVID-19. Heartland Bank looks forward to being able to offer customers that support option and is accepting registrations of interest on its website at www.heartland.co.nz/covid-19-update now."

Under the scheme, businesses with annual revenue between $250,000 and $80 million can apply to their banks for loans up to $500,000, for up to three years.

The real sting was in the next paragraph though:

"Importantly, a range of other support options may be available to all Heartland Bank customers who have been financially affected by COVID-19. All affected customers are encouraged to contact Heartland to discuss support available to meet their loan repayments."

IOW, Heartland would really prefer that businesses sort themselves out without using this particular government scheme. Quite understandable when under it, Heartland would wear 20% of any 'generous' loan that went bad. Other banks seemed to agree. On 1st May, rules around the scheme were changed removing the $250,000 minimum revenue cap and allowing businesses in the agricultural space to join.

https://www.interest.co.nz/banking/104809/government-allows-banks-issue-taxpayer-underwritten-loans-businesses-including-agri

"Secondly, the Government is removing the requirement for a “general security agreement” under the scheme."

"This means that for a loan of more than $50,000, a bank will no longer have to "obtain security from the borrower under a general security agreement". "

"Borrowers will no longer have to draw down on all existing facilities provided to them by their bank before applying for a loan under the scheme."

That last sentence is important. I think it means that Heartland can effectively transfer existing loans, or at least the incremental headroom on existing loans into the scheme. Ultimately Heartland could transfer 80% of the risk of a marginal existing loan to the government. As far as I understand the banking laws, this does not reduce the amount of capital that Heartland needs to hold to support such a loan. But it does support the downside loss of capital if the loan were to go bad.

More recently we have the "COVID-19 Small Business Cash Flow Loan (SBCS)" administered by the IRD.

https://www.interest.co.nz/business/104805/small-business-cashflow-loan-scheme-details-unveiled-govt-write-viable-small

"Robertson said it was necessary for the Government to write businesses loans directly, in addition to underwriting bank loans, as the latter isn't meeting businesses' needs nor the Government's expectations."

The new IRD administered scheme provides an interest free loan for one year for up to $11,800 for a sole trader, to $100,000 for a firm with up to 50 full time employees. The scheme is only open for a one month window commencing 12th May. This must be serious competition for Heartlands 'O4B' on line small business loans. Who would take out a $100,000 loan from Heartland if they could get the same thing from the IRD at no cost? I guess if the IRD loan scheme is extended beyond 12th June , Heartland's O4B might be declared dead. But in the current business environment, I am not sure if this is a negative or a positive!

So what does this picture suggest for profitability in FY2021?

'O4B' was 3% of the Heartland bank loan book in December 2019, with $158m of loans on the books.

Heartland has been earning an ROE of more than 15% on this O4B portfolio.
If O4B sinks, then the annual tax profit loss for Heartland will be about:

0.15 x $158m = $24m

That is likely an overestimate as O4B also offers partially secured loans of up to $250,000 (well beyond the $100,000 limit of the NZ government scheme) and secured and unsecured loans into Australia. Those boundaries are beyond the IRD scheme. I would estimate the actual annualised profit hit to be 80% of my calculated figure, or around $19m. I estimate the IRD loan scheme may have brought forward about three months worth of loan applications that otherwise might have gone through O4B. If the IRD scheme is dropped on 12th June as planned, then the impact flowing into FY2021 may only be a couple of months. That equates to a reduction in FY2021 profit of $19m x 2/12 = $3.2m.

If the remaining 'outside of government scheme boundary' loans profit of $5m were to sink by 10%, then that would knock $0.5m off annual profits going forwards.

Likewise if the residual O4B loan profit balance of $19m- $3.2m = $15.8m were to reduce by 10%, that would wipe $1.6m off annual profits.

Now putting these three effects together, the expected annual profit decreases from the base year of FY2019 are as follows:

FY2021: -$3.2m - $0.5m - $1.6m = -$5.3m
FY2022: - $0.5m - $1.6m = -$2.1m

SNOOPY

[Cyclical]

Thanks for the hard work you put into the analysis in your posts, Snoopy, makes for interesting reading. Hold, or fold do you think?

[Snoopy]

Heartland has an objective of growing their business loans in areas that the big banks are less interested in serving. Supplying Working Capital and funding for Plant and Equipment are two areas where Heartland can help. Who are the customers? Many are SMEs and stand alone professionals and tradespeople. Plumbers, Electricians and Designers may not always cross paths. But they have a common problem where finding capital is not always straightforward. Many have modest capital needs that are not a priority for big banks. Heartland will lend money on the basis of 'business performance' and not how much equity a prospective borrower has in their own home.

Heartland have also partnered with at least three intermediary 'FinTech' lenders. Heartland lending through intermediaries increased by $101.7m up 34% on the previous year to $425m at EOFY2019. This represents 38% of all categorised 'business lending' at balance date. That percentage is set to increase as the more traditional -but lower margin- in house 'business relationship lending' book is run down, Heartland's intermediaries are often lenders who have their own independent on line lending platforms. These providers don't need a physical office that customers can visit. Heartland is in fact pushing forward their own business loan expansion targets through these FinTech partners. The three partners they are on record as working with are as follows (see Annual Review FY2017, p13):

1/ 'Spotcap Australia and New Zealand' This company changed ownership on 6th September 2019 for $A9.3m (ZIP HY2020 p6) and is now managed as a division of ASX listed Zip Co. (ASX:ZIP). The purchase included $NZ7m of NZ based receivables and $A23m of Australian SME receivables. 'Spotcap' has been active in Australia since 2015 and active in New Zealand since January 2017. The average Australian loan has a size of $35,000 and has a duration of nine months. A potential New Zealand customer is required to have an 18 month trading history and a turnover north of $200,000. Loans available are in the $10,000 to $250,000 range. There were $A36.9m of receivable loan assets on the books as at 31st December 2019 (ZIP HY2020 Presentation p22). The competitive advantage that Spotcap claim to have is the IP related to their 'Proven SME credit decisioning platform'. However this IP is not owned. It is licensed perpetually from 'Spotcap Global', the Berlin-based FinTech that offers “lending as a service” decision systems around the world.

2/ 'Fuelled' is a New Zealand based start up that has been trading since 2015. The problem that 'Fuelled' was created to solve was to answer the question

"What happens when cashflow gets tight?"

'Fuelled' sees uncollected invoices as having value. So they will lend a company money before an invoice is paid to 'tide them over'. The relationship is purely between the company and 'Fuelled', not with the debtor. Any such transaction is confidential, no personal guarantees are required and costs are simple and transparent. (For example, an outstanding $10,000 invoice can receive $9000 from 'Fuelled', along with a fee of $471 for 30 days cover). 'Fuelled' partners with Xero and MYOB. It can use a customer's own on line information in the cloud to determine how much funding it can provide. This detailed information means that a request in the morning can turn to cash that afternoon. Heartland Bank has a 25% shareholding (a value less that $1m at the time of subscription) in 'Fuelled' bought on 20th February 2017. This investment funded 'Fuelled''s own equity/balance sheet and provided a credit line as well.

The vehicle that runs 'Fuelled' is on the NZ Company's register. "FUELLED LIMITED (5344042) Registered".

https://app.companiesoffice.govt.nz/companies/app/ui/pages/companies/5344042

The company last filed a return on 26th March 2019 and is now overdue to file the FY2020 return. It is under threat of de-registration as I write this. I cannot connect to the company website (www,fuelled.co.nz). Heartland note in their FY2018 presentation that they have made a gain on the sale of Heartland's 'invoice finance business' of $0.6m. I am not clear if this transaction is related to 'Fuelled' or not.

3/ 'Harmoney' (not a spelling mistake) started in 2014 as ostensibly a peer to peer lender, although they have always had wholesale debt funding as well. Sadly for the small guy, the entry level lender now needs - as of 1st April 2020 - a cool $10m to participate. So far the company has facilitated over $1.6 billion in loans to over 50,000 customers on both sides of the Tasman. Heartland took a 10% stake in Harmony on 8th September 2014. Heartland made a further investment in 'Harmoney' on 15th January 2015 for a total investment of $3.5m. The second investment was needed to retain Heartland's 10% stake after 'TradeMe' bought in as a cornerstone investor. Based on the investment made by 'Trade Me', the market value of Heartland's 10% stake in 'Harmoney' became worth $5m.

'Harmoney' use algorithm based credit checks. But the core values of the company are plugged into human needs.

Harmoney makes money by charging a platform fee to borrowers and a service fee to investors. The platform fee amount varies from 2% to 6% depending on the borrower's credit grade, while the service fee is 1.25% on all amounts the borrower pays. Borrowers pay either $200 or $450, depending on the size of the loan, if their loan is successfully funded.
Harmoney peer to peer investors earn money from interest and receive repayments from borrowers as they are made, proportionate to the percentage of the loan total they funded.

'Harmoney' core business proposition is to:

a/ be easy to use.
b/ be convenient to use (they are 100% on-line and open 24/7)
c/ have fair interest rates, based on a borrowers personal risk,

'Harmoney' reported their first profit, after an accounting standard change, of $7.22m over FY2019. Included in these calculations were a recognition of tax loss assets of $4.85m and deferred R&D expenses of $4.74m. Before these adjustments, 'Harmoney' lost $233,000 in the year to March 2019. At EOFY2019, 'Harmoney' had $367m of financial receivables on the books. Heartland's share of this receivables book amounted to:

0.131 x $367m = $48m.

So what does this picture suggest for profitability in FY2021?

'Business Relationship' lending fell by 16% in FY2019 to $559.4m (Annual Review FY2019 p9), and I expect this trend to continue into FY2020 and FY2021. This means I am projecting the 'Business Relationship' loan book to be down to:

$559.4 x 0.84 x 0.84 = $395m

That number corresponds to the receivables book shrinking by $165m. We are told ROE for these loans is between 0% and 11% (AGM2019 Presentation p15). If the closed out loans averaged an ROE of 6%, this would represent a drop in Heartland profit from FY2019 levels of:

$165m x 0.06 = $10m

I am predicting that when some of the lending through intermediaries starts to shrink, Heartland will renew their interest in writing business relationship loans directly. So I see no further shrinkage in profit from this category between FY2021 and FY2022.

'Business Intermediated' lending is projected to grow in FY2020.

But I think that by FY2021, it will shrink back down 10% below FY2019 levels (down to $425.4m x 0.9 = $383m, a decrease of $42m). My reason for believing this is that there will be lower tradie activity in FY2021, and sensible tradespeople will have transferred to IRD backed ultra low interest loans, at least in NZ. The silver lining of this is that by existing Heartland customers effectively refinancing with the government, many bad debts to Heartland will be avoided. Business Intermediary loans have an ROE of between 11% and 15% (AGM2019 Presentation p15). If we assume the average margin is 13%, this will represent a loss of profit for Heartland in FY2021 of:

$42m x 0.13 = $5.5m

The kind of business loans sought by Heartland tend to be short term. So I am not expecting the general reduction in business loans to have a compounding effect year on year.

SNOOPY

[Snoopy]

Thanks for the hard work you put into the analysis in your posts, Snoopy, makes for interesting reading. Hold, or fold do you think?


I don't think Heartland is going to go out of business. So the question is what price is fair value for investment? I still remember New Zealand's second greatest ever banker, the late Sir John Anderson, standing up at a special PGW meeting called to sell off the highly successful PGW Finance business. He stated that even a really good finance business is only worth its asset backing. Sir John was PGW Chairman at the time. That was immediately post GFC. Fast forward to Heartland post Covid. Would Sir John be saying the same thing if he was still with us today?

SNOOPY

[nevchev]

I don't think Heartland is going to go out of business. So the question is what price is fair value for investment? I still remember New Zealand's second greatest ever banker, the late Sir John Anderson, standing up at a special PGW meeting called to sell off the highly successful PGW Finance business. He stated that even a really good finance business is only worth its asset backing. Sir John was PGW Chairman at the time. That was immediately post GFC. Fast forward to Heartland post Covid. Would Sir John be saying the same thing if he was still with us today?

SNOOPY

So what is fair value here Snoopy?Still alot of unknowns to work thru.

[Snoopy]

Yeap, all that no deposit unsecured lending to Harmoney is super safe...what could possibly go wrong lol

Sorry to pose an awkward question but....

Where does the Harmoney lending appear in the Heartland annual accounts? I will accept answers from allcomers (not just Beagle).

And yes, there is a reason for asking that question!

SNOOPY

[Snow Leopard]

Harmoney & the like are filed under Other Personal in the Accounts.

[King1212]

Broker slapped $1.54 target price

[Beagle]

Broker slapped $1.54 target price

Which one mate ?

[King1212]

Your favorite one...marketscreener ...

Been following all stocks with that marketscreener...seem pretty accurate

[Beagle]

Yeah I see that's the average price target of 3 brokers. Been some pretty big moves in banking stocks in the last few days. One wonders if we aren't at an inflection point ?
I brought up the chart but technical analysis wasn't much help. Share price is right on the 30 day MA line, whereas with say regional banks in Australia BEN and BOQ, there is a clear break up through the 30 day MA indicating a breakout. I also see clear breakouts above the 30 day MA for WBC, ANZ, NAB, and CBA but not for HGH ?

I have this on my watchlist. It appears to be building a bottom and I am following closely. The concern at a fundamental level is that the level of loan defaults is going to very seriously escalate both in this years accounts and next year. Its a very hard stock to price because the level of defaults and provisions is almost impossible to predict. I remain very cautious with this one. Disc: Presently don't hold.

[King1212]

Come on Master Beagle...no risk no gain....HGH is one of Nz best company

[Snoopy]

Harmoney & the like are filed under Other Personal in the Accounts.


Here is the bit I find confusing.

1/ There is a nice pie graph on page 8 and 9 of the 'Annual Review 2019' showing the distribution of gross receivables. That totals $4.4 billion and 'Harmoney and Other Consumer Lending' has a definite slot in $224.6m of the total. BUT

2/ When we turn to the 'Annual Report 2019' p40 and look at the 'Concentration of Credit Risk by Industry Sector' categories, the categories no longer line up. There is no obvious slot for Harmoney. Has it been rounded up into 'Households'? Or is it in 'Other'?

Yet an even more important question than that confusion is why I even have the right to ask the original question: "Where does the Harmoney lending appear in the Heartland annual accounts?" No one told me overnight that I shouldn't be asking such a question.

I thought Heartland had a 10% stake in Harmoney. I checked with the companies office and found I am out of date with this view.

https://app.companiesoffice.govt.nz/companies/app/ui/pages/companies/5177041/shareholdings?backurl=H4sIAAAAAAAAAEXLQQoCMQyF4dt0 O7pwGcSNCs5CcC4Q2qiFaVOTVOntHbHi7n8fvKHgjXTwnArmuJ QSir9vH3BESZypOcoWrU2tkMJuHPu%2BGFrVg3AtX47Zs5S9cI LeE4PDEIRU%2F%2B8OJ2ovlgBODcVg5eaYosF64%2FS6YPg8n5 g9hTNmmsGkkkscCH7%2BBiKNrJq6AAAA

Heartland now own 13.1% of Harmoney. That was a shock in itself as I don't remember Heartland announcing they were upping their stake. But 10% or 13.1% doesn't change the argument I am about to present. With such a small stake (I thought they needed 50.1% of an subsidiary for consolidation), why are Harmoney receivables consolidated into the Heartland accounts at all? Can anyone answer that?

SNOOPY

[Beagle]

My understanding is HGH do a LOT of the wholesale funding of Harmoney's loan book. I think all of this lending is unsecured.

[King1212]

Businesses got wage subsidy from the labour...free interest loan.... everything back to normal now.....chance of business failure b bad debts are low on the the short term. ..not sure about end of year....

[Beagle]

Businesses got wage subsidy from the labour...free interest loan.... everything back to normal now.....

You sure about that mate ? Have Ngai Tahu started up their tourism business's again ? https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12327101
Interesting article on Waitomo Caves on telly last night. Visitor numbers down more than 90%. Maybe a good time for Kiwi's to go and avoid the crowds ?

[King1212]

Not hospitality n tourism....what I said our economy. Yes...I will see businesses especially on tourism n hospitality go bust. .but HGH loans are heavy on farming.... agriculture.....so....yeahhh...

[dobby41]

You sure about that mate ? Have Ngai Tahu started up their tourism business's again ? https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12327101
Interesting article on Waitomo Caves on telly last night. Visitor numbers down more than 90%. Maybe a good time for Kiwi's to go and avoid the crowds ?

Good time for Kiwis to go to lots of places and avoid the crowds - we get our country back for a while (at a bit of the jobs cost).

[dobby41]

Not hospitality n tourism....what I said our economy. Yes...I will see businesses especially on tourism n hospitality go bust. .but HGH loans are heavy on farming.... agriculture.....so....yeahhh...

Good point - thread context is important.

[Snoopy]

3/ 'Harmoney' (not a spelling mistake) started in 2014 as a peer to peer lender. Sadly for the small guy, the entry level lender needs - as of 1st April 2020 - a cool $10m to participate. That hasn't stopped the company facilitating over $1.6 billion in loans to over 50,000 customers on both sides of the Tasman. Heartland took a 10% stake in Harmony on 8th September 2014. Heartland made a further investment in 'Harmoney' on 15th January 2015 for a total investment of $3.5m. The second investment was needed to retain Heartland's 10% stake after 'TradeMe' bought in as a cornerstone investor. Based on the investment made by 'Trade Me', the market value of Heartland's 10% stake in 'Harmoney' became worth $5m.

'Harmoney' reported their first profit an after tax gain of $7.22m over FY2019. Included in these calculations were tax losses of $4.85m and deferred R&D expenses of $4.74m. Before tax 'Harmoney' lost $233,000 in the year to March 2019. At EOFY2019, 'Harmoney' had $367m of financial receivables on the books. Heartland's share of this receivables book amounted to $36.7m.



My understanding is HGH do a LOT of the wholesale funding of Harmoney's loan book. I think all of this lending is unsecured.

You are saying that the consolidation of Harmoney into the Heartland accounts is because Heartland act as wholesale funders for Harmoney. And it is the not insignificant wholesale funding of Harmoney's books that has put Heartland's shareholders at risk, not the was 10% now 13.1% of Heartland's shareholding in Harmoney?

I don't know exactly how much Heartland has invested in Harmoney as an equity partner. It was $3.5m at the time of the TradeMe joining the share register which gave an implied $5m value for the Heartland stake as a result of a $3,5m total cash investment up to that point. If the stake is now 31% higher and the price paid to increase that stake was the same price TradeMe paid, then Heartland must have invested:

$5m x 0,31 = $1.55m more

to up their stake to 13,1%. So total cash put up by Heartland is now $3.5m + $1.55m = $5.05m.

That looks small bikkies compared to the $367m of loans current on the Harmoney loan book today.

(see https://www.harmoney.co.nz/investors/marketplace-statistics)

I must say I find the Harmoney reporting very opaque. I have never seen a full balance sheet published by Harmoney itself. If anyone can lead me to that information then I am all ears

Yet in the Heartland Annual Review 2019, 'Harmoney and Other Consumer Lending' only totalled $224m (a total which probably includes at least 'SpotCap' as well), and a total which has risen to $250m in the 'Company Factsheet 2020 as at 31-12-2019'. So it doesn't look like Heartland are doing all of the wholesale funding for Harmoney. You are of the view that Harmoney is done for in the post Covid-19 environment Beagle? I have had a look at the Harmoney thread on the peer to peer forum. Some investors have had some loans go bad, but these have been offset by good returns on other loans. It doesn't read like Harmoney is collapsing 'over there'.

SNOOPY

[Beagle]

Sorry mate I am not following this one especially closely so can't be much help.

[Snoopy]

I must say I find the Harmoney reporting very opaque. I have never seen a full balance sheet published by Harmoney itself. If anyone can lead me to that information then I am all ears

Yet in the Heartland Annual Review 2019, 'Harmoney and Other Consumer Lending' only totalled $224m (a total which probably includes at least 'SpotCap' as well), and a total which has risen to $250m in the 'Company Factsheet 2020 as at 31-12-2019'. So it doesn't look like Heartland are doing all of the wholesale funding for Harmoney.


Look what popped up when I put 'Harmoney Balance Sheet' into the search engine. The article is dated 5th March 2020.

https://australianfintech.com.au/harmoney-completes-115m-debt-securitisation-warehouse-facility/

"(Harmoney) has secured its first debt warehousing facility in Australia from one of the big four banks to cover the company’s unsecured personal lending book with a two-year availability period. The A$115 (approx $NZ124) million facility is designed to enhance the company’s capabilities to offer online personal lending on its own balance sheet in the Australian market."

"The company has recently also scaled up to NZ$140million the existing debt securitisation warehouse from the Bank of New Zealand, a subsidiary of the National Australia Bank (NAB) Group of companies."

Those debt facilities are designed to support future growth. The current Harmoney active loan balance is at $367m. I guess it is encouraging that two (or is it one, the wording of the article doesn't make this clear) other bank(s) is/are willing to back Harmoney. If Heartland had made $140m of facilities available to Harmoney which was then matched by $140m from the BNZ and then $124m came in from a mystery third banking player, then we have facility funding totalling just over $NZ400m in loans,

Digging back further, BNZ first stumped up with a initial $50m in 'securitisation funding' back in 7th March 2019.

https://www.interest.co.nz/banking/98492/harmoney-funder-says-50-million-securitisation-programme-bnz-doesnt-mean-any-changes

Securitisation is the conversion of an asset, such as a loan, into marketable securities (this is often done by aggregating similar loans into a loan package).
Overseen by a trustee, 'Harmoney Warehouse Ltd' has been set up as a special purpose vehicle to issue the securitisation programme's notes. The idea is the securitisation notes are sold to debt market investors at some point. BNZ have taken on senior notes. 'Senior' in this context is that BNZ are the first in line to get paid should any debt go bad. If any debt goes bad then the first 70c in the dollar of any recoveries are paid out to BNZ. If there is any money left after that, then that money goes to the next financier down the securitisation scale (if any) termed the mezzanine financier. Harmoney has a mezzanine financier, another Australasian entity that does not want to be named. Finally, if there is no more money to pay back the funders, the difference must be made up from Harmoney's own shareholder equity.

An alternative to securitisation is wholesale or institutional funding.

Information on the Harmoney balance sheet has been reported in another article.

https://www.interest.co.nz/banking/100850/online-lender-harmoney-reports-after-tax-gain-722-million-and-vastly-increased-assets

Following the successful implementation of a securitisation programme, Harmoney's balance sheet has been transformed over the past financial year (ended 31st March 2019) . Total assets stood at $65.51 million, up from $9.72 million the year before. The biggest component in the increase is the addition of $37 million of finance receivables, which have been funded by $37 million of borrowings. Another asset referred to in the article was $4.5m of tax losses. This information allows us to work out an 'upper bound' of shareholder equity at the 31-03-2019 balance date.

Harmoney Shareholder Equity is less than: $65.5m - $37m - $4.5m = $24m

After balance date (the article was written on 24th July 2019) the article reports that an additional minimum $20m in shareholder equity was in the process of being raised (possibly as much as $25m).

In this article

https://www.interest.co.nz/personal-finance/101804/harmoneys-neil-roberts-says-p2p-lender-which-launched-september-2014-has

another funder of Harmoney loans, TSB Bank, was revealed.

SNOOPY

[Beagle]

Wow, that's a lot of unemployed people that could give Harmoney the bird and walk away from their unsecured loan.

[Snoopy]

Wow, that's a lot of unemployed people that could give Harmoney the bird and walk away from their unsecured loan.


I am a bit flighty about Heartland's interest in Harmoney as well. But extrapolating a few thoughts from my previous post.

Assumption Let's assume that Heartland has the same senior debt funding conditions for supporting loans that the BNZ has,

Scenario Let's imagine that in the Covid-19 downturn, 30% of all money lent by Heartland to Harmony to be on lent to Harmoney customers is not returned.

Under this scenario, Heartland's 'loan support money' will be returned in full (because under the senior debt arrangement I have assumed, if the combined securitised debt goes bad, then the first 70c in the dollar of any recoveries will be paid out to Heartland). The next in line mezzanine financier will take a bath and get nothing of their loan back. Then the rest of the creditors will have to fight over the remaining assets of Harmoney that will be put into receivership. Under this scenario, Heartland will lose their equity in Harmoney, which I have previously estimated to be worth around $5m. That won't be nice for Heartland shareholders, but it wouldn't be the end of the world either. Could it be you are getting a little too worried about the bear mauling Harmoney to death, and the associated downstream effect on Heartland shareholders?

SNOOPY

[Beagle]

Snoopy - BEN has just announced Covid 19 provisioning of $148.3m https://www.news.com.au/finance/business/breaking-news/bendigo-bank-provides-148m-for-virus-hit/news-story/674c96f7e63a75b4b9c5ea13d7dc1d6b?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Friday+29+M ay+2020 and other banks provisioning is included in this article.

BEN has a market cap of almost exactly 5 times the size of HGH. If HGH's provisioning is in line with theirs's they can expect to provide one fifth of what BEN has which suggests Covid 10 provisioning for HGH might be somewhere around ~ $30m.

What might be a fun exercise seeing as you like to get your snout deep into these things is to compare market cap's of the other Aussie banks and their Covid 19 provisioning and see what that suggests on a relative basis for HGH ?

[winner69]

Worry that huge provisioning by other banks

Percy saw this likely to happen at Heartland and bailed before the **** really hit the fan

Reads the market well that percy.

[Snoopy]

Snoopy - BEN has just announced Covid 19 provisioning of $148.3m https://www.news.com.au/finance/business/breaking-news/bendigo-bank-provides-148m-for-virus-hit/news-story/674c96f7e63a75b4b9c5ea13d7dc1d6b?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Friday+29+M ay+2020 and other banks provisioning is included in this article.

BEN has a market cap of almost exactly 5 times the size of HGH. If HGH's provisioning is in line with theirs's they can expect to provide one fifth of what BEN has which suggests Covid 10 provisioning for HGH might be somewhere around ~ $30m.

What might be a fun exercise seeing as you like to get your snout deep into these things is to compare market cap's of the other Aussie banks and their Covid 19 provisioning and see what that suggests on a relative basis for HGH ?


Not a bad concept Beagle. I see some implementation difficulties though. Westpac, for example, made big Covid-19 write downs in the half year results announced earlier this month. But then they announced those write downs only represented an initial bite at the Covid-19 write down cherry. Very likely more significant write downs would be coming. The main unaccounted for fear there seems to be what might happen to the value of office buildings once a whole lot of companies realise they don't need an office fortress in downtown Sydney or Melbourne. So the first problem is assessing what the final Covid-19 write down might be. The second problem is thinking of Westpac, for example, as a scaled up Heartland for the purposes of making write down estimations for the latter. One might ask how many downtown office blocks do Heartland finance? I suspect the answer is none. To be honest I am finding it hard to find a suitable measuring stick for Heartland. So rather than do a top down comparison of how Heartland should behave, based on experience of other companies, I am currently doing a 'bottom up' analysis. I am starting from Heartland's FY2019 result and superimposing on that what I think 'market forces' will do to profits going forward, division by division.

I don't think there is too much point in dwelling on FY2020 which only has a month to run. I am much more interested in FY2021 and FY2022. Stay tuned!

SNOOPY

[Snoopy]

I am going to base my earnings estimates on the normalized profits of Heartland in FY2019, before this Covid-19 thing hit

Heartland FY2019 (Normalised Profit): $73.617m+ 0.72x($1.8m+$1.3m+$1.1m) -$1.936m -$0.173m =$74.532m

I am going to use FY2019 as my 'base case' becasue tjhat result contains no impact of Covid-19.

Notes on Normalising Profit

1/ I have adjusted for the $4.2m in costs associated with listing on the ASX. Specifically this included $1.8m of corporate restructure and ASX listing costs, a $1.1 million dollar break fee due to the early repayment of a Tier 2 Australian Subordinated bond and $1.3m in foreign currency costs also related to the corporate restructure (See 'Annual Review FY2019 p40).
2/ I have removed the $1.936m fair value movement of investment property gain, and the $173k gain on sale of investments.

The adjustments I make below are based on what I believe will be a fairly significant changes in 'borrowing attitudes' and 'business opportunities' going forwards.

Reverse Mortgages

Jeff has a fairly bullish view on the growth prospects for reverse mortgages going forwards, at least for FY2020 By contrast I believe the reverse mortgage market will be flat by FY2021. My reasoning for this is that in a rising property market, oldies can feel good about taking out a reverse mortgages because the value of their home is increasing consummately and their overall wealth is not going down. By contrast, when property prices fall, not only is any capital they spent on a reverse mortgage lost. The interest charges very obviously burrow into the oldies remaining savings as well. I am not saying that all reverse mortgages for capital expenditure will stop. If a pensioner needs capital for a hip replacement or to purchase unfunded cancer drugs or to visit a faraway relative they will still borrow. But they might not borrow to update their car, or for an annual holiday in the sun. Many of the oldies have frugality built into their character. It is a psychological mindset that I think will see reverse mortgage growth stall.


Motor Vehicle Finance Adjustment



So what does this picture suggest for profitability in FY2021?

As at December 2019 the motor vehicle finance book at Heartland was $1,124m. Let's guess new vehicle sales were $500m of that. So a 45% reduction would see a loss of:

0.45 x $500m = $225m worth of finance business in turnover.

Motor vehicle finance has traditionally had some of the best margins at Heartland. Heartland's AGM presentation had an ROE north of 15%. In recessionary times I am going to stick to the 15% figure. This means the earnings that Heartland will miss out on due to plunging new car finance deals will be around:

0.15 x $225m = $34m

Of course the annual hit won't be this much, as finance typically has a three year cycle. So the FY2021 hit will be about 1/3 of that, $11.4m.

I am guessing the FY2022 impact will be only half that in FY2021, $5.7m, but unfortunately the financing effect from FY2021 is cumulative into FY2022.

Underlying profit was around $74m in FY2019 (a bit less in FY2020?). So it looks like new car financing alone will knock Heartland's profit down to just shy of $63m, or a 15% drop.

Lot's of figures pulled out of the air here.

Anyone like to comment if I am on the right track?


Business Finance (Part 1): O4B




So what does this picture suggest for profitability in FY2021?

'O4B' was 3% of the Heartland bank loan book in December 2019, with $158m of loans on the books.

Heartland has been earning an ROE of more than 15% on this O4B portfolio.
If O4B sinks, then the annual tax profit loss for Heartland will be about:

0.15 x $158m = $24m

That is likely an overestimate as O4B also offers partially secured loans of up to $250,000 (well beyond the $100,000 limit of the NZ government scheme) and secured and unsecured loans into Australia. Those boundaries are beyond the IRD scheme. I would estimate the actual annualised profit hit to be 80% of my calculated figure, or around $19m. I estimate the IRD loan scheme may have brought forward about three months worth of loan applications that otherwise might have gone through O4B. If the IRD scheme is dropped on 12th June as planned, then the impact flowing into FY2021 may only be a couple of months. That equates to a reduction in FY2021 profit of $19m x 2/12 = $3.2m.

If the remaining 'outside of government scheme boundary' loans profit of $5m were to sink by 10%, then that would knock $0.5m off annual profits going forwards.

Likewise if the residual O4B loan profit balance of $19m- $3.2m = $15.8m were to reduce by 10%, that would wipe $1.6m off annual profits.

Now putting these three effects together, the expected annual profit decreases from the base year of FY2019 are as follows:

FY2021: -$3.2m - $0.5m - $1.6m = -$5.3m
FY2022: - $0.5m - $1.6m = -$2.1m



Business Finance (Part 2): Business Intermediated & Business Relationship




So what does this picture suggest for profitability in FY2021?

'Business Relationship' lending fell by 16% in FY2019 to $559.4m (Annual Review FY2019 p9), and I expect this trend to continue into FY2020 and FY2021. This means I am projecting the 'Business Relationship' loan book to be down to:

$559.4 x 0.84 x 0.84 = $395m

That number corresponds to the receivables book shrinking by $165m. We are told ROE for these loans is between 0% and 11% (AGM2019 Presentation p15). If the closed out loans averaged an ROE of 6%, this would represent a drop in Heartland profit from FY2019 levels of:

$165m x 0.06 = $10m

I am predicting that when some of the lending through intermediaries starts to shrink, Heartland will renew their interest in writing business relationship loans directly. So I see no further shrinkage in profit from this category between FY2021 and FY2022.

'Business Intermediated' lending is projected to grow in FY2020.

But I think that by FY2021, it will shrink back down 10% below FY2019 levels (down to $425.4m x 0.9 = $383m, a decrease of $42m). My reason for believing this is that there will be lower tradie activity in FY2021, and sensible tradespeople will have transferred to IRD backed ultra low interest loans, at least in NZ. The silver lining of this is that by existing Heartland customers effectively refinancing with the government, many bad debts to Heartland will be avoided. Business Intermediary loans have an ROE of between 11% and 15% (AGM2019 Presentation p15). If we assume the average margin is 13%, this will represent a loss of profit for Heartland in FY2021 of:

$42m x 0.13 = $5.5m

The kind of business loans sought by Heartland tend to be short term. So I am not expecting the general reduction in business loans to have a compounding effect year on year.


Rural Finance Adjustment

Rural finance at Heartland is transitioning between 'all of business funding' to funding seasonal assets. The former is far less profitable than the latter. So while I am expecting the rural loan book as a total receivable value to shrink, I am picking the Rural finance profit to remain flat,

Harmoney and Other Consumer Lending

Harmoney' reported their first profit, after an accounting standard change, of $7.22m over FY2019. Included in these calculations were a recognition of tax loss assets of $4.85m and deferred R&D expenses of $4.74m. Before these adjustments, 'Harmoney' lost $233,000 in the year to March 2019. At EOFY2019, 'Harmoney' had $367m of financial receivables on the books. The main profit that Heartland makes from Harmoney is not from the fraction of the Harmoney NPAT that they are entitled to via their partial ownership of Harmoney. No the profit comes from the provision of funds to Harmoney to run their loan book. If Heartland fund the loan book to the extent of their shareholding, then Heartland's share of this receivables book amounted to:

0.131 x $367m = $48m

At a 15% return on this loan money, this level of lending would produce:

0.15 x $48m = $7.2m of annual profit.

I predict that Harmoney will not survive the post Covid-19 and will be wound down in an orderly way mid way through FY2021. Other consumer lending should be OK.




FY2021FY2022


Baseline Reference Profit$74.5m$74.5m


Reverse Mortgage Adjustment$0m$0m


Motor Vehicle Finance Adjustment($11.4m)($17.1m)


Business Finance (Part 1) Adjustment($5.3m)($2.1m)


Business Finance (Part 2) Adjustment($15.5m)($15.5m)


Rural Finance Adjustment$0m$0m


Harmoney and Other Consumer Lending Adjustment($3.6m)($7.6m)


Total Forecast NPAT$38.7m$32.2m


No. Shares on Issue581.0m581.0m


Earnings Per Share6.7cps5.5cps



I don't think many current shareholders will be happy reading this! However, for those that exited at the right time, perhaps they will be happier? I am hoping the real results won't be as gloomy as this. I am also assuming in these calculations that all of Jeff's initiatives over the next couple of years come to nothing. That is a state of affairs that if you look at Jeff's record is unlikely to pan out. Still, what do they say in tough times? Hope for the best, but plan for the worst? Maybe in 2022 when interest rates on deposit drop to 0%, getting a 5c annual dividend on your Heartland shares will look attractive?

SNOOPY

[Beagle]

For what its worth Snoopy, Westpac initial provisioning was 2.5% of market cap so on an adjusted basis that suggests ~ $17m for HGH.
As you suggest they have very different business models but I would suggest whatever level of specific and general provisioning banks bring to account in their books is nothing better than a very wild guess anyway as everyone is effectively just throwing darts at a dartboard while blindfolded as we're in unchartered waters and nobody has a playbook for this thing or how its going to affect their customers.

Concentrate of the level of their capital adequacy and liquidity, those are the more reliable indicators we have, right at the moment.

[Cyclical]

Is there any concern at this point, and maybe a bit further down the track, that there may be a flight of capital as those with term deposits get a bit nervous? Being a smaller bank, are people in danger of lumping them in with the likes of South Canterbury / Hanover? I know back in the day my parents wisely pulled their money from Hanover and that they currently have a TD with Heartland... I might have to ask how they are feeling about everything when I catch up with them this long weekend.

[Beagle]

Fitch have recently given them the tick of approval and maintained their credit rating.

[pierre]

Fitch have recently given them the tick of approval and maintained their credit rating.

Mr Market has given them a tick too - up another couple of points at the close to 119.:t_up:

[King1212]

Upward from here...will settle around $1.50 ....till the next update.

Always my favorite stock...!

U should jumped onboard master Beagle!

[Beagle]

Well done mate.

[Snoopy]

Upward from here...will settle around $1.50 ....till the next update.

Always my favorite stock...!


King , I have to admire your optimism. But $1.50 is basically pre-Covid levels. You really think that this financial crisis, which has been described as the greatest since the depression of the 1930s, will have no effect on the financial system at all?

Let me reprise what assumptions I have built into my own valuation modelling for Heartland.

1/ Reverse Mortgage market flat.
2/ A 45% reduction in New Vehicle funding, coupled with no reduction in used vehicle funding. A lot of that is due to the end of Holden, which was by far the largest new vehicle funding partner for Heartland.
3/ The effective closing down of O4B small business funding for three months (because O4B can't compete with 0% interest rate loans from the IRD) with O4B recovering to 90% of base level after that.
4/ 'Business Intermediated' loans will likewise shrink by 10%.
5/ Business Relationship loans will decline by 16% for two years, because Heartland indicated pre-Covid they were wanting to wind back this side of the business.
6/ Rural earnings steady.
7/ The collapse of Harmoney, the unsecured consumer loan lender, in about a year's time.

If you think those assumptions are wrong, I will quite happily rework my valuation model. But as it stands looking out to FY2021, a share price of $1.50 and eps of 6.6c equates to a PE ratio of 22, rising to 27 for FY2022. One could make an argument that the PE for Heartland should be half that. And that equates to a share price of just 75c.

SNOOPY

[Beagle]

Heartland has traded in a PE range of 10-17. Close to 17 is a SELL. I find this one almost impossible to value at the moment, (not sure anyone can reliably predict the earnings) as the extent of projected losses are impossible to quantify. In the past, bank shares have been a very bad place to be in a deep recession. I can't see any good reason why it would be different this time so I remain VERY cautious.

[King1212]

Haha....when u ever got HGH valuation or sp right Snoopy?

Even before covid....your valuation was all over the place.

Pre covid was $1.80 ish. I sold before it crashed $1.84.

I remembered when SP went down to $1.30...gloom n doomed before covid... everyone was thinking capital raise...but HGH did not do capital raise...it shocked the market.

Everything comes to a risk....that is share market.

Recession or no recession...no one has a crystal ball. Even my master Beagle ...he was cashing all up before covid n sworn no to be back in the market till end or year or when the market recover.

But...he jumped in back quicker than he thought so ....

Be careful out there....crazy market here

[King1212]

What I learnt from my other Master...

Master Wu kui
Yesterday is history, tomorrow is a mystery, but today is a gift. That is why it is called present.

[BlackPeter]

Haha....when u ever got HGH valuation or sp right Snoopy?

Even before covid....your valuation was all over the place.

Pre covid was $1.80 ish. I sold before it crashed $1.84.

I remembered when SP went down to $1.30...gloom n doomed before covid... everyone was thinking capital raise...but HGH did not do capital raise...it shocked the market.

Everything comes to a risk....that is share market.

Recession or no recession...no one has a crystal ball. Even my master Beagle ...he was cashing all up before covid n sworn no to be back in the market till end or year or when the market recover.

But...he jumped in back quicker than he thought so ....

Be careful out there....crazy market here

Nobody can predict future stock prices (Ben Graham), and I suppose neither Snoopy nor me nor any professional analyst nor you are exempt from this rule. Does not mean we don't get it right from time to time ... has something to do with statistics and the number of possible choices ;):

Still - I find it always useful to understand the reasoning of other people explaining why they assess a certain stock in a certain way. It helps to better view and understand a company, to see risks and opportunities.

[King1212]

One rule on the market...there is no rule...market is irrational.

Go and value Air...AIA.....kmd ....SKT...

Yet our darling PPH...which every kiwis in denial about the future of PPh...
They have to list in ASX to be able to grow.

The only NZ bank that listed in the market. Hgh will storm the weather and will sail it through

[Snoopy]

Haha....when u ever got HGH valuation or sp right Snoopy?


In the early days looking at Heartland, I underestimated the post GFC property recovery in the greater Queenstown market. When the property market recovered, the risks of the alternative downward path are quickly forgotten. Not by me though. So I have no regrets about my Heartland warnings of the time. I was only made to look foolish with the benefit of hindsight.



Even before covid....your valuation was all over the place.

Pre covid was $1.80 ish. I sold before it crashed $1.84.


IIRC this was when Beagle topped up at $1.85, just a few days before he changed his mind and sold back out. I advised Beagle at the time of my capitalised dividend valuation price well below that. And I was proved right that this was a very poor time to buy HGH.



I remembered when SP went down to $1.30...gloom n doomed before covid... everyone was thinking capital raise...but HGH did not do capital raise...it shocked the market.


I remember that too. That is when I entered the Heartland share register. Another good call by me at the time. I think my record with Heartland over the last couple of years is pretty good.



Everything comes to a risk....that is share market.

Recession or no recession...no one has a crystal ball. Even my master Beagle ...he was cashing all up before covid n sworn no to be back in the market till end or year or when the market recover.

But...he jumped in back quicker than he thought so ....

Be careful out there....crazy market here


If you think 'no recession' is an option going forwards, I think you need to get out more. Still it does explain why you think the share price might be headed back to $1.50 soon. For the record, if no recession does turn out to be the path forward, then I agree with you.

SNOOPY

[King1212]

Recession or no recession....it will happen or not.... nobody can tell.

However....the true economy impact won't be seen at least 6months from now.....why?

1. Too much money pumped on the market. Not on domestic but international too. Europe is going to release 750b to help the recovery.

2. Labour has given too much lollies. Businesses all using the tap....yum yum....

3. Consumer spending is still okay at the moment....we all locked down for 6 weeks. .. hardly spent any Moni. All of us still got paid....full, subsidy or loss job...on benefits. People can even tap in 8 weeks of $500 cash!

No matter what RNB said....NZ banks are in a good position to weather the storm.... people still in cautious.

Only time can tell. No body would see market recover so fast. Not even me....I even told TJ...I would be out of market because my balls was shaken as the market was so vilotile.

Good luck....only small holding on HGH...love u all

[Snoopy]

For what its worth Snoopy, Westpac initial provisioning was 2.5% of market cap so on an adjusted basis that suggests ~ $17m for HGH.
As you suggest they have very different business models but I would suggest whatever level of specific and general provisioning banks bring to account in their books is nothing better than a very wild guess anyway as everyone is effectively just throwing darts at a dartboard while blindfolded as we're in unchartered waters and nobody has a playbook for this thing or how its going to affect their customers.

Concentrate of the level of their capital adequacy and liquidity, those are the more reliable indicators we have, right at the moment.


You are right to bring into the spotlight, the capital position of Heartland at this time Beagle. Here is what Heartland said about capital inflows with their 18th March 2020 announcement. I am not aware of this position being updated since.

"Heartland continues to forecast a result in line with the original NPAT forecast in the range of $77 million to $80 million, and expects that a result in the middle of that range is likely. (i.e. $78.5m)"

Now, so far in FY2020 there have been two dividends:

1/ On 06/09/2019 a 6.5cps dividend was declared for a total payment of $37.007m, of which $11.296m was clawed back via the dividend re-investemt scheme. That adds up to a net dividend payment of $37.007m - $11.296m = $25.711m. The DRP increased the number of shares on issue to 576,651,228
2/ On 11/03/2020 a 4.5cps dividend was declared. of $25.950m of which $5.600m was clawed back That adds up to a net dividend payment of $25.950m-$5.600m= $20,350m. The share DRP increased the number of shares on issue by 3,511,020 to 580,162,248.

This means the net increase in shareholder capital over FY2020 is therefore projected to be: $78.5m - $20.350m - $25.711m = $32.439m

Now how much capital is likely to be written off over FY2020?

The new ECL (Expected Credit Loss) method for provisioning, under IFRS9, is more conservative than the old standard it replaced. As of EOFY2018, the previous allowance from the older standard was increased by nearly $28m. Although the finance industry grizzled about this at the time, with Covid-19 emerging the increased provisions now seem prescient.

I have a big concern around small business debt. Small businesses are Heartland's customers. But the government has issued Heartland a big 'get out of jail free' card with the no interest IRD loan scheme. Jeff will no doubt be encouraging any knife edge loans that Heartland has on its books right now, to change to the IRD scheme asap! So I am picking the new ECL loan provisions on the books right now will cover any business debt write-downs.

Moving onto the motor vehicle portfolio, I have concerns on the lease deal residual values of the soon to be dead Holden marque. Now, over three years, lets say the Holdem loan book totals $225m. Let's say Heartland take a one off hit on the difference between the booked retained value (40%) and the actual retained value (maybe as low as 35%). This difference would result in a 'capital write down' of:

0.05 x $225m = $11m

Rural loans I am picking will be Okay, as Heartland continue their orderly wind back from relationship loans to more profitable seasonal lending.

Reverse Mortgages tend to be less highly geared than conventional mortgages. So I don't see any capital write downs here, even if house prices drop 10% overnight.

Harmoney must be a real concern with lots of unsecured lending to hapless consumers But the main downside to Harmoney, I believe, is to the downstream business that Heartland operates for Harmoney. IOW the wholesale money advanced by Heartland to Harmoney. This working capital, in the shadow of a probable default, should be largely protected by Senior Debt loan agreements. OTOH, what would be lost is any equity that Heartland has in Harmoney itself, about $5m as I have previously estimated.

This means the likely extra one off provisioning I am expecting from Heartland in FY2020 is a total of $16m.

The retained capital verses write-down situation looks more than manageable, and it will be boosted by the very likely non payment of any dividend in September. With all this in mind I am prepared to make a bold call. 'There will be no capital raising done by Heartland for the rest of this calendar year' Remember, you read it here first!

SNOOPY

[Beagle]

You're right mate, my last minor top up was at $1.85 in late December 2019, but most were bought in the 130's 140's and 150's.
By early February 2020 it was clear the world had changed and I sold out in the late 180's as a capital preservation measure.

IIRC the guaranteed future value of Holden's is set at just 40% so I would not be too worried about losses there as the terms and conditions on those agreements are quite strict both in terms of mileage and the condition the vehicle is returned in.

Capital adequacy looks sound to me and I note Fitch recently reaffirmed their credit rating.

In terms of Covid 19 provisioning, scaling this against other banks provisioning gives an indicative range of $9m to $30m for 2020. If we go towards the top end of that range, (just as a guess seeing as they do get into a lot of unsecured lending), and call it $25m that means they will still make ~ $53m for 2020. Not too bad and gives about 9.1 cents eps so at $1.19 they're on a PE of about 13, (BUT that level of Covid 19 provisioning is a just a total guess on my part).

A lot depends upon how the N.Z. economy tracks over the next couple of years. Mercifully, we appear to be doing exceptionally well in the battle against Covid 19 so maybe the shares are about fair value given how well we've done with the Covid battle ? As King1212 quite rightly says, there's a vast amount of stimulus money being thrown around and another $20 billion unallocated in the budget sitting in reserve.

HGH broken up through the 30 day MA so technically its starting to look encouraging too. Crikey, I've almost talked myself into buying some lol

Some random thoughts on future loan demand.
Retired folks home equity lending demand will be very strong as retirees battle 100 year low's in investment returns on fixed interest deposits.
I expect luxury car loan demand to be down ~ 50%
The average age of our N.Z. vehicle fleet is very old at about 14 years if my memory serves me correctly. Record low interest rates will be stimulatory. A lot of business's with have a freeze on capex and many households will have reduced incomes. Nevertheless there is still a vast body of people out there that will need to update their vehicles so I expect about 15-20% reduction in demand for standard type vehicle loans. Overall demand including 50% reduction in luxury cars might be just over 20% in my opinion. We will see a lot of manufacturers offering multi year interest free deals if you pay full RRP.
BMW for example are already doing 1/4 down and 3 further payments of a quarter each in the subsequent 3 years @ 0% interest.

[Baa_Baa]

HGH broken up through the 30 day MA so technically its starting to look encouraging too. Crikey, I've almost talked myself into buying some lol

It's above the 50MA was well, clear run to $1.30 resistance as banks are risk on again, a pause then on to the 61.8% fib and resistance around $1.53. It could move fairly quickly, creeps away from you this one unless you've got clear buy markers and act.

[winner69]

If Heartland 'needs' to do some big provsioning' (guesses on here from $10m to $30m or something) why haven't they mentioned it

Jeez year ends soon - they would have a pretty good idea of what's needed by now

Are we all jumping to conclusions and and seeing things that aren't there .... because if they need a huge provision the $75m to $80m or whatever profit guidance is very misleading.

[Beagle]

Maybe an announcement is coming in June so they will save face for their August reporting. As long as they announce something sometime in June they could still make the case they were complying with their continuous disclosure obligations.

[Snoopy]

If Heartland 'needs' to do some big provsioning' (guesses on here from $10m to $30m or something) why haven't they mentioned it

Jeez year ends soon - they would have a pretty good idea of what's needed by now

Are we all jumping to conclusions and and seeing things that aren't there .... because if they need a huge provision the $75m to $80m or whatever profit guidance is very misleading.


The key phrase in the 18th March update from Jeff is the last sentence.

"This situation appears is developing very quickly, and Heartland will continue to monitor conditions and provide further market updates if and when required."

IOW everything is so uncertain that it would be misleading to give updates because they might be out of date the next day anyway.

Jeff will no doubt be awaiting the resolution of this discussion on this forum so he can figure out what he 'market' expectations of any write down is. It saves Heartland money if we do this work for him - see how smart Jeff is? Then some time next week Jeff will announce the write down to 'meet the market' and remind shareholders that it is a 'non-cash adjustment' so doesn't materially affect any previous forecasts made by him. That's how these things work isn't it Winner?

SNOOPY

[King1212]

Dang ...got 2 thumbs up from Master Beagle for above post n MET post.

I learnt well eh Master Beagle.

Admin....I think I deserve more strips.... any chance to get promoted? possible more strips?

[Baa_Baa]

The key phrase in the 18th March update from Jeff is the last sentence.

"This situation appears is developing very quickly, and Heartland will continue to monitor conditions and provide further market updates if and when required."

IOW everything is so uncertain that it would be misleading to give updates because they might be out of date the next day anyway.

Jeff will no doubt be awaiting the resolution of this discussion on this forum so he can figure out what he 'market' expectations of any write down is. It saves Heartland money if we do this work for him - see how smart Jeff is? Then some time next week Jeff will announce the write down to 'meet the market' and remind shareholders that it is a 'non-cash adjustment' so doesn't materially affect any previous forecasts made by him. That's how these things work isn't it Winner?

SNOOPY

Tongue in cheek hopefully 👍😀

I guess we all know and love your FA and the discussion it attracts, though we also know you’re not really into ‘market sentiment’ or how it affects share prices. Like poles apart.

A long term holder who has no intention of selling ever, might be interested in whether their company is still sound and their dividends sustainable. FA is an important informer of that. As it is to the extent above or below fair value.

Occasionally though, even for us unlikely to ever sell our assets, the market presents from time to time opportunities to buy well below our estimate of fair or reasonable value. Likewise when it’s above or way above estimated value.

It’s these extended events that FA abandons us, only helpful for underlying value and we need a mechanism to determine whether to take advantage of lower than value prices and accumulate, or higher than value prices and take some of the table enjoying a capital gain for re-investment later.

And particularly when to act.

In my time I’ve not found a better complement to FA (what to buy or sell) than TA (when to buy or sell). It is a reliable indicator of the market sentiment when it over or under runs fair value. Combined with these insights and a willingness to have a predetermined strategy, one can act and improve overall long term returns, over and above relying on one analytics technique or another.

[Snoopy]

For what its worth Snoopy, Westpac initial provisioning was 2.5% of market cap so on an adjusted basis that suggests ~ $17m for HGH.
As you suggest they have very different business models but I would suggest whatever level of specific and general provisioning banks bring to account in their books is nothing better than a very wild guess anyway as everyone is effectively just throwing darts at a dartboard while blindfolded as we're in unchartered waters and nobody has a playbook for this thing or how its going to affect their customers.

Concentrate of the level of their capital adequacy and liquidity, those are the more reliable indicators we have, right at the moment.


I want to reprise this topic, as it remains an operational risk for Heartland going into the future, albeit not a current one, The risk here is that Heartland will run out if money to pay their depositors back because of a mismatch in time between when a depositor wants their money back and when the lender , who the deposit money has passed through to, wants to pay it back. Heartland funding capital is approximately 75% term deposits from bank customers and 25% form various institutional bonds. These bonds at half year balance date are listed in order of maturity date.



BondAmountIssue DateRepayment Date


Two Year Unsubordinated Notes$A50m08-03-201908-5-2021


Medium Term Note (MTN) Debt Issuance$A100m13-11-201913-05-2022


Five Year Unsubordinated Notes$NZ150m21-11-201721-11-2022


Five Year Unsubordinated Notes$NZ125m12-04-201912-04-2024


Other Certificates of Deposits (1)$NZ69.811m??-??-??????-??-????


Registered New Certificates of Deposits (1)$NZ20m16-03-2020??-??-????



(1) Reported on 18th March market update.

Note that in contrast to previous years all Subordinated Notes and Bonds have been redeemed. Why is this important? Because a subordinated debt is an unsecured loan or bond that ranks below other, more senior loans or securities. That means in the event of a partial default, Heartland now only has to pay their unsubordinated back debt back ahead of most other creditors. I think that includes Heartland bank account depositors,

For those who have forgotten (I had) there is a particularly detailed summary of the Heartland Reverse Mortgage business from pages 15 to 33 in this Heartland Presentation.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/327018/290747.pdf

On page 20 we learn that the weighted average length of a reverse mortgage turns out to be 6.1 years in Australia and 7.1 years in New Zealand. These are average figures at the discretion of the house owners, and it is the owners who decide when a reverse mortgage contact is terminated, not Heartland. Reverse mortgages are terrible for liquidity because Heartland has to stump up cash now, with no interest income or capital repayments to be collected until the reverse mortgage contract is terminated. The Heartland bond program is =time wise= out of step with the average repayment schedule for Reverse Mortgages However Jeff can patch up any holes in the mismatch by inducing NZ small scale depositors to put money into Heartland Bank accounts. All that is fine as long as depositors retain confidence in the bank. Confidence, however, can be fickle in tough times. IMO retaining the BBB credit rating, which Heartland has done, is crucial in maintaining customer confidence. Well done Jeff - so far! Where are those longer dated wholesale bond investors you were going to obtain for us though?

How worried am I about the liquidity mismatch at Heartland? I have to say that:

1/ I am not too worried, BUT
2/ I am also aware that he liquidity risk right now is way way higher than it ever has been over the whole existence of Heartland.

SNOOPY

[winner69]

Jeff says "This situation appears is developing very quickly“ (Covid that is)

We should be pleased that Jeff (and his Heartland) are very agile and resilient and full of vitality (Rob Campbell uses these terms term a lot but I don’t think he’s a good example of what they stand for)

Nearly three months have passed and no doubt Jeff has done a lot of monitoring. The year end is only a few weeks away as well so Jeff wil know what the answer is.

No news is good news. Heartland don’t have much need to increase provisions and that $75m to $80m profit F20 is safe as houses. No worries here

Bit of a worry PERCY packed a sad bailed from his beloved Heartland (he was a trader rather than an investor after all) ...I’d be gutted if Jeff gave him The nudge nudge wink wink thing and left other shareholders in the dark.

[Snoopy]

How worried am I about the liquidity mismatch at Heartland? I have to say that:

1/ I am not too worried, BUT
2/ I am also aware that he liquidity risk right now is way way higher than it ever has been over the whole existence of Heartland.


I went to bed last night and woke up worried. So time to do a bit more work on this liquidity question. Looking just at the year ahead, from an EOFY2019 perspective, I have taken the contracted loan maturities from Heartland Group Holdings ( AR2019 p43 )and subtracted from that the equivalent figures for subsidiary Heartland Bank ( Heartland Bank Disclosure statement for June 2019 p64 ). The difference, of course, represents largely the Heartland Reverse Mortgage business in Australia.



Loan Maturity
HGH FY2019 Financial Receivables Maturity: Contracted
less HBL FY2019 Financial Receivables Maturity: Contracted
equals Heartland Australia FY2019 Financial Receivables Maturity: Contracted


On Demand
$80.584m
$45.228m
$35.356m


0-6 months
$1,020.160m
$1,003.319m
$16.841m


6-12 months
$646.123m
$618.563m
$27.560m


Deposit Maturity
HGH FY2019 Financial Liabilities Maturity: Contracted
less HBL FY2019 Financial Liabilites Maturity: Contracted
equals Heartland Australia FY2019 Financial Liabilities Maturity: Contracted


On Demand
$895.290m
$898.292m
($3.002m)


0-6 months
$1,531.594m
$1,512.358m
$19.236m


6-12 months

Replies: 0
Views: 64

Nevl
Today, 01:22 PM Go to last post

Go to first new post RAK Rakon
Started by Nevl, 16-03-2006 11:48 AM


$620.836m
$611.382m
$9.454m


Loan-Deposit Maturity


Loan-Deposit difference is Heartland Australia FY2019 Financial Receivables - Liabilities: Summation


On Demand


$38.358m


0-6 months


($2.395m)


6-12 months


$18.106m



So what does this table mean?

The loan maturity is ostensibly the money that is coming in, and the deposit figure is the wholesale loan supporting the Reverse Mortgage that has to be repaid. When the difference figure between loans and deposits becomes negative Heartland Australia has a problem. Because that means there isn't enough money coming in to pay the depositors back. The 0-6 month period in the tables represents the time period starting 1st July 2019 and finishing 31st December 2019. Heartland obviously survived this negative difference period, because they are still trading. I imagine some small change from Heartland Bank (it was only a $2.350m deficit after all) must have been shuffled off to Australia to meet the contractual shortfall. But this was pre-Covid. And right now the NZ Government has legislated that 'dividends' from NZ banks have been ordered not to be paid. So what would have happened if this shortfall had occurred within the current 1st January 2020 and 30th June 2020 time frame? I think Heartland Australia, and by extension Heartland Group Holdings could have been in trouble. With Heartland Australia now 'out on a limb' seemingly cut off from Heartland Bank funding, I think the monitoring of the liquidity of Heartland Australia is something that we shareholders will now have to watch closely.

SNOOPY

[justakiwi]

Bit of a worry PERCY packed a sad bailed from his beloved Heartland (he was a trader rather than an investor after all)

So anybody who makes a decision to exit a holding, is automatically a trader? That’s BS. Read Percy’s post properly as he clearly explained the reasoning behind his decision to exit HGH.


...I’d be gutted if Jeff gave him The nudge nudge wink wink thing and left other shareholders in the dark.

I really hope this was joke because if it wasn’t, you should be ashamed of yourself. I don’t know Jeff, but I know Percy well enough to know he would never be part of something like that!

[winner69]

So anybody who makes a decision to exit a holding, is automatically a trader? That’s BS. Read Percy’s post properly as he clearly explained the reasoning behind his decision to exit HGH.


!

Yep, I read Percy’s reasoning why a divorce from HGH was necessary

I think you and me have different meanings / interpretation for the term ‘investor’

My interpretation of percy to exit ...circumstances changed so he closed out his (long term) trade in Hgh

[King1212]

Come on guys...peace talk...we have enough tension between china n usa.

Don't want any more here...after all it is only a share company.

Right or wrong...market will determine it at last.

People are more worry about HGH...than AIR or SKT... funny that. That what I said....no rule in the market. At the end....the market will price it to the human emotion

[Baa_Baa]

11638
Chill, it's a beautiful day. :)

[justakiwi]

So what, pray tell, is your definition of investor then, and how is it different from trader?


Yep, I read Percy’s reasoning why a divorce from HGH was necessary

I think you and me have different meanings / interpretation for the term ‘investor’

My interpretation of percy to exit ...circumstances changed so he closed out his (long term) trade in Hgh

[Snoopy]

Let me reprise what assumptions I have built into my own valuation modelling for Heartland (under Scenario 1)

1/ Reverse Mortgage market flat.
2/ A 45% reduction in New Vehicle funding, coupled with no reduction in used vehicle funding. A lot of that is due to the end of Holden, which was by far the largest new vehicle funding partner for Heartland.
3/ The effective closing down of O4B small business funding for three months (because O4B can't compete with 0% interest rate loans from the IRD) with O4B recovering to 90% of base level after that.
4/ 'Business Intermediated' loans will likewise shrink by 10%.
5/ Business Relationship loans will decline by 16% for two years, because Heartland indicated pre-Covid they were wanting to wind back this side of the business.
6/ Rural earnings steady.
7/ The collapse of Harmoney, the unsecured consumer loan lender, in about a year's time.



I have been thinking about alternative future earnings paths, and have decided to re-run my earnings model using different input parameters. I am not withdrawing what I have retrospectively labelled as 'Scenario 1'. I am just putting an alternative view forward, acknowledging that alternative future profit paths are possible. Rather than repeat previous workings that do not change, I will report in detail only on the changes I am making.

Reverse Mortgages

I have used FY2019 as a base level of business. However the reverse mortgage business has continued to grow over HY2020 (Australian +9.5% to $887m, New Zealand +4.9% to $536m => Whole portfolio now $1,423). I am going to assume zero growth for the second half of FY2020. Consequently I intend to use these half year figures to create a new base level of activity. Furthermore I intend to model the whole reverse mortgage portfolio showing incremental gains of 2.5% over both FY2021 ( $1,423m x 1.025 = $1,459m) and FY2022 ( $1,459m x 1.025 = $1,495m), This means the incremental increase in turnover for our years of interest are:

FY2021: $1,459m - $1,319m = $140m
FY2022: $1,495m - $1,319m = $176m

We can now use the average ROE for Reverse Mortgages (Heartland AGM 2019 Presentation p15) of 13% to forecast the incremental earnings in our years of attention.

FY2021: $140m x 0.13 = +$18m
FY2022: $176m x 0.13 = +$23m

Motor Vehicle Finance

My new vehicle funding scenario remains unchanged, I am going to add in a used vehicle funding decline of 10% (previously 0%). I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.

FY2021/2022: -$75m x 0.15 = -$11m

Because I am modelling finance deals with a three year life, this annual loss compounds.

Business Finance

No change

Rural finance

No change

Harmoney and Other Consumer Lending

The main profit that Heartland makes from Harmoney is not from the fraction of the Harmoney NPAT that they are entitled to via their partial ownership of Harmoney. No, the profit comes from the provision of funds to Harmoney to run their loan book. If Heartland fund the loan book to the extent of their shareholding, then Heartland's share of this receivables book amounted to:

0.131 x $367m = $48m

At a 15% return on this loan money, this level of lending would produce:

0.15 x $48m = $7.2m of annual profit.

I predict that Harmoney will be severely affected post Covid-19 and will struggle on at half their current size. That corresponds to a $7.2m /2 = $3.6m profit hit per annum.



FY2021FY2022


Baseline Reference Profit$74.5m$74.5m


Reverse Mortgage Adjustment$18m$23m


Motor Vehicle Finance Adjustment (New)($11.4m)($17.1m)


Motor Vehicle Finance Adjustment (Used)($11.0m)($22m)


Business Finance (Part 1) Adjustment($5.3m)($2.1m)


Business Finance (Part 2) Adjustment($15.5m)($15.5m)


Rural Finance Adjustment$0m$0m


Harmoney and Other Consumer Lending Adjustment($3.6m)($3.6m)


Total Forecast NPAT$45.7m$37.2m


No. Shares on Issue581.0m581.0m


Earnings Per Share7.9cps6.4cps



SNOOPY

[Snow Leopard]

11640
The Snow Leopard (https://animals.sandiegozoo.org/animals/snow-leopard) patiently holds HGH

[winner69]

F20 NPAT

Snoopy forecast $37.2m to $45.7m

Jeff says $77m $80m

Hope Jeff is on the ball.

[percy]

F20 NPAT

Snoopy forecast $37.2m to $45.7m

Jeff says $77m $80m

Hope Jeff is on the ball.
Jeff's projections were made on 18th March.
The world is now a very different place,and I very much doubt Jeff, or anyone else, would have any idea how the next 3 months,let alone the next 3 years, will turnout for HGH.
I certainly have no idea.
Perhaps the word we have to get used to is "challenging".
I know I could not say HGH is "well positioned."

ps.Anthong Gough is the owner developer of "The Strip" one of the most popular socialising locations in the inner city , the row of restaurants, bars and nightclubs that front onto the Avon River between Hereford and Cashel Streets.
He had to call on his brothers to help him achieve the level of finance before banks would lend to him.
A recent article I read,he said he expected half of his tenants would go broke.Now we expand the ripple affect of that,and we can see a huge amount of capital lost.But whose capital ?.How quickly will they go broke.?What value is a failed bar/resaturant.?Will Anthony Gough go broke.?When will we know the answers.?

pps.Sorry Winner69I could not be bothered replying to your Sunday rant about me being a trader .

[Snoopy]

F20 NPAT

Snoopy forecast $37.2m to $45.7m

Jeff says $77m $80m

Hope Jeff is on the ball.


Let's just correct the record about who said what.

Forecast Profit



FY2020FY2021FY2022


Jeff$77-$80mNMNM


Snoopy Scenario 1 (my post 13361)NM$38.7m$32.2m


Snoopy Scenario 2 (my post 13392)NM$45.7m$37.2m



As you can see I am not trying to second guess Jeff. I am trying to fill in the blanks that Jeff hasn't told us about yet. Personally, I have given up caring about the FY2020 result. Bar one month's trading, it is all historical anyway and it has been distorted by Covid-19. This is why I am using FY2019 as my profit base case. The sharemarket is always forward looking. So it will be the profits from FY2021 and FY2022 that drive the HGH share price forward from here.

The above profit figures are about operational profits. The thing I will be paying attention to when the FY2020 results are released are the one off write downs. Any such write downs will represent Jeff's thinking on where the damage is going to come in the future.

SNOOPY

[Beagle]

This greying and weary looking Beagle https://www.bing.com/images/search?view=detailV2&ccid=UcvKD%2bgN&id=FBB949352A92AF5CF00A39B1B4266218CA7D6248&thid=OIP.UcvKD-gN68dSTD6vjJnSyAHaEA&mediaurl=https%3a%2f%2fthehappypuppysite.com%2fwp-content%2fuploads%2f2018%2f12%2fOld-Beagle-long.jpg&exph=650&expw=1200&q=old+beagle&simid=607989613051514183&selectedIndex=0&ajaxhist=0 appears to be watchful of a lot of trouble ahead and is a good representation of how I am at present.

I agree with Percy there is no way of reliably knowing how much trouble but once the stimulus money runs out we will find out how many people and business's have been swimming naked.

What I find both confronting and perplexing is how few people and business's have a decent rainy day fund to weather a decent storm. I know this from long experience running my accounting practice. Why most people choose to sail so close to the wind with their finances, (its not that hard to build a decent rainy day fund over a number of years if you can show restraint and discipline with spending) is something that has dogged me for decades.

Beagle's are pack animals. I suspect the other one's sense that the real trouble starts in FY21 and carries on into FY22 indicates to this one that his nose for trouble is working pretty well. This greying dog will not try and quantify the extent of the trouble ahead but senses it in sufficient quantity to stay away and look for his next feed elsewhere.

I agree with Baa Baa that there is no better friend for FA than TA but a TA signal on its own is not enough to shake me out of my belief that some share prices are substantially disconnected with the underlying economic reality. A recovery from here in this one would see me put HGH into that category.

My sense is HGH is probably about fair value at present but with little prospect of dividends in the foreseeable future and obvious downside risk, this one is for investors with more patience and tolerance to risk than me.

[winner69]

Sorry Snoops ....misunderstood you ..or didn’t read properly.

[winner69]

This greying Beagle https://www.bing.com/images/search?view=detailV2&ccid=UcvKD%2bgN&id=FBB949352A92AF5CF00A39B1B4266218CA7D6248&thid=OIP.UcvKD-gN68dSTD6vjJnSyAHaEA&mediaurl=https%3a%2f%2fthehappypuppysite.com%2fwp-content%2fuploads%2f2018%2f12%2fOld-Beagle-long.jpg&exph=650&expw=1200&q=old+beagle&simid=607989613051514183&selectedIndex=0&ajaxhist=0 appears to be watchful of a lot of trouble ahead.

I agree with Percy there is no way of reliably knowing how much trouble but once the stimulus money runs out we will find out how many people and business's have been swimming naked.

What I find both confronting and perplexing is how few people and business's have a decent rainy day fund to weather a decent storm.

Rainy day funds not good use of capital they say ..that’s why there’s so much debt floating around.

Government leads by example ....Robertson says the rainy days have arrived so he he has a license to borrow heaps.

[Snoopy]

I agree with Percy there is no way of reliably knowing how much trouble but once the stimulus money runs out we will find out how many people and business's have been swimming naked.

What I find both confronting and perplexing is how few people and business's have a decent rainy day fund to weather a decent storm.


I think what many haven't got their head around yet is that the cushioning of the economy with wage stimuli is to prevent an economic melt down. The wage subsidy will not rescue the economy. It will hopefully allow some employers to think more carefully about the post Covid-19 work environment rather than sacking staff in a panic. But people are going to be laid off in large numbers and it is going to be serious. Some may think it amazing that there are so many folk out there insufficiently prepared for this eventuality. But let's say you are a young well qualified working couple who have just bought a house in Auckland. Would it be reasonable to think that both of you might be locked out from work for two months (the wage subsidy doesn't equate to anything like your normal wages remember) , and then both of you face the prospect of job losses at the same time? Then you both face the toughest job market for a generation? Even loss of income insurance typically only lasts for six months. I don't think there was any reasonable way to prepare for what we are seeing now. Rather than 'swimming naked', what you will see is a whole lot of people on the out tide who think they have a safe pair of togs on, when they all suddenly find out together that their tog's elastic has disintegrated.

So how does this affect Heartland? Heartland looks to the project covering market with loans taken out and repaid within the year. I have been forecasting a 10% drop in credit demand across the business loan portfolio. But this will lead to a much greater proportional loss in profits, because channels like O4B are so efficient already, that you can't cut the cost base to match the fall in revenue. Then there is the savage blow of the government competing with you in the loan market with 0% loans. I wonder if I am being too conservative forecasting 'only' a 10% fall in demand for business loans at Heartland? I had it in the back of my mind that some customers from the bigger banks might migrate to Heartland as a banker of last resort? Respected property developer Anthony Gough, the new face of a typical Heartland customer?

SNOOPY

[winner69]

Jeff often repeats Heartland's fortunes depend on what GDP growth is and levels of unemployment

[Beagle]

A bit off topic but why have a rainy day fund at all ?
Serious health issues, temporary loss of income and similar are not uncommon issues. Well regarded American financial commentator Suzie Orman explains https://www.suzeorman.com/blog/emergency-fund-101/

[winner69]

A bit off topic but why have a rainy day fund at all ?
Serious health issues, temporary loss of income and similar are not uncommon issues. Well regarded American financial commentator Suzie Orman explains https://www.suzeorman.com/blog/emergency-fund-101/

Our own esteemed Mary says the same

Good to see Mary honoured for her services to financial literacy education

Seeing we on Heartland thread seems jeff will have to wait longer for his knighthood

[Snoopy]

Reverse Mortgages

Jeff has a fairly bullish view on the growth prospects for reverse mortgages going forwards, at least for FY2020 By contrast I believe the reverse mortgage market will be flat by FY2021. My reasoning for this is that in a rising property market, oldies can feel good about taking out a reverse mortgages because the value of their home is increasing consummately and their overall wealth is not going down. By contrast, when property prices fall, not only is any capital they spent on a reverse mortgage lost. The interest charges very obviously burrow into the oldies remaining savings as well. I am not saying that all reverse mortgages for capital expenditure will stop. If a pensioner needs capital for a hip replacement or to purchase unfunded cancer drugs or to visit a faraway relative they will still borrow. But they might not borrow to update their car, or for an annual holiday in the sun. Many of the oldies have frugality built into their character. It is a psychological mindset that I think will see reverse mortgage growth stall.


Jeff sees a bright future in Reverse Mortgages. But I wonder if this whole loan category is being overhyped? Let me explain...

On page 8 and 9 in Annual Review 2019, there is a big pie chart of receivables. The biggest slice of the pie is "Reverse Mortgages", up 19.4% from $1104.5m to $1,318.8m. Great for shareholders. I see the current Heartland Senior's reverse mortgage rate is 6.5% compounding monthly (https://www.heartland.co.nz/reverse-mortgage/reverse-mortgage-calculator).

6.5% compounding monthly equates to a bill of 6.5%/12 = 0.5416% per month. Over the year this interest rate compounds 1.005416^12 = 6.7%

So the accrued interest during the year must have been something like:

$1,104.5m x 0.067 = $74m

Now, the key word in the above sentence is accrued. The interest would be booked into Heartland's profits. But it would then go onto the Heartland books as an account receivable, boosting the size of the Reverse Mortgage Account Receivable pie graph slice. This process would go on, on average over 6 years, Contrast this to most of the other loans where Heartland actually collects interest owed, with interest paid each period in cash. The actual growth in the size of the underlying new customer book for Reverse Mortgages over FY2019 was therefore:

( $1,318.8m - $74m) / $1,104.5m = +12.7%

That is still good. But it is well below the 19.4% growth figure printed on the PIE graph. And it is below the growth rate of Motor Vehicle Finance listed at 13.3%. My conclusion is that 'Reverse Mortgages' are not quite the growth engine that Heartland are telling us they are. And in today's interest rate environment, how long will Heartland be able to sign up business at what seems to be an exorbitant annual equivalent mortgage interest rate of 6.7%? Especially since the Australian government is under pressure to reduce the Federal Supplementary Income reverse mortgage scheme rate down from an 'exorbitant' 5.25% (edit: new Oz government rate is 5.15%)

SNOOPY

[Beagle]

All mortgages charge interest or compound monthly so its best to stick to the headline rate when comparing them.
https://www.interest.co.nz/borrowing
Table below shows well respected TSB bank charging 5.34% on a standard variable home loan so 6.5% for a reverse equity loan with guarantees you won't lose your home do not look exorbitant to me.

[winner69]

I for one would be very disappointed if Jeff comes out and says there's a $20m or so hit to profit because of Covid

Jeez, he seemed OK with $77m to $80m about 3 months ago and the year end is nigh ...and he's said nothing

No news is good news

[King1212]

That would make a class action master winner....that a big drop of forecast.

[Snoopy]

I have been looking at some motor vehicle year to date sales figures.

https://www.mia.org.nz/Portals/0/MIA-Sales%20Data/Vehicle%20Sales/Monthly%20Sales%20Tables/2020/April%202020%20Sales%20Table.xls

Kia right on top in the lockdown month of April, even outselling perennial market leaders Toyota. And Heartland are the ones that finance Kia sales - wow! YTD Kia is in 5th place just behind Holden (also financed by Heartland). Kia being a 'budget' brand might grow. They seem to be having great success with the new Seltos small SUV. Let's say sales grow 10% in FY2021. Yet Holden is a zombie company now, so that part of the Heartland business will probably disappear altogether in three years as present day Holden loans unwind. Jaguar/Land Rover are the other brand financed by Heartland, as are Hino trucks. But they are both niche players and don't appear on the top 15 sales statistics.

Jaguar Land Rover are having some sales issues globally but seem to be running hot in New Zealand.

https://www.driven.co.nz/news/did-the-series-i-land-rover-kick-off-the-suv-segment-back-in-1948/

“For Jaguar, sales have experienced an increase of over 100 per cent since the launch of the F-Pace in 2017 and subsequent launches of the E-Pace and the EV I-Pace. Land Rover, too, has experienced double-digit percentage growth year on year thanks to the growth of the category but also having models with high-performance attributes."

Prestige brands generally slow in sales during a recession though. So I am picking JLR sales might halve this calendar year.

So what will all this do to Heartland's financing of new vehicles? Well, Heartland's financial year ends on 30th June. Only three months of the year will be 'post lockdown', so things might not be as ugly as some think. Particularly as dealers look to quit excess stock with sweet finance deals. Bad for motor dealers but ironically good for Heartland,

The market is always forward looking though. So the real interest is, what will motor vehicle finance look like in FY2021? If you are Heartland, don't look in the mirror. You will see 'ugly'. If the base case for funding new vehicles is split for FY2020 45:45:10 between Holden:Kia:JLR (an educated guess) then FY2021 is likely to look like 0:50:5 on the same scale. That means new car financing down 45%.

So what does this picture suggest for profitability in FY2021?

As at December 2019 the motor vehicle finance book at Heartland was $1,124m. Let's guess new vehicle sales were $500m of that. So a 45% reduction would see a loss of:

0.45 x $500m = $225m worth of finance business in turnover.

Motor vehicle finance has traditionally had some of the best margins at Heartland. Heartland's AGM presentation had an ROE north of 15%. In recessionary times I am going to stick to the 15% figure. This means the earnings that Heartland will miss out on due to plunging new car finance deals will be around:

0.15 x $225m = $34m

Of course the annual hit won't be this much, as finance typically has a three year cycle. So the FY2021 hit will be about 1/3 of that, $11.4m

I am guessing the FY2022 impact will be only half that in FY2021, $5.7m, but unfortunately the financing effect from FY2021 is cumulative into FY2022

Underlying profit was around $74m in FY2019 (a bit less in FY2020?). So it looks like new car financing alone will knock Heartland's profit down to just shy of $63m, or a 15% drop.

Lot's of figures pulled out of the air here.

Anyone like to comment if I am on the right track?






Motor Vehicle Finance

My new vehicle funding scenario remains unchanged, I am going to add in a used vehicle funding decline of 10% (previously 0%). I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.

FY2021/2022: -$75m x 0.15 = -$11m

Because I am modelling finance deals with a three year life, this annual loss compounds.





Forecast Profit



FY2020FY2021FY2022


Jeff$77-$80mNMNM


Snoopy Scenario 1 (my post 13361)NM$38.7m$32.2m


Snoopy Scenario 2 (my post 13392)NM$45.7m$37.2m




I have put my motor finance posts together so that readers can see at once the whole sorry story. It is motor vehicle financing that is torpedoing any potential Heartland profit recovery in FY2022 as I see it, The problem is there is a 'lag effect' on Heartland profits as the much smaller sized future new car loan book ripples through the system. I am assuming that all of the profits from signing a three year finance deal on a motor vehicle are not booked in year 1. I am imagining motor vehicle finance profits are booked as the annual use by the customer of the vehicle is accrued. But no doubt there are enough clever people reading this to correct me if I am wrong.

The shutting down of Holden is a big part of this projected two year profit decline. It is true that Heartland has Kia as a reasonably priced alternative brand to finance. Heartland backed 'Kia Finance' only started operating on 4th November 2019. The official line is that the Holden brand will be retired "by 2021". But in reality it looks like most of the Holden stock of cars will be sold off by the end of June 2020. That doesn't leave much overlap between the two brands from a financing perspective. And the JLR luxury brands are likely to fall into their own recession induced finance hole too (as I previously noted) I wish I had better news for Heartland shareholders going forwards. But if motor vehicle loans work on average in three year cycles, we are looking at three solid down years before Heartland finds a 'new motor vehicle' sales base. The only hope I can see out of this is if Jeff signs a new finance marque partnership - he did do the Kia deal last year after all.

SNOOPY

[Beagle]

Jeff will be Snooping, (sorry couldn't resist) around other marques but all will have existing arrangements and Holden were the 4th biggest brand in N.Z. with 8% market share.
That said Snoopy, its evident demonstrators and unsold stock as well as Holden trade-in's will be around for many years to come...a brand that size doesn't simply disappear from N.Z. roads overnight. Holden dealers still have lots of unsold stock to last them well into 2021 in my opinion. Then all those Holden owners will turn their vehicles over every so many years. At least with vehicle finance you have something to repossess when times get tough. Try repossessing used commercial kitchen equipment under an open for business loan and you'd be lucky to get 10 cents on the dollar in today's hospitality market.

Its open for business and unsecured Harmoney loans that have the most potential to be anything but harmonious in my opinion.

[Baa_Baa]

Have you looked at what the Holden dealers are diversifying into? They’re backing Holden to clear brand name stock, at big discounts, but also for long term service and support, and also putting up other marques for sale. Survival.

[Snoopy]

Have you looked at what the Holden dealers are diversifying into? They’re backing Holden to clear brand name stock, at big discounts, but also for long term service and support, and also putting up other marques for sale. Survival.


In Christchurch the local Holden dealer sells Mazda as well. When I went to visit the Kapiti Coast, the Holden dealer there also handles Kia and Suzuki. All these arrangements were in place before Holden 'pulled the plug'. Some dealers will continue to represent the brand for service and support. But not all. The Kapiti dealer I noticed has ripped down all Holden branding from the building quick smart, and there is not a Holden to be seen on site.

Yet all this is moot, because IIRC the financing agreement with Heartland was with 'Holden New Zealand', not the individual dealers. Holden New Zealand will be winding down new vehicle sales by 2021. There may be a very few unsold models out the back of dealers yards in Auckland come new year. But they'll probably be registered as demonstrators and sold on as used cars. The press releases I have read are very clear. By 2021 Holden New Zealand will be gone from the new car market. That means there will be no new Holden sales approved for finance via Heartland by Holden New Zealand from that point. Of course there will still be used Holden cars around. But Heartland will no longer have an exclusive deal to finance those sales. And future Holden sales will be at used vehicle prices, which will require a lower dollar level of funding like all used cars. That's how I read the situation.

SNOOPY

[Snoopy]

I am going to base my earnings estimates on the normalized profits of Heartland in FY2019, before this Covid-19 thing hit

Heartland FY2019 (Normalised Profit): $73.617m+ 0.72x($1.8m+$1.3m+$1.1m) -$1.936m -$0.173m =$74.532m

I am going to use FY2019 as my 'base case' because that result contains no impact of Covid-19.

Notes on Normalising Profit

1/ I have adjusted for the $4.2m in costs associated with listing on the ASX. Specifically this included $1.8m of corporate restructure and ASX listing costs, a $1.1 million dollar break fee due to the early repayment of a Tier 2 Australian Subordinated bond and $1.3m in foreign currency costs also related to the corporate restructure (See 'Annual Review FY2019 p40).
2/ I have removed the $1.936m fair value movement of investment property gain, and the $173k gain on sale of investments.

The adjustments I make below are based on what I believe will be a fairly significant changes in 'borrowing attitudes' and 'business opportunities' going forwards.

Reverse Mortgages

Jeff has a fairly bullish view on the growth prospects for reverse mortgages going forwards, at least for FY2020 By contrast I believe the reverse mortgage market will be flat by FY2021. My reasoning for this is that in a rising property market, oldies can feel good about taking out a reverse mortgages because the value of their home is increasing consummately and their overall wealth is not going down. By contrast, when property prices fall, not only is any capital they spent on a reverse mortgage lost. The interest charges very obviously burrow into the oldies remaining savings as well. I am not saying that all reverse mortgages for capital expenditure will stop. If a pensioner needs capital for a hip replacement or to purchase unfunded cancer drugs or to visit a faraway relative they will still borrow. But they might not borrow to update their car, or for an annual holiday in the sun. Many of the oldies have frugality built into their character. It is a psychological mindset that I think will see reverse mortgage growth stall.


Motor Vehicle Finance Adjustment

So what does this picture suggest for profitability in FY2021?

As at December 2019 the motor vehicle finance book at Heartland was $1,124m. Let's guess new vehicle sales were $500m of that. So a 45% reduction would see a loss of:

0.45 x $500m = $225m worth of finance business in turnover.

Motor vehicle finance has traditionally had some of the best margins at Heartland. Heartland's AGM presentation had an ROE north of 15%. In recessionary times I am going to stick to the 15% figure. This means the earnings that Heartland will miss out on due to plunging new car finance deals will be around:

0.15 x $225m = $34m

Of course the annual hit won't be this much, as finance typically has a three year cycle. So the FY2021 hit will be about 1/3 of that, $11.4m.

I am guessing the FY2022 impact will be only half that in FY2021, $5.7m, but unfortunately the financing effect from FY2021 is cumulative into FY2022.

Underlying profit was around $74m in FY2019 (a bit less in FY2020?). So it looks like new car financing alone will knock Heartland's profit down to just shy of $63m, or a 15% drop.

Lot's of figures pulled out of the air here.

Anyone like to comment if I am on the right track?

Business Finance (Part 1): O4B


So what does this picture suggest for profitability in FY2021?

'O4B' was 3% of the Heartland bank loan book in December 2019, with $158m of loans on the books.

Heartland has been earning an ROE of more than 15% on this O4B portfolio.
If O4B sinks, then the annual tax profit loss for Heartland will be about:

0.15 x $158m = $24m

That is likely an overestimate as O4B also offers partially secured loans of up to $250,000 (well beyond the $100,000 limit of the NZ government scheme) and secured and unsecured loans into Australia. Those boundaries are beyond the IRD scheme. I would estimate the actual annualised profit hit to be 80% of my calculated figure, or around $19m. I estimate the IRD loan scheme may have brought forward about three months worth of loan applications that otherwise might have gone through O4B. If the IRD scheme is dropped on 12th June as planned, then the impact flowing into FY2021 may only be a couple of months. That equates to a reduction in FY2021 profit of $19m x 2/12 = $3.2m.

If the remaining 'outside of government scheme boundary' loans profit of $5m were to sink by 10%, then that would knock $0.5m off annual profits going forwards.

Likewise if the residual O4B loan profit balance of $19m- $3.2m = $15.8m were to reduce by 10%, that would wipe $1.6m off annual profits.

Now putting these three effects together, the expected annual profit decreases from the base year of FY2019 are as follows:

FY2021: -$3.2m - $0.5m - $1.6m = -$5.3m
FY2022: - $0.5m - $1.6m = -$2.1m

Business Finance (Part 2): Business Intermediated & Business Relationship

So what does this picture suggest for profitability in FY2021?

'Business Relationship' lending fell by 16% in FY2019 to $559.4m (Annual Review FY2019 p9), and I expect this trend to continue into FY2020 and FY2021. This means I am projecting the 'Business Relationship' loan book to be down to:

$559.4 x 0.84 x 0.84 = $395m

That number corresponds to the receivables book shrinking by $165m. We are told ROE for these loans is between 0% and 11% (AGM2019 Presentation p15). If the closed out loans averaged an ROE of 6%, this would represent a drop in Heartland profit from FY2019 levels of:

$165m x 0.06 = $10m

I am predicting that when some of the lending through intermediaries starts to shrink, Heartland will renew their interest in writing business relationship loans directly. So I see no further shrinkage in profit from this category between FY2021 and FY2022.

'Business Intermediated' lending is projected to grow in FY2020.

But I think that by FY2021, it will shrink back down 10% below FY2019 levels (down to $425.4m x 0.9 = $383m, a decrease of $42m). My reason for believing this is that there will be lower tradie activity in FY2021, and sensible tradespeople will have transferred to IRD backed ultra low interest loans, at least in NZ. The silver lining of this is that by existing Heartland customers effectively refinancing with the government, many bad debts to Heartland will be avoided. Business Intermediary loans have an ROE of between 11% and 15% (AGM2019 Presentation p15). If we assume the average margin is 13%, this will represent a loss of profit for Heartland in FY2021 of:

$42m x 0.13 = $5.5m

The kind of business loans sought by Heartland tend to be short term. So I am not expecting the general reduction in business loans to have a compounding effect year on year.

Rural Finance Adjustment

Rural finance at Heartland is transitioning between 'all of business funding' to funding seasonal assets. The former is far less profitable than the latter. So while I am expecting the rural loan book as a total receivable value to shrink, I am picking the Rural finance profit to remain flat,

Harmoney and Other Consumer Lending

Harmoney' reported their first profit, after an accounting standard change, of $7.22m over FY2019. Included in these calculations were a recognition of tax loss assets of $4.85m and deferred R&D expenses of $4.74m. Before these adjustments, 'Harmoney' lost $233,000 in the year to March 2019. At EOFY2019, 'Harmoney' had $367m of financial receivables on the books. The main profit that Heartland makes from Harmoney is not from the fraction of the Harmoney NPAT that they are entitled to via their partial ownership of Harmoney. No the profit comes from the provision of funds to Harmoney to run their loan book. If Heartland fund the loan book to the extent of their shareholding, then Heartland's share of this receivables book amounted to:

0.131 x $367m = $48m

At a 15% return on this loan money, this level of lending would produce:

0.15 x $48m = $7.2m of annual profit.

I predict that Harmoney will not survive the post Covid-19 and will be wound down in an orderly way mid way through FY2021. Other consumer lending should be OK.




FY2021FY2022


Baseline Reference Profit$74.5m$74.5m


Reverse Mortgage Adjustment$0m$0m


Motor Vehicle Finance Adjustment($11.4m)($17.1m)


Business Finance (Part 1) Adjustment($5.3m)($2.1m)


Business Finance (Part 2) Adjustment($15.5m)($15.5m)


Rural Finance Adjustment$0m$0m


Harmoney and Other Consumer Lending Adjustment($3.6m)($7.6m)


Total Forecast NPAT$38.7m$32.2m


No. Shares on Issue581.0m581.0m


Earnings Per Share6.7cps5.5cps



I am hoping the real results won't be as gloomy as this.


On reflection, I have decided that I need to make three tweaks to my 'profit of gloom' scenario.

1/ Motor Vehicle Finance Adjustment

I had assumed that used vehicle financing would not be affected. I now think I should align this outlook with what I proposed in Scenario 2. That means a used market down by 10% in revenue.

I am going to add in a used vehicle funding decline of 10% (previously 0%). I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.

FY2021/2022: -$75m x 0.15 = -$11.3m

Because I am modelling finance deals with a three year life, this annual loss compounds.

2/ Reverse Mortgage Adjustment

I had assumed a 'steady' Reverse Mortgage market. But because the interest on Reverse Mortgages are compounded and not collected, even a steady Reverse Mortgage market means the receivable book will grow by about 6.7% per year.

Reverse Mortgage Balance at EOFY2019: $1,318.8m

Reverse Mortgage Balance at EOFY2021: $1,318.8m x 1.067 x 1.067 = $1,501.4m
Incremental Receivable Gain EOFY2019 to EOFY2021: $1,501.4m - $1,318.8m = $182.6m

Incremental Profit Gain from EOFY2019 to EOFY2021 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $182.6m = $23.7m

Reverse Mortgage Balance at EOFY2022: $1,318.8m x 1.067 x 1.067 x 1.067= $1,602.0m
Incremental Receivable Gain EOFY2019 to EOFY2022: $1,602.0m - $1,318.8m = $283.2m

Incremental Profit Gain from EOFY2019 to EOFY2022 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $283.2m = $36.8m

3/ Business Finance (Part 1): O4B

The 'O4B' business loan scheme may be affected more than I originally thought. The O4B balance at SOCY2020 was $158m (from Company factsheet 2020) . I am continuing to assume that the smaller loan end of the business will be wiped out for two months in FY2021, due to flow on competition from 0% IRD loans. The IRD loan scheme does not cover loans between $100,000 and the O4B ceiling of $250,000, nor does it cover Australian loans. I am going to assume the portion of the O4B loans that overlaps with the IRD loan scheme is 80% by value.

I can calculate this profit loss over two months (and using a minimal ROE multiple from AGM 2019 Presentation p16 = 15%) of no O4B business as follows:

0.15 x (0.8 x$158m) x 2/12 = -$3.2m

The remaining O4B 'outside of government scheme boundary' loans have revenue of: $158m x 0.2 = $31.6m. If this revenue were to sink by 15% (0.15 x $31.6m = $4.7m), then that would knock 0.15 x $4.7m = -$0.7m off annual profits going forwards, over one year.

Likewise the previously described smaller loans category ( $158m x 0.8 = $126.4m of Revenue), if it were to lose 15% of that revenue would lose 0.15 x $126.4m = -$19.0m. That $19m revenue loss would equate to a profit reduction of 0.15 x $19m = $2.9m over any year. But for FY2021 we are already modelling the wiping out of two months of profits. So the profit loss for the remaining ten months is:

(10/12) x -$2.9m = -$2.4m

Putting these effects together, the expected annual profit decreases for O4B from the base year of FY2019 are as follows:

FY2021: (-$3.2m -$2,4m) - $0.7m= -$6.3m
FY2022: -($2.9m) - $0.7m= -$3.6m

Now let's incorporate these three changes into our table and see what happens.



FY2021FY2022


Baseline Reference Profit
$74.5m
$74.5m


Reverse Mortgage Adjustment
$23.7m
$36.8m


Motor Vehicle Finance Adjustment (New)
($11.4m)
($17.1m)


Motor Vehicle Finance Adjustment (Used)
($11.3m)
($22.6m)


Business Finance (Part 1) Adjustment
($6.3m)
($3.6m)


Business Finance (Part 2) Adjustment
($15.5m)
($15.5m)


Rural Finance Adjustment
$0m
$0m


Harmoney and Other Consumer Lending Adjustment
($3.6m)
($7.6m)


Total Forecast NPAT
$50.1m
$44.9m


No. Shares on Issue
581.0m
581.0m


Earnings Per Share
8.6cps
7.7cps



That is a significant improvement on my earlier version of this forecast, albeit still well down on FY2019 levels of profitability.

SNOOPY

[Beagle]

In Christchurch the local Holden dealer sells Mazda as well. When I went to visit the Kapiti Coast, the Holden dealer there also handles Kia and Suzuki. All these arrangements were in place before Holden 'pulled the plug'. Some dealers will continue to represent the brand for service and support. But not all. The Kapiti dealer I noticed has ripped down all Holden branding from the building quick smart, and there is not a Holden to be seen on site.

Yet all this is moot, because IIRC the financing agreement with Heartland was with 'Holden New Zealand', not the individual dealers. Holden New Zealand will be winding down new vehicle sales by 2021. There may be a very few unsold models out the back of dealers yards in Auckland come new year. But they'll probably be registered as demonstrators and sold on as used cars. The press releases I have read are very clear. By 2021 Holden New Zealand will be gone from the new car market. That means there will be no new Holden sales approved for finance via Heartland by Holden New Zealand from that point. Of course there will still be used Holden cars around. But Heartland will no longer have an exclusive deal to finance those sales. And future Holden sales will be at used vehicle prices, which will require a lower dollar level of funding like all used cars. That's how I read the situation.

SNOOPY

Fair point but that doesn't stop HGH financing used Holden's. FWIW My local dealer has been selling Suzuki's and Kia's as well as Holden's for years and is quite happy to have a significant stock of Holden's still on his yard. I wouldn't get too concerned about the loss of business to Holden N.Z. Jeff will snoop around and find some other brand to finance :)

On the liquidity thing, if you think they have a liquidity problem then I suggest you check their website for their current deposit and at call rates which have all been reduced in line with other banks. My opinion looking at current term deposit rates is they are no longer a way to get a return after tax that will keep you ahead of inflation. This has implications for shares paying reliable dividends that achieve that objective.

[percy]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANZ/354034/323702.pdf
HGH did not buy UDC.
ANZ has announced they are selling UDC to Shinsei Bank for $762 million.
Price to book ratio 1.2.

[Beagle]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANZ/354034/323702.pdf
HGH did not buy UDC.
ANZ has announced they are selling UDC to Shinsei Bank for $762 million.
Price to book ratio 1.2.

Thanks Percy. As we all know, Japanese interest rates are zero and ANZ have been capital constrained for some time. Shinsei bank will have access to extremely cheap capital in considerable abundance so therefore UDC will be far more formidable competitors going forward.

One wonders into what new area's UDC will branch out and grow into the future ?

On the other hand 1.2 times HGH's NTA = $1.26. As I suggested on the weekend (and now supported by this transaction), the shares seem to be about fair value at present BUT who knows the extent of losses from Covid 19 in HGH's books in the next 2-3 years ? I think anyone who tells you they do is in fantasy land lol

[winner69]

Heartland makes lot more money than UDC

UDC receivables $3.4 billon npat $24m
Heartland receivables $4.6 billion npat $80m (so Jeff says)

[Beagle]

Well...that's what he said several months ago. I expect a downgrade this month.

[Snoopy]

Heartland makes lot more money than UDC

UDC receivables $3.4 billon npat $24m
Heartland receivables $4.6 billion npat $80m (so Jeff says)


Winner, the balance date for UDC has traditionally been 30th September. So I think that $24m profit mentioned in the profit release might be a half year figure. The full year profit for FY2018 for UDC was $65.3m.

SNOOPY

[winner69]

Winner, the balance date for UDC has traditionally been 30th September. So I think that $24m profit mentioned in the profit release might be a half year figure. The full year profit for FY2018 for UDC was $65.3m.

SNOOPY

So don’t believe everything on the internet eh but it does seem it was half year

https://www.udc.co.nz/comm/about_us/media_article/article/26651/0/0/udc-finance-half-year-profit-up-6percnt;-to-$34.7-million.html?type

By comparison then Heartland pretty useless

Must be those home equity release things being a drag.

[Cyclical]

On the liquidity thing, if you think they have a liquidity problem then I suggest you check their website for their current deposit and at call rates which have all been reduced in line with other banks. My opinion looking at current term deposit rates is they are no longer a way to get a return after tax that will keep you ahead of inflation. This has implications for shares paying reliable dividends that achieve that objective.

Yep, this one of the things that make this market downturn different to previous ones isn't it. Makes it really hard to know if we'll see the gradual decline over the coming months that many of us are predicting, or if we'll start to see the traditional conservative TD money pouring in in search of yield, further bolstering the younger Sharesies like influx we've seen over the last couple of months?

Caught up with my parents over the long weekend...Mary Holm seems to have Mum convinced that she needs to chuck a bunch of cash at a NZX50 ETF. I'm like, yeah, sure, if you're not in your 70s and you're pretty confident it's going to head north in the short/medium term. For me personally, until such confidence returns, my KiwiSaver stays in a cash fund. Meanwhile, I'll dabble selectively with a handful of stocks, not the entire NZX50.

Back to HGH and liquidity, my parents have money with them on TD...and like plenty others I expect...if they suddenly decide that they need to throw that towards the sharemarket, what impact will that have on HGH funding? Are they in a position to issue bounds in exchange for cheap money? SPP next option?

[Beagle]

A cash issue at some stage this year would not surprise me in the slightest. I doubt they will pay a final dividend for the FY20 year so there's more capital from retained earnings as well.

[winner69]

A cash issue at some stage this year would not surprise me in the slightest. I doubt they will pay a final dividend for the FY20 year so there's more capital from retained earnings as well.

OMG ...I better start saving if I need cash for both Heartland and Oceania cap raises.

Hate cap raises when they’re needed to shore up the balance sheet ....even more so when both have been so generous with dividends.

It’s like getting a dividend knowing you’ll probably have to give it back later.

[Snoopy]

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.







Loan-Deposit Maturity


Loan-Deposit difference in Heartland Australia FY2019 Financial Receivables - Liabilities: Summation


On Demand


$38.358m


0-6 months


($2.395m)


6-12 months


$18.106m






On the liquidity thing, if you think they have a liquidity problem then I suggest you check their website for their current deposit and at call rates which have all been reduced in line with other banks. My opinion looking at current term deposit rates is they are no longer a way to get a return after tax that will keep you ahead of inflation. This has implications for shares paying reliable dividends that achieve that objective.

I think the numerical data I have presented on liquidity as it relates to the current six months (from 1st January 2020 to 30th June 2020) is clear. It says there is no liquidity problem. I have put the figures of most interest in bold in the quotes from my previous posts. The first quote represents the whole of Heartland Group Holdings. The figure of positive $420.139m represents the excess of cash available over and above that needed to pay back maturing term deposits in the current time period.

The second reference figure relates to Heartland Australia only. The $18.106m represents the excess of Australian Reverse Mortgages being paid back over the wholesale bonds that were set up to fund these mortgages, but are now due for repayment. The word 'excess' means there is money to do this.

If there is plenty of money floating about to repay wholesale depositors when a loan is due, then there is little incentive for Heartland to keep deposit interest rates high right now , because they probably already have most of the working capital they want,

However, this result is not something that can be extrapolated into subsequent time periods.

SNOOPY

[Snoopy]

A cash issue at some stage this year would not surprise me in the slightest. I doubt they will pay a final dividend for the FY20 year so there's more capital from retained earnings as well.


Balance sheet losses from areas of the business that are likely to go bad look to be contained and manageable within the current capital structure. Slowing growth is going to obviate the need for more capital in the medium term IMO. We know now that extra capital will not be needed to fund the purchase of UDC. So I am of the opinion that a capital raising will not be required in the short to medium term. Having said that, and if I apply wider banking services logic to Heartland itself, the best time to ask a bank for a loan is when you don't really need one. You could apply the same logic to a potential capital raising by Heartland from shareholders! So while I don't expect a capital raising, I am prepared to help fund one if called upon to do so.

SNOOPY

[King1212]

Crap guys... capital raising....might sell mine one soon....

[winner69]

OMG just saw a chart that in the US bank stocks are strongly correlated to long term treasuries. Stocks rise as rates rise (& curve steepens) ...and vice versa

Just as well those things don’t happen in NZ ...or else we could be looking at a capital raise at 45 cents

[King1212]

UDC gone...to Japanese Bank.

So...no hope on buying UDC

[Beagle]

Balance sheet losses from areas of the business that are likely to go bad look to be contained and manageable within the current capital structure. Slowing growth is going to obviate the need for more capital in the medium term IMO. We know now that extra capital will not be needed to fund the purchase of UDC. So I am of the opinion that a capital raising will not be required in the short to medium term. Having said that, and if I apply wider banking services logic to Heartland itself, the best time to ask a bank for a loan is when you don't really need one. You could apply the same logic to a potential capital raising by Heartland from shareholders! So while I don't expect a capital raising, I am prepared to help fund one if called upon to do so.

SNOOPY

Bingo, you're on to it ! Makes sense to "sure up the ship" just in case.

[Snoopy]

OMG just saw a chart that in the US bank stocks are strongly correlated to long term treasuries. Stocks rise as rates rise (& curve steepens) ...and vice versa

Just as well those things don’t happen in NZ ...or else we could be looking at a capital raise at 45 cents


So the thesis is that as our NZ interest rates fall further, the HGH share price would be expected to fall? This seemed to be the reasoning behind a respected broker I know suggesting that all of their clients get out of bank shares late last year. Of course with hindsight this was excellent advice (which I didn't follow!), although all of this was well before Covid-19 which just may have had something to do with the decline of bank shares as well.

I 'sort of' get the idea, so I will explain it as best as I can understand it. Interest rates are low when the demand for borrowing is low. The Reserve Bank lowers interest rates when trying to stimulate the economy. However, on the other side of the lending ledger, there must still be some incentive for depositors to put their money in the bank. So banks have to pay slightly over the odds to depositors to keep them even slightly interested in putting a term deposit with the bank at what seems an historically low interest rate. Thus the margin between what a bank pays out in interest and what a bank charges in interest becomes squeezed. And when the interest margins become squeezed, then profits become compressed. This all seems logical and makes sense.

Except..... when I look at actual examples, like Heartland and Westpac, and consider what has happened to the interest margin as interest rates have declined, the theory appears to be hogwash. Because no decline in interest margin is apparent at all. If anything the margin looks to be getting larger as interest rates decline.. The following table contains information extracted from p76 of the Westpac Annual Report from 2019. The Heartland information has been calculated by me here:

https://www.sharetrader.co.nz/showthread.php?10678-An-Investment-Story-Geneva-Turners-Heartland/page3&highlight=Story



FY2019FY2018FY2017FY2016FY2015


Westpac Interest Rate Margin2.12%2.13%2.06%2.10%2.09%


Heartland Interest Rate Margin4.31%4.41%4.43%4.37%3.91%



Would anyone care to explain that to me?

SNOOPY

[Snoopy]

I have been thinking about alternative future earnings paths, and have decided to re-run my earnings model using different input parameters. I am not withdrawing what I have retrospectively labelled as 'Scenario 1'. I am just putting an alternative view forward, acknowledging that alternative future profit paths are possible. Rather than repeat previous workings that do not change, I will report in detail only on the changes I am making.

Reverse Mortgages

I have used FY2019 as a base level of business. However the reverse mortgage business has continued to grow over HY2020 (Australian +9.5% to $887m, New Zealand +4.9% to $536m => Whole portfolio now $1,423). I am going to assume zero growth for the second half of FY2020. Consequently I intend to use these half year figures to create a new base level of activity. Furthermore I intend to model the whole reverse mortgage portfolio showing incremental gains of 2.5% over both FY2021 ( $1,423m x 1.025 = $1,459m) and FY2022 ( $1,459m x 1.025 = $1,495m), This means the incremental increase in turnover for our years of interest are:

FY2021: $1,459m - $1,319m = $140m
FY2022: $1,495m - $1,319m = $176m

We can now use the average ROE for Reverse Mortgages (Heartland AGM 2019 Presentation p15) of 13% to forecast the incremental earnings in our years of attention.

FY2021: $140m x 0.13 = +$18m
FY2022: $176m x 0.13 = +$23m

Motor Vehicle Finance

My new vehicle funding scenario remains unchanged, I am going to add in a used vehicle funding decline of 10% (previously 0%). I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.

FY2021/2022: -$75m x 0.15 = -$11.3m

Because I am modelling finance deals with a three year life, this annual loss compounds.

Business Finance

No change

Rural finance

No change

Harmoney and Other Consumer Lending

The main profit that Heartland makes from Harmoney is not from the fraction of the Harmoney NPAT that they are entitled to via their partial ownership of Harmoney. No, the profit comes from the provision of funds to Harmoney to run their loan book. If Heartland fund the loan book to the extent of their shareholding, then Heartland's share of this receivables book amounted to:

0.131 x $367m = $48m

At a 15% return on this loan money, this level of lending would produce:

0.15 x $48m = $7.2m of annual profit.

I predict that Harmoney will be severely affected post Covid-19 and will struggle on at half their current size. That corresponds to a $7.2m /2 = $3.6m profit hit per annum.



FY2021FY2022


Baseline Reference Profit$74.5m$74.5m


Reverse Mortgage Adjustment$18m$23m


Motor Vehicle Finance Adjustment (New)($11.4m)($17.1m)


Motor Vehicle Finance Adjustment (Used)($11.0m)($22m)


Business Finance (Part 1) Adjustment($5.3m)($2.1m)


Business Finance (Part 2) Adjustment($15.5m)($15.5m)


Rural Finance Adjustment$0m$0m


Harmoney and Other Consumer Lending Adjustment($3.6m)($3.6m)


Total Forecast NPAT$45.7m$37.2m


No. Shares on Issue581.0m581.0m


Earnings Per Share7.9cps6.4cps





In light of my realization that 0% growth in the Reverse Mortgage portfolio actually equates to some 6.7% receivables growth (because all of the interest is compounded, not collected) I am redoing the 'Reverse Mortgage' profit calculation that I fed into this Scenario.


2/ Reverse Mortgage Adjustment

I had assumed a 'steady' Reverse Mortgage market. But because the interest on Reverse Mortgages are compounded and not collected, even a steady Reverse Mortgage market means the receivable book will grow by about 6.7% per year. I am going to add to this an extra 2.5% increment (for a total of 9.2%) to model a modest real growth in the reverse mortgage portfolio going forwards,

Reverse Mortgage Balance at EOFY2019: $1,318.8m

Reverse Mortgage Balance at EOFY2021: $1,318.8m x 1.092 x 1.092 = $1,572.6m
Incremental Receivable Gain EOFY2019 to EOFY2021: $1,572.6m - $1,318.8m = $253.8m

Incremental Profit Gain from EOFY2019 to EOFY2021 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $253.8m = $33.0m

Reverse Mortgage Balance at EOFY2022: $1,318.8m x 1.092 x 1.092 x 1.092= $1,717.3m
Incremental Receivable Gain EOFY2019 to EOFY2022: $1,717.3m - $1,318.8m = $398.5m

Incremental Profit Gain from EOFY2019 to EOFY2022 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $398.5m = $51.8m

So putting this updated information into our scenario table.



FY2021FY2022


Baseline Reference Profit
$74.5m
$74.5m


Reverse Mortgage Adjustment
$33.0m
$51.8m


Motor Vehicle Finance Adjustment (New)
($11.4m)
($17.1m)


Motor Vehicle Finance Adjustment (Used)
($11.3m)
($22.6m)


Business Finance (Part 1) Adjustment
($5.3m)
($2.1m)


Business Finance (Part 2) Adjustment
($15.5m)
($15.5m)


Rural Finance Adjustment
$0m
$0m


Harmoney and Other Consumer Lending Adjustment
($3.6m)
($3.6m)


Total Forecast NPAT
$60.4m
$65.4m


No. Shares on Issue
581.0m
581.0m


Earnings Per Share
10.4cps
11.3cps



SNOOPY

[winner69]

I nteresting stuff on NIMs Snoops but I assume punters also assume that as rates fall lending growth and bad debts could also key factors in assessing bank profitability ... in tight times adversely?

But back to banks share prices being correlated to long term interest rates it probably comes down to market sentiment (ie valuation multiples)

Declining interest rates implies stuffed economy etc and that makes punters sad and they mark bank stocks down (irrespective of what's happening to NIMs)

[Beagle]

More competition from UDC now being owned by a Japanese bank and now more competition for reverse mortgages https://tmmonline.nz/article/976516933/sbs-revamps-reverse-mortgage-product?utm_source=GR&utm_medium=email&utm_campaign=SBS+revamps+reverse+mortgage%3B+ASB+h elps+bereaved+borrowers

[winner69]

SBS guy says ‘SBS feels reverse mortgages aren't not done very well in New Zealand’

[dobby41]

SBS guy says ‘SBS feels reverse mortgages aren't not done very well in New Zealand’

If they actually said those words then they are illiterate!

[Peter Webster]

Not quite sure on the OZ reverse mortage figures - new players in the market there, including support from Legal and General UK - product appears overpriced against lower rates

[Beagle]

https://www.sbsbank.co.nz/rates 6.20% for home equity release loans. Makes Heartland's 6.50% look a bit high.

[tim23]

Not quite sure on the OZ reverse mortage figures - new players in the market there, including support from Legal and General UK - product appears overpriced against lower rates

Priced to make $ for shareholders and probably a good option for people who want to free up some cash. Then again why don't people simply have a revolving credit mortgage facility, once effectively mortgage free then don't cancel the facility?

[Baa_Baa]

Priced to make $ for shareholders and probably a good option for people who want to free up some cash. Then again why don't people simply have a revolving credit mortgage facility, once effectively mortgage free then don't cancel the facility?

I’d hazard a guess that a lot of the REL customers have been mortgage free for some time or a long time, then asset rich but cash poor, they take up a new REL.

[Snoopy]

Crap guys... capital raising....might sell mine one soon....


This scenario is for King when I finally put on my more optimistic hat. I wouldn't want to see him sell out at the wrong time.....

I am making three changes from Scenario 2b.

a/ I am assuming used car sales fully recover by FY2022. But I am continuing to assume that new car sales remain depressed. This is a 'cautious recovery' picture where tradies get back to work but prudently settle for one or two year old pre-depreciated set of wheels as they remain 'cost conscious'.

b/ For reverse mortgages, I am going for 8% growth over and above the accumulating compounding interest of 6.7%. This is mid way between last years underlying growth rate for NZ (3.3%) and Australia (13.3%). My logic here is that pensioners will want to travel and splash put on some treats that will be increasingly denied to them as traditional sources of fixed interest income go to zero. They may even choose to finance their recently redundant children into new careers.

c/ I am assuming the decline in 'relationship business' is only half that previously assumed, as Heartland sees the value in getting back alongside their long standing clients directly.

How does looking at these three things in a slightly more positive way change Heartland's fortunes going forwards?

1/ Motor Vehicle Finance Adjustment (Used)

I have assumed that used market down by 10% by revenue in FY2021, but that it recovers to reference year (FY2019) levels by FY2022..

I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.

FY2021: -$75m x 0.15 = -$11.3m

Because I am modelling finance deals with a three year life, this annual loss is carried through the ensuing three years. That is why when I model revenues recovering in FY2022, the profit does not recover (because FY2022 still carries the long 'reduction in funding' shadow of the FY2021 downturn).


2/ Reverse Mortgage Adjustment

I had assumed a 'steady' Reverse Mortgage market. But because the interest on Reverse Mortgages are compounded and not collected, even a steady Reverse Mortgage market means the receivable book will grow by about 6.7% per year. I am going to add to this an extra 8% increment (for a total of 14.7%) to model continuing growth in the reverse mortgage portfolio going forwards, This is a similar growth rate to what actually occurred over FY2019.

Reverse Mortgage Balance at EOFY2019: $1,318.8m

Reverse Mortgage Balance at EOFY2021: $1,318.8m x 1.147 x 1.147 = $1,735.0m
Incremental Receivable Gain EOFY2019 to EOFY2021: $1,735.0m - $1,318.8m = $416.2m

Incremental Profit Gain from EOFY2019 to EOFY2021 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $416.2m = $54.1m

Reverse Mortgage Balance at EOFY2022: $1,318.8m x 1.147 x 1.147 x 1.147 = $1,990.1m
Incremental Receivable Gain EOFY2019 to EOFY2022: $1,990.1m - $1,318.8m = $671.3m

Incremental Profit Gain from EOFY2019 to EOFY2022 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $671.3m = $87.3m

3/ Business Finance (Part 2): Business Intermediated & Business Relationship

3a/ 'Business Relationship' lending

'Business Relationship' lending fell by 16% in FY2019 to $559.4m (Annual Review FY2019 p9), and I expect this trend to continue into FY2020 but stabilize by FY2021. This means I am projecting the 'Business Relationship' loan book to be down to:

$559.4 x 0.84 = $470m

That number corresponds to the receivables book shrinking by: $559.4 - $470m = $89.4m. We are told ROE for these loans is between 0% and 11% (AGM2019 Presentation p15). If the closed out loans averaged an ROE of 6%, this would represent a drop in Heartland profit from FY2019 levels of:

$89.4m x 0.06 = $5.4m

I am predicting that when some of the lending through intermediaries (see below) starts to shrink, Heartland will renew their interest in writing business relationship loans directly. So I see no further shrinkage in profit from this category between FY2021 and FY2022.

3b/ 'Business Intermediated' lending

Over FY2021, I am modelling Heartland's downstream lending partners will shrink back to 10% below FY2019 levels in revenue terms (down to $425.4m x 0.9 = $383m, a decrease of $42m). My reason for believing this is that I think there will be lower tradie activity in FY2021, as sensible tradespeople will have transferred to IRD backed ultra low interest loans, at least in NZ. The silver lining of this is that by existing Heartland customers effectively refinancing with the government, many bad debts to Heartland will be avoided. Business Intermediary loans have an ROE of between 11% and 15% (AGM2019 Presentation p15). If we assume the average margin is 13%, this will represent a loss of profit for Heartland in FY2021 of:

$42m x 0.13 = $5.5m

The kind of business loans sought by Heartland tend to be short term. So I am not expecting the general reduction in business loans to have a compounding effect year on year. i am picking this will affect FY2021 only, and intermediary earnings will recover to FY2019 levels by FY2022.

So putting this updated information into our scenario table.



FY2021FY2022


Baseline Reference Profit
$74.5m
$74.5m


Reverse Mortgage Adjustment
$54.1m
$87.3m


Motor Vehicle Finance Adjustment (New)
($11.4m)
($17.1m)


Motor Vehicle Finance Adjustment (Used)
($11.3m)
($11.3m)


Business Finance (Part 1) Adjustment
($5.3m)
($2.1m)


Business Finance (Part 2) Adjustment
($10.9m)
($5.4m)


Rural Finance Adjustment
$0m
$0m


Harmoney and Other Consumer Lending Adjustment
($3.6m)
($3.6m)


Total Forecast NPAT
$86.1m
$122.3m


No. Shares on Issue
581.0m
581.0m


Earnings Per Share
14.8cps
20.1cps



What a recovery! Jeff's concentration on Reverse Mortgages as they continue to grow at historic rates is really paying off, and more than wipes out the declines in business lending as profit in FY2022 rockets.. Jeff does it again! (although because this is a future scenario, Jeff hasn't actually done it yet).

SNOOPY

[Ggcc]

https://www.sbsbank.co.nz/rates 6.20% for home equity release loans. Makes Heartland's 6.50% look a bit high.
Generally if you are happy with a bank and their staff for the little difference you will stay with their rate. People hate filling out new forms for an application to a bank account and then filling out more paperwork for 0.3% saving, as silly as it sounds.

[forest]

Great detailed work Snoopy.

One question I have, how confident are you that the present amount of shares on issue stays steady at app 581m?
If I have my numbers right than HGH has app 1.7m share options and app 3.2m performance right on issue at the end of 2019 financial year.
This company has a bad habit of diluting shareholders through dividend reinvestment plans, share options, performance rights and capital raisings.
With all these regular dilutions in shareholdings the earnings per share do not rise
anywhere as fast as the profits.

[Snoopy]

Great detailed work Snoopy.

One question I have, how confident are you that the present amount of shares on issue stays steady at app 581m?
If I have my numbers right than HGH has app 1.7m share options and app 3.2m performance right on issue at the end of 2019 financial year.


I have created Scenario 1b, Scenario 2b and Scenario 3 (which doesn't get a 'b' as I haven't had to modify it yet). These are meant to represent a pessimistic, realistic and optimistic view of how Heartland's profits might go up to FY2022. In Scenarios 1b and 2b, I am projecting profits to be below FY2019 and FY2020 levels. In this situation I wouldn't expect many (or any?) performance rights or share options to be exercised. However, in Scenario 3, with profits up sharply in FY2022 there is a very good chance that performance rights would be exercised. Yet if all the new shares you have outlined are converted, that would only be 4.9m out of 581m. That is less than 1% of the shares on issue. So I am not too worried about a potential error in the 'eps' calculation from this source.



This company has a bad habit of diluting shareholders through dividend reinvestment plans, share options, performance rights and capital raisings.
With all these regular dilutions in shareholdings the earnings per share do not rise anywhere as fast as the profits.

Yes very good points. I am guessing that the HGH dividend will be suspended for the rest of this calendar year at least.

No dividend => no DRP operating => No increase in shares

However if the REL loan book really does expand to $1,990.1m by EOFY2022, then Heartland may indeed need to raise more capital to support this loan book growth. So your point is very valid 'forest'. In that 'optimistic' scenario, my estimated eps figure may indeed end up being significantly too high.

My inkling though, and given that all of these are Scenarios are guesses, albeit hopefully intelligently framed guesses, is that other errors will be more significant than the number of shares on issue. The rate of expansion of the REL loan book is something I could be more than a little wrong about. Likewise I find it difficult to guess by how much business lending will really decline. That being the case, I am not going to get too hung up on the number of shares on issue. You were certainly right to bring this matter to everyone's attention though 'forest'!

SNOOPY

[forest]

Originally posted Snoopy.
Yet if all the new shares you have outlined are converted, that would only be 4.9m out of 581m. That is less than 1% of the shares on issue. So I am not too worried about a potential error in the 'eps' calculation from this source.


You right that is only less than 1% and if you put it that way my point looks pedantic.
The unknown however is the future amount of options, performance rights, dividend reinvestment shares, placements etc in the pipe line to dilute present share holdings.
All we know is that dilution of shares seem to be the norm for HGH.

So let's look back over a 5 year period to see the effect of the share dilution over that period.
For the year 2014 there were app 412m weighted average shares on issue.
For the year 2019 there were app 563m weighted average shares on issue.

So over a 5 year period an extra app 151m dilution of shares. That is an extra 36% of shares. Now this to me looks material and makes me wary of investing.

We know that for the 2020 year the weighted average shares on issue will have increased
again. Shares on issue are already app 581m.

[winner69]

Originally posted Snoopy.
Yet if all the new shares you have outlined are converted, that would only be 4.9m out of 581m. That is less than 1% of the shares on issue. So I am not too worried about a potential error in the 'eps' calculation from this source.


You right that is only less than 1% and if you put it that way my point looks pedantic.
The unknown however is the future amount of options, performance rights, dividend reinvestment shares, placements etc in the pipe line to dilute present share holdings.
All we know is that dilution of shares seem to be the norm for HGH.

So let's look back over a 5 year period to see the effect of the share dilution over that period.
For the year 2014 there were app 412m weighted average shares on issue.
For the year 2019 there were app 563m weighted average shares on issue.

So over a 5 year period an extra app 151m dilution of shares. That is an extra 36% of shares. Now this to me looks material and makes me wary of investing.

We know that for the 2020 year the weighted average shares on issue will have increased
again. Shares on issue are already app 581m.

That's what happens when you have capital raises where most of it goes to pay juicy divies

[Beagle]

Great detailed work Snoopy.

One question I have, how confident are you that the present amount of shares on issue stays steady at app 581m?
If I have my numbers right than HGH has app 1.7m share options and app 3.2m performance right on issue at the end of 2019 financial year.
This company has a bad habit of diluting shareholders through dividend reinvestment plans, share options, performance rights and capital raisings.
With all these regular dilutions in shareholdings the earnings per share do not rise
anywhere as fast as the profits.

That's an absolute disgrace. Jeff is already paid a grossly excessive amount of money in my opinion.

I missed the rebound in this one and I am okay with that. Plenty of trouble coming down the track for HGH with their hundreds of millions of finance company type loans, much of it unsecured.

[forest]

That's what happens when you have capital raises where most of it goes to pay juicy divies

That is right.
Continuing this trend seems value destructing to smaller shareholders.
The extra shares on issue require larger capital raisings for the extra dividends. Which follows ever larger discounted placements for institutions to pay this dividend.
It has become a visual circle.

[Snoopy]

Originally posted Snoopy.
"Yet if all the new shares you have outlined are converted, that would only be 4.9m out of 581m. That is less than 1% of the shares on issue. So I am not too worried about a potential error in the 'eps' calculation from this source."

You right that is only less than 1% and if you put it that way my point looks pedantic.
The unknown however is the future amount of options, performance rights, dividend reinvestment shares, placements etc in the pipe line to dilute present share holdings.
All we know is that dilution of shares seem to be the norm for HGH.

So let's look back over a 5 year period to see the effect of the share dilution over that period.
For the year 2014 there were app 412m weighted average shares on issue.
For the year 2019 there were app 563m weighted average shares on issue.

So over a 5 year period an extra app 151m dilution of shares. That is an extra 36% of shares. Now this to me looks material and makes me wary of investing.

We know that for the 2020 year the weighted average shares on issue will have increased
again. Shares on issue are already app 581m.

A couple of points here.

1/ You talk about a five year period and shares increasing by 36%. But I am only forecasting two years and one month out. So is a 36% dilution in shares a realistic expectation over that time period?

2/ The 581m shares on issue -now- includes those shares issued as part of the DRP in March 2020. So I doubt that the number of shares will increase by financial year end, or indeed calendar year end (given that the Reserve Bank has dictated all dividend payments by banks in NZ must be stopped until further notice).

Furthermore you should bear in mind that if there is a cash issue (and I have made the argument in previous posts that this is by no means a given), then existing shareholders are likely to be able to purchase new HGH shares at a discount to the market price via a share purchase plan. So issuing a whole lot of new shares is not 100% bad for existing shareholders.

Now. lets forgo all the arguments I have made above, and assume your worries are realised and 18% more Heartland shares (say) are issued over FY2022. I would argue that this is most likely to occur under my Scenario 3 where Heartland is really growing again. Growth requires a larger capital base. Just standing still means that existing capital levels are likely to be adequate. So in this instance you would take my FY2022 earnings per share forecast and divide it by a factor to reflect the larger number of shares on issue:

20.1cps /1.18 = 17.0cps

i am not going to disagree with you that if you believe that the shares will be diluted to this extent, then when assessing 'eps' this is what you should do. But we don't know this dilution will occur. So my preference is to keep my modelling figures as they are but be aware that despite coming up with 'definite numbers' my modelling will contain errors (such as not accounting for capital dilution). I think it is important to remember that all business forecasting should be treated with a degree of scepticisim, no matter how carefully detailed and complicated it appears to be.

SNOOPY

[oldtech]

Meanwhile, SP continues to head in the right direction :) ... $1.33 currently

[forest]

Like you Snoopy I have no idea about the extent of share dilution in time to come. All I like to point out that dilution of shares seem to be the norm at HGH and that it is detrimental to shareholders unless they can participate in share placements. The Share purchase plans are often unfair and combersome.

[Snoopy]

One wonders into what new area's UDC will branch out and grow into the future ?

On the other hand 1.2 times HGH's NTA = $1.26. As I suggested on the weekend (and now supported by this transaction), the shares seem to be about fair value at present BUT who knows the extent of losses from Covid 19 in HGH's books in the next 2-3 years ? I think anyone who tells you they do is in fantasy land lol


No one knows exactly how this Covid-19 tail may whip around and strike down HGH profits in the future. But I would argue you don't have to know this to build an investment case. I would argue the solution to investing in these circumstances is to do a 'Scenario Analysis'. That means look at different possible outcomes and then do a probability assessment of how likely each of the possible scenarios will unfold. Such a system is by no means perfect. But it is one better than sitting in your investment armchair utterly bamboozled that you cannot see a clear path ahead. You don't need a clear path to make rational investment decisions if you use 'Scenario Analysis'. For those who have been following this thread over the last few days, you will see that I have compiled three forecast scenarios: Scenario 1b, Scenario 2b and Scenario 3. I assess that the likelihood of each of these scenarios occurring in order is 30%, 50% and 20% (observant readers will notice these three relative probabilities add up to 100%).

So what happens when I combine my forecast from each scenario in those proportions?



FY2021epsProbabilityFactored Earnings Contribution


Scenario 1b8.6c30%2.58c


Scenario 2b10.4c50%5.20c


Scenario 314.8c20%2.96c


Total100%10.7c





FY2022epsProbabilityFactored Earnings Contribution


Scenario 1b7.7c30%2.31c


Scenario 2b11.3c50%5.65c


Scenario 320.1c20%4.02c


Total100%12.0c



Now I believe that a suitable PE ratio for a second tier finance company should be between 10 and 12 in the current business environment. So this would imply the following share price ranges based on the above probability combined projected earnings.

FY2021: $1.07 to $1.28
FY2022: $1.20 to $1.44

With the share trading at $1.33 today, I would argue the share price has got ahead of itself and is now in the mid price range of FY2022 earnings projections. There are too many uncertainties about to justify buying in at this price now. I would like to increase my own stake in HGH further. But I am going to wait for a pull back in the share price before I do so.

SNOOPY

discl: hold HGH with an average holding price of $1.40 (excluding dividends). Of course most of that holding was accumulated pre Covid with different earnings expectations!

[winner69]

Meanwhile, SP continues to head in the right direction :) ... $1.33 currently

That’s pretty good eh

Could be $1.50 next week


I think some lose sight of the numbers and as such lose sight of any chance of being objective.

[percy]

History has shown there is a definite correlation between HGH's increasing share price, and the negative HGH posts here on Sharetrader....lol.

[winner69]

History has shown there is a definite correlation between HGH's increasing share price, and the negative HGH posts here on Sharetrader....lol.

That’s why I worry when it all goes quiet on here :t_up:

[Cyclical]

That’s pretty good eh

Could be $1.50 next week

Of course it will be. I know this for a fact as i sold out at $1.27 yesterday...thinking at the time that this was starting to get a bit heady. However, as with pretty much all of my recent sells, I have proven to be wrong. Maybe you guys can start paying me to tell you when I've sold something so you can make some?

[nevchev]

Got look of a pump and dump to me.I think Snoops analysis may proof to be correct

[Ggcc]

Got look of a pump and dump to me.I think Snoops analysis may proof to be correct
Maybe spoke too soon. It is not cheap any longer, I agree with that..

[Waltzing]

1.50? I was thinking of buying more ARG and selling HGH but if winner69 is right i will own him. The speed of this market recovery will go down in history if this keeps up.

[oldtech]

ARG isn't doing too badly itself at the moment ... for me, I'm just happy to have both in my portfolio currently :t_up:

[nztx]

but then most of the NZX listed Banking stocks are getting a pumping, with no sign of any dumping yet ..

include in the bundle ANZ, WBC as well as HGH

[fish]

That's an absolute disgrace. Jeff is already paid a grossly excessive amount of money in my opinion.

I missed the rebound in this one and I am okay with that. Plenty of trouble coming down the track for HGH with their hundreds of millions of finance company type loans, much of it unsecured.

I guess this is just one example of an unsecured loan ?

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12340240

[winner69]

I guess this is just one example of an unsecured loan ?

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12340240

It’s only a half million.

They get caught up with some weird businesses ....remember that we’ll connected lady who took them for a ride with her IT companies.

[fish]

It’s only a half million.

They get caught up with some weird businesses ....remember that we’ll connected lady who took them for a ride with her IT companies.

Yes -that as well.
I must admit I have nearly sold all my HGH over the past 5 months .

[Beagle]

I guess this is just one example of an unsecured loan ?

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12340240

Tip of the Iceberg.

[winner69]

If a finance company doesn’t have some bad loans it’s not doing a very good job

[fish]

If a finance company doesn’t have some bad loans it’s not doing a very good job

These are very difficult times and lots of companies are going to fail.
If they have a culture that allows loans without adequate security it is not doing a very good job.
Finance companies fail in such circumstances.
At the very least it could be years before dividends resume.
I am likely to sell my remaining shares as I feel increasingly uncomfortable.

[Beagle]

Pretty obvious some major provisioning is going to be required in regard to Covid 19 as per what Australian banks have done and in percentage of loan book terms probably a fair bit higher because of the nature of a significant part of HGH's lending. I am not sure one way or the other whether that places an obligation upon HGH to update guidance under the continuous disclosure regime of the NZX ? I half expect an update some time this month but who knows...

As fish has astutely observed the dividend outlook is very uncertain. When one of the major supporters of this stock for many many years, (Percy) has sold out, (although we all make mistakes and nobody has a perfect track record, myself included), people should probably sit up and take note.

[winner69]

Pretty obvious some major provisioning is going to be required in regard to Covid 19 as per what Australian banks have done.
I am not sure one way or the other whether that places an obligation upon HGH to update guidance under the continuous disclosure regime of the NZX ? I half expect an update some time this month but who knows...

Jeff says about $80m profit this year and with only a week to got to year end that’s going to be the number.

Heartland probably like most do a ‘soft close’ after 11 months and nothing cone of it so so all honky dory.

[Beagle]

Jeff says about $80m profit this year and with only a week to got to year end that’s going to be the number.

Heartland probably like most do a ‘soft close’ after 11 months and nothing cone of it so so all honky dory.

I take it after reading that post you have quite a few ;)

[Snoopy]

Now how much capital is likely to be written off over FY2020?

The new ECL (Expected Credit Loss) method for provisioning, under IFRS9, is more conservative than the old standard it replaced. As of EOFY2018, the previous allowance from the older standard was increased by nearly $28m. Although the finance industry grizzled about this at the time, with Covid-19 emerging the increased provisions now seem prescient.


With the financial year ended 30th June just wound up, I am trying to get more of a handle on Heartland's upcoming 'Covid-19 loan book losses'. I said previously that the ECL (Expected Credit Loss) method is a more conservative way of looking at the bad debt picture. But I am not sure if this is really true.

On my wider reading on this subject (actually just studying the Westpac FY2019 Annual Report, and HY2020 Interim Report) I note that all of the new business signed up during the year and the end of the line business that is finally written off are two classes of loans that are excluded excluded from the ECL analysis. This isn't so surprising when you think about it. A new loan that is not on the ECL system at the start of the year cannot be re-rated for credit quality if it has never been rated in the first place. Such must be the case with all 'new' loans. Likewise once a loan - or part thereof - is finally written off, it drops out of the bottom of the credit rating system. You can't re-rate a loan that has finally been determined to be unrecoverable!

Having said that, when I go to the Heartland interim report Note 7 (p16 HY2020 i.e. period ended 31-12-2019) and look at the Non-securitised loans') both the 'new and increased provisions (net of collective provision releases)' are combined in a single ECL analysis. That seems to immediately make a lie of my claim that 'New Loans' are not part of the ECL. But I tend to think my logic is right. That means, whether combined with existing loans or not, new loans cannot be re-rated in the period in which they are instigated.

There is another bit of the Heartland presentation on that page that strikes me as odd. The impairment allowance is reduced by adding back the 'Recovery of amounts previously written off'. That seems to make a liar of me again, as I have just stated that what is 'written off' under ECL cannot be brought back into the system. Yet two lines down that same figure is added back in (as though the recovery didn't happen) when it comes to calculating the impairment allowance. Weird to my eyes.

The interesting thing about the three finance companies with which I am most familiar, (Heartland, Turners and Westpac) is that all of them had an increased 'bad loan provision' on adopting the new ECL debt rating system. But I am wondering if that was a conservative provision realignment, due to the lack of familiarity with how the new system will operate over time? I did note that in the case of the Westpac HY2020 report, hidden in all the Covid-19 and other new provisions, the 'Business Activity During Period' was written back up in value (meaning the bad debt provision was decreased as a result) under the ECL method.

I am quite encouraged by comments coming out of Turners after the lockdown period. They reported their finance division remained profitable as people stayed home, didn't spend their money on frivolous things and paid down their loans. I am hopeful that many of the Heartland 'motor vehicle loans' got similar treatment. But whether this will continue into FY2021, now that we NZers are 'unlocked' and possibly about to lose our jobs as the wage subsidy ends is another matter.

SNOOPY

[winner69]

I am trying to get more of a handle on Heartland's upcoming Covid-19 loan book losses. I said previously that the ECL method is a more conservative way of looking at the bad debt picture. But I am not sure if this is really true.

On my wider reading on this subject (actually just studying the Westpac Annual Report) I note that all of the new business signed up during the year and the end of the line business that is finally written off are excluded from the ECL analysis. This isn't so surprising when you think about it. A new loan that is not on the ECL system at the start of the year cannot be re-rated for credit quality if it has never been rated in the first place. Such must be the case with all 'new' loans. Likewise once a loan - or part thereof - is finally written off, it drops out of the bottom of the credit rating system. You can't re-rate a loan that has finally been determined to be unrecoverable.

What does that really mean re Heartland snoops?

[peat]

I am trying to get more of a handle on Heartland's upcoming Covid-19 loan book losses. I said previously that the ECL method is a more conservative way of looking at the bad debt picture. But I am not sure if this is really true.

On my wider reading on this subject (actually just studying the Westpac Annual Report) I note that all of the new business signed up during the year and the end of the line business that is finally written off are excluded from the ECL analysis. This isn't so surprising when you think about it. A new loan that is not on the ECL system at the start of the year cannot be re-rated for credit quality if it has never been rated in the first place. Such must be the case with all 'new' loans. Likewise once a loan - or part thereof - is finally written off, it drops out of the bottom of the credit rating system. You can't re-rate a loan that has finally been determined to be unrecoverable.


What does that really mean re Heartland snoops?

I think it means that there is an extended lag before a loan gets tagged bad.

[Snow Leopard]

Bank profits down 20% so far because of Covid-19 (https://www.stuff.co.nz/business/300048038/covid19-takes-20-per-cent-bite-out-of-bank-profits)

Sell, sell, sell why you still can.

[and I will buy them] :t_up:

Disc: this post may contain traces of ramping. :p

[Snoopy]

Bank profits down 20% so far because of Covid-19 (https://www.stuff.co.nz/business/300048038/covid19-takes-20-per-cent-bite-out-of-bank-profits)

Sell, sell, sell why you still can.

[and I will buy them] :t_up:

Disc: this post may contain traces of ramping. :p

The article states that profits are down 'driven by a significant increase in impaired assets'.

The article then goes on to talk about 'mortgage deferrals' which the banks have previously indicated are not being counted as evidence of impairment.

Then John Kensington, KPMG head of banking and finance says:

“What no one can say with certainty is the form of the recovery – will it be a V, a W, or some other shape? So many unknown factors impact the answer here."

I would summarise the article as follows. The banks have made a guess that they might lose a lot of money and have provisioned accordingly. But they don't really know how all of this will pan out, so all guesses as to losses are really up in the air. If this article hadn't been published electronically, I would say it was a complete waste of printers ink!

The whole 'write off' question depends on the quality of the underlying assets. With the big reverse mortgage portfolio that Heartland has, I would say the Heartland loan book is as sound, credit wise, as the big banks. Yes I do expect issues with some Heartland business loans. But a lot of these are short term and seasonal. I am feeling a lot happier about my Heartland shareholding than my Westpac shareholding. Yet if you believe the bank credit ratings the reverse should be true.

SNOOPY

[Snoopy]

What does that really mean re Heartland snoops?

I think one trend worth keeping tabs on is the 'Credit Provisions' vs 'Write Offs'. The common factor linking these two figures are that they are 'statements of judgement at the time'. But one is a forecast taking into account future periods while the other is the 'actual amount' written off.



1HY20192HY20191HY20202HY2020


New and Increased Provision$13.347m-$1.485m
$10.668m
Covid-19 havoc?


Write Offs$12.456m$8.257m$8.771mCovid-19 havoc?



The second half year figures are made up from the full year figure less the first half figure. That negative provision for the second half year does look odd though. I wonder if I have that right?

SNOOPY

[winner69]

I think one trend worth keeping tabs on is the 'Credit Provisions' vs 'Write Offs'. The common factor linking these two figures are that they are 'statements of judgement at the time'. But one is a forecast taking into account future periods while the other is the 'actual amount' written off.



1HY20192HY20191HY20202HY2020


New and Increased Provision$13.347m-$1.485m
$10.668m
Covid-19 havoc?


Write Offs$12.456m$8.257m$8.771mCovid-19 havoc?



The second half year figures are made up from the full year figure less the first half figure. That negative provision for the second half year does look odd though. I wonder if I have that right?

SNOOPY

Maybe proactive provisioning ...you know the game.

But Jeff hasn’t indicated any issues yet so no Covid havoc?

June year end but a lot of this stuff is done a month before (and then fine tuned in last period) so he would essentially know what ‘havoc’ there’s been and should have told us by now?

[Snoopy]

I said previously that the ECL (Expected Credit Loss) method is a more conservative way of looking at the bad debt picture. But I am not sure if this is really true.




What does that really mean re Heartland snoops?




I think it means that there is an extended lag before a loan gets tagged bad.




Maybe proactive provisioning ...you know the game.


Some more thoughts on this 'Expected Credit Loss' (the new method under NZ IFRS9) bad debt build up.

Looking at p11 in AR2019, 'Stage 1' doubtful debts are described as follows:

These are loans 'past due 30 days or less' BUT 'Where there has been no evidence of increased credit risk since initial recognition and are not credit impaired upon origination, the portion of the lifetime ECL associated with the probability of default events occurring within the next 12 months is recognised'.

To me this doesn't quite scan. if there is no evidence of increased credit risk, why are we picking out loans that are up to 30 days overdue as part of the baseline method to identify bad loans? Surely the fact that a loan is 'past due 30 days or less' is in itself a precursor indicator that a loan might go bad. Otherwise why use 'past due 30 days or less' as a sifting tool in the first place?

Perhaps this is some sort of sop to the 'stage 1' ECL loan originators? Are we saying to them:

"Well, if patterns of history repeat, then some of you boys who have taken out loans will be 'bad boys'. But we don't want to call out any of you boys as bad yet because none of you have done anything wrong, (except being a little late with your payments). Nevertheless some of you actually will go bad, but we don't want to pin down which of you that will be yet. Right now you are all good, but we know some of you are shysters, yet we don't want to finger you as such just yet."

My next thought is that although the potential bad loans recognised go up, this is just a timing issue. Winner is quite right when he talks about 'proactive provisioning'. That is the whole point about ECL. But contrary to what Winner implies this does appear to be a brand new game. The implication here is that ECL was brought in because lenders, in general, have not been nearly pro-active enough in bad loan provisioning in the past. But can we tag Heartland with this broad brush view?

Peat's comment is by my way of thinking a twisted way of looking at what is happening under ECL. The timing of a loan going bad does not change. But the timeframe in recognising that a loan might go bad has expanded. Effectively bad loans are tagged as bad before they even look like going bad. Yet the only thing that makes these loans 'look bad' is historical precedent.

The result of the ECL method looks to be more loans being put under the 'bad loan microscope'. But that does not mean more bad loans, even though it appears on the books as though there are more bad loans. This was what I had in mind in my own quoted post when I said the ECL method was 'more conservative' in identifying bad loans. IMO, it is the people equivalent of 'racial profiling' where people of a certain race are targeted as 'suspects' to a crime. Some loans just 'look' suspicious from a bad debt perspective. But if Heartland knew these loans 'looked suspicious' to start with, why approve them in the first place? Or is this part of the 'second tier lender risk profile' where bad loans are deliberately entered into? But because only a proportion of these will go bad and because the profitability of the loans that do not go bad is high, it is worth doing it anyway?

To summarize, I think what I am saying here is that the ECL method observed jump in bad loans on the books is a one off. It means more loans under scrutiny at any one time. But if the bad loan recognition problem has not been an issue in the past for Heartland, then it does not mean more bad loans. Conversely if Heartland had consistently underestimated bad loans in the past, then the adoption of ECL should 'fix' this problem (if it existed).

I'd like to throw in one last curve ball on the subject. The ECL method rates loans. But it does not rate the propensity of existing clients to take out future bad loans. The Westpac half year result had an extra 'Covid-19' adjustment factor to take this into account. The thinking here was that certain customer classes would have a propensity to get into debt trouble on loans they had not yet entered into. Thus there should be provisioning against future loans that the customer has not even asked for yet. Ultimately these loans will come under the ECL system as well. But the ECL system cannot provision for loans that do not yet exist. So an extra 'Covid-19 fiddle factor' is required. Heartland hasn't hinted that they will do anything like Westpac has done. I wonder if they will?

SNOOPY

[percy]

https://sendy.tarawera.co.nz/l/J6oLVth2f3f6IXNYvUBQEg/UlVvyXvRljPtroQRplaYtg/0e7PbLXHVb763jcs76335id4WQ
Well done Heartland Bank.

[Beagle]

An insolvency expert was reported on NBR to be predicting a really substantial level of bankruptcies in 2021. Reckons the economic stimulus has kicked the can down the road a bit but 2021 will be where the rubber meets the road in a really big way. Has serious implications for banks engaged in extensive business and motor vehicle lending in my opinion.

[Snoopy]

An insolvency expert was reported on NBR to be predicting a really substantial level of bankruptcies in 2021. Reckons the economic stimulus has kicked the can down the road a bit but 2021 will be where the rubber meets the road in a really big way. Has serious implications for banks engaged in extensive business and motor vehicle lending in my opinion.


A very plausible forward looking view on the future of financing in New Zealand. But the market is forward looking too. So how does 'Mr Market' view the future of financing in New Zealand as things have developed over the last month? Here is Mr Market's take on four financers in descending order of creditworthiness (according to the ratings agency anyway).



Share Price 26th JuneMonthly Low
Share Price 26th JulyMonthly Gain


Westpac$19.45$18.75
$19.05-2%


Heartland Group Holdings$1.26$1.20
$1.32+5%


Turners Automotive Group$2.12$2.06
$2.27+7%


Geneva Finance$0.425$0.37
$0.4250%



The worst performer is the one that has the highest credit rating. Of course the fact that 4/5s of Westpac's business is in Australia might have something to do with this. But both Heartland and Turners, big motor vehicle funders, are up 5% for the month and up 10% off their monthly lows. Turners even managed to pay a dividend over the period. Geneva, down at the more dodgy end of the loan market has flat-lined. So what can explain this?

Most motor vehicle funding will have been 'baked in' well before Covid-19 struck. So loans kept on being paid off with many of the alternative spending temptations unavailable. The other side of things is that NZ is very much a 'motor country'. An awful lot of people still need motor transport to go to work. And car use has bounced back faster than public transport use. I am surprised at how well Holden- with cars sold financed by Heartland-, but now a zombie company, are doing in the motor vehicle market. Did I see last month they were number 2, behind only Toyota? I guess there isn't much wrong with the product they sell, and kiwis are never shy to turn down a run-out bargain. I also read that during the worst month of lock-down Kia, also financed by Heartland, held the number one position, ahead of even Toyota! That doesn't mean much given the low numbers of vehicles sold that month. But it does show that Kia are on the ascendance. Turners funding is all for used vehicles. The used vehicle market should be naturally more resilient when times are tough.

My own feeling is that we are in a kind of 'false holding dawn'. Come September when the wage subsidies are suddenly removed, I think the dire outlook for 2021 will suddenly come into sharper focus. But with Inland Revenue kindly funding the bad company loans (thank you Grant) , I can see Heartland with a smaller loan book but not necessarily a loan book that is worse for wear credit wise. So maybe Mr Market's view that mid tier finance companies are in a relative sweet spot is correct? That Mr Market does seem to do an OK job of forecasting, for 90% of the time at least, might be something to ponder?

SNOOPY

[RTM]

A very plausible forward looking view on the future of financing in New Zealand. But the market is forward looking too. So how does 'Mr Market' view the future of financing in New Zealand as things have developed over the last month? Here is Mr Market's take on four financers in descending order of creditworthiness (according to the ratings agency anyway).



Share Price 26th JuneMonthly LowShare Price 26th July


Westpac$19.45$18.75$19.05


Heartland Group Holdings$1.26$1.20$1.32


Turners Automotive Group$2.12$2.06$2.27


Geneva Finance$0.425$0.37$0.425



The worst performer is the one that has the highest credit rating. Of course the fact that 4/5s of Westpac's business is in Australia might have something to do with this. But both Heartland and Turners, big motor vehicle funders, are up 5% for the month and up 10% off their monthly lows. Turners even managed to pay a dividend over the period. Geneva, down at the more dodgy end of the loan market has flat-lined. So what can explain this?

So maybe Mr Market's view that mid tier finance companies are in a relative sweet spot is correct? That Mr Market does seem to do an OK job of forecasting, for 90% of the time at least, might be something to ponder?

SNOOPY

Worth considering also what Mr Mkt thought before COVID. Shall we say 25 Nov 19
Westpac $25.89
Heartland $1.70
Turners $2.62
Geneva $0.56
So already significantly discounted I guess

[Snoopy]

Worth considering also what Mr Mkt thought before COVID. Shall we say 25 Nov 19

So already significantly discounted I guess


Good point. It pays not to forget the 'bigger picture'.



Share Price 25th November 2019
Dividends Paid
Share Price 26th July
Period Gain


Westpac$25.89
0c
$19.05-26%


Heartland Group Holdings$1.70
4.5c
$1.32-20%


Turners Automotive Group$2.62
4.0c+6.0c
$2.27-10%


Geneva Finance$0.56
(1.25c +1.5c)x 0.7c
$0.425-21%



Turners suffering less than the others. Perhaps being free on all restrictions about paying dividends has something to do with that? Although I see Geneva Finance are still paying dividends post pandemic. Some things don't change though. Westpac has still been the worst of the four to own over the Covid-19 period.

SNOOPY

[Beagle]

My own feeling is that we are in a kind of 'false holding dawn'. Come September when the wage subsidies are suddenly removed, I think the dire outlook for 2021 will suddenly come into sharper focus. But with Inland Revenue kindly funding the bad company loans (thank you Grant) , I can see Heartland with a smaller loan book but not necessarily a loan book that is worse for wear credit wise. So maybe Mr Market's view that mid tier finance companies are in a relative sweet spot is correct? That Mr Market does seem to do an OK job of forecasting, for 90% of the time at least, might be something to ponder?

SNOOPY

Yeap I noticed during the week it broke above its 100 day moving average and have had a bit of a think about things already. My preliminary thinking is along very similar lines to you and we are in some sort of false economic dawn and once the stimulus wears out, look out ! The massive recent jump in unemployment feels to me like the tip of the iceberg. Plenty more pain to come. LOTS of small business's just holding on by their fingernails is how I see it from the coalface.

[tim23]

Firming nicely lately, I think the effect of ending of extended wage subsidy is over stated, not convinced the impact is going to be as bad as predicted.

[Snoopy]

Firming nicely lately, I think the effect of ending of extended wage subsidy is over stated, not convinced the impact is going to be as bad as predicted.


Tim I notice you are posting from Masterton. I was there for the day last year attending Sir Brian's funeral. The town looked very spick and span I thought. The rugby ground was immaculate, and I'm not just saying that because it was the 'venue of the day'. People on the street were wandering around with purpose and contentment on their faces, Plenty of customers at the little cafe where I stopped off for lunch in town. But, it has to be said, there weren't many signs of overseas tourists about. There are lots of inter-generational drystock farmers in the Manawatu who are having their day in the sun with good prices for lamb and beef. Farming wealth runs this town, This is a solid farming community off the main tourist trail. I think Masterton will do OK as the wage subsidy comes off. Where I do see problems are in the tourist towns, particularly in the South Island: Kaikoura, Queenstown, Franz Joseph and Fox Glacier. The other places I see problems are the gateway cities of Christchurch and Auckland. There is too much high end hospitality in those cities that locals will not be prepared to step up and pay for at last years market rates. What I am saying here is that I expect the effect of the wage subsidy removal to be uneven around the country. Don't assume that because your patch looks O.K. that other towns around the country will be.

SNOOPY



.

[nztx]

Good point. It pays not to forget the 'bigger picture'.



Share Price 25th November 2019
Dividends Paid
Share Price 26th July
Period Gain


Westpac$25.89
0c
$19.05-26%


Heartland Group Holdings$1.70
4.5c
$1.32-20%


Turners Automotive Group$2.62
4.0c+6.0c
$2.27-10%


Geneva Finance$0.56
(1.25c +1.5c)x 0.7c
$0.425-21%



Turners suffering less than the others. Perhaps being free on all restrictions about paying dividends has something to do with that? Although I see Geneva Finance are still paying dividends post pandemic. Some things don't change though. Westpac has still been the worst of the four to own over the Covid-19 period.

SNOOPY

That really depends on one's entry point and how their Average cost of a holding looks

It's been possible to accumulate some very attractively priced holdings over the past 4-5 months

Factor in possibly a larger next period dividend (perhaps to make up for an interim or final suspended), prospects of SP lift
as & when normal economic conditions return (if they do & to what extent)

Also external factors - with the Aussie banks, SP will be seeing reaction to continuing C-19 infection rates particularly in VIC & NSW still resurging with further lock-downs in OZ

I think a valid comparison should look at the High & Low over the past 4-5 months, rather than a fixed point start & end

[nztx]

Yeap I noticed during the week it broke above its 100 day moving average and have had a bit of a think about things already. My preliminary thinking is along very similar lines to you and we are in some sort of false economic dawn and once the stimulus wears out, look out ! The massive recent jump in unemployment feels to me like the tip of the iceberg. Plenty more pain to come. LOTS of small business's just holding on by their fingernails is how I see it from the coalface.

Very much an Economy in a caged goldfish bowl, where the Haves & Have nots after many transitions between the two courtesy of C-19 is likely to prevail

Some niches & sectors have done very nicely - thank you very muchly.

Some have not fared well & may be on the edge (I think we can pick the sectors & likely flow on feed into other businesses servicing those sectors)

However very fair warning worth observing before dipping toe into some securities / sectors + always do some research & diligence before throwing gold at shares / funds one knows little about

Interest bearing Investors are likely to be suffering, Share investors remaining hopeful on the future.
If not scrambling for stocks with solid prospects / likely dividend continuity with minimum perceived risk
or into commercial property away from Low Interest Returns & Politically punished Residential Rental sector

that said, the boards on NZX & other Exchanges are littered with increasing proportions of what can only be termed 'low quality rubbish' and quality investment grade shares are being picked out by Buyers and priced back up quite quickly

[Snoopy]

That really depends on one's entry point and how their Average cost of a holding looks

It's been possible to accumulate some very attractively priced holdings over the past 4-5 months

Factor in possibly a larger next period dividend (perhaps to make up for an interim or final suspended), prospects of SP lift
as & when normal economic conditions return (if they do & to what extent)

Also external factors - with the Aussie banks, SP will be seeing reaction to continuing C-19 infection rates particularly in VIC & NSW still resurging with further lock-downs in OZ

I think a valid comparison should look at the High & Low over the past 4-5 months, rather than a fixed point start & end


nztx, you present a valid argument. Let's investigate what gains were available from that dark end of March 2020 Covid-19 shock date.



Late March LowShare Price 26th July (includes dividends)Gain from late March Low


Westpac$14.50
$19.05 + 0c+31%


Heartland Group Holdings$0.93
$1.32 + 0c+39%


Turners Automotive Group$1.12
$2.27 + 6c+108%


Geneva Finance$0.35
$0.425 + 1.5c x0.7+24%



Given what has happened in Australia with the new Victorian lock down (I expect the WBC price to be negatively influenced by that), I am surprised at how similar the bounce back by Westpac and Heartland has been. I am also surprised at how relatively small (in terms of a potential percentage share price gain) the opportunity has been to gain from Geneva Finance in the same circumstances. Squinting at the chart it looks like around 20,000 GFL shares were traded on that low day.

20,000 x 0.35 = $7000 worth of shares traded

That isn't much value to grab for all those charting opportunists, or even existing loyal shareholders out there. Low liquidity shares can often make nonsense of charts and the apparent opportunities they present for this reason.

The big surprise to me was how low Turners Automotive Group dived relative to the others. They may have been caught out by their name when car sales ground to a near halt. Although even in the darkest month Turners made some hay by selling to essential workers! As most existing shareholders know, Turners is really a finance company with an automotive sales feeder arm. Just because there are next to no automotive sales in a month, that doesn't mean that all the finance contracts signed over the previous few years come to a halt. I think the market overlooked that. Looking backwards, forcing people to stay at home may have meant that some dodgy car loans were in fact repaid because there just weren't alternative ways available to squander cash.

There is another wider issue with buying finance companies in a crisis. Generally the only way out of trouble is for finance companies in a deep recession is to issue new capital. And that means issuing new shares at a discount to the market price. That means that the thinking person buying at the bottom would be doing so knowing that they would likely be asked to stump up even more cash in a share issue at an even more discounted price. But how much new capital? At the depths of a crisis it wold be very difficult to put a number on that. For this reason, I would not be prepared to buy into a finance company in a crisis until i got a very clear signal from management as to how it was being affected and how much new capital, if any, was going to be required. Yet obviously there are some out there who consider ' buying at at shock low' as a risk worth taking.

SNOOPY

discl: who nevertheless bought some Heartland at $1.10 on 17th March on the way down on the hunch that the price fall was an over-reaction, before the full extent of the financial crisis was apparent. By my own definition I wasn't thinking clearly and with hindsight I just got lucky! Although I was at the time , and am now, prepared to support a cash issue if Heartland wants to square up their books.

[tim23]

Tim I notice you are posting from Masterton. I was there for the day last year attending Sir Brian's funeral. The town looked very spick and span I thought. The rugby ground was immaculate, and I'm not just saying that because it was the 'venue of the day'. People on the street were wandering around with purpose and contentment on their faces, Plenty of customers at the little cafe where I stopped off for lunch in town. But, it has to be said, there weren't many signs of overseas tourists about. There are lots of inter-generational drystock farmers in the Manawatu who are having their day in the sun with good prices for lamb and beef. Farming wealth runs this town, This is a solid farming community off the main tourist trail. I think Masterton will do OK as the wage subsidy comes off. Where I do see problems are in the tourist towns, particularly in the South Island: Kaikoura, Queenstown, Franz Joseph and Fox Glacier. The other places I see problems are the gateway cities of Christchurch and Auckland. There is too much high end hospitality in those cities that locals will not be prepared to step up and pay for at last years market rates. What I am saying here is that I expect the effect of the wage subsidy removal to be uneven around the country. Don't assume that because your patch looks O.K. that other towns around the country will be.

SNOOPY



.

Fair point - I think there will be variations in how different regions recover at the moment the Wairarapa seems okay.

[winner69]

How will Heartland cope with a W shaped recovery

Next year might be tough

https://www.jarden.co.nz/news-and-insights/leading-economist-picks-w-shaped-recovery-for-australia-and-nz/

[Snow Leopard]

well a W is better than a VL

Disc: may have bought an extra heartland share or two recently.

[peat]

well a W is better than a VL

Disc: may have bought an extra heartland share or two recently.

only if you want to go to Wellington or Whanganui. Not so good if you're going to Vladivostok

[kiora]

only if you want to go to Wellington or Whanganui. Not so good if you're going to Vladivostok

Now theres a place I have often heard about but never visited.What is it like?Anyone been?
I imagine pretty cold.

[percy]

https://www.youtube.com/watch?v=HTYp2f3UCvg
https://www.youtube.com/watch?v=Fqdbh6yrMZo

Some other good videos on Youtube

[winner69]

Seems profit will be about the guidance they’ve stayed with all year

No big adjustments (ie impairments) coming

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/357731/328085.pdf

[Oliver Mander]

Seems profit will be about the guidance they’ve stayed with all year

No big adjustments (ie impairments) coming

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/357731/328085.pdf


interesting that they will be filing reports outside the usual deadlines though...seems slightly unusual if it is 'business as usual'. Am I missing something?
But yes, no +/- 10% movement from guidance obviously...

[Snoopy]

Seems profit will be about the guidance they’ve stayed with all year
removed
No big adjustments (ie impairments) coming

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/357731/328085.pdf


The announcement tentatively dangled the prospect of a final dividend, without promising there would be one, while saying they were taking extra time to sort out the Covid-19 effects on their business. I guess we shareholders might infer from that, that the reverse mortgage business in Australia must be doing well. If it wasn't, then a dividend from the outside of the Heartland Bank sub unit, the Australian arm of Heartland, would not be possible. But the Australian arm is also capital hungry, which is why it was removed from inside of Heartland Bank to start with. So we could also assume that if a dividend is paid, then the outlook for growth of the Australian arm is poor.

As for there being no significant impairments coming, if something was obvious by now then Heartland would have a duty to the market to announce it. But all Heartland have said is that they are taking a bit more time with their accounts to make sure they can work through any Covid-19 effects. So while it is encouraging that there are no reasons to declare significant impairments right now, in contrast to what Winner has written, I don't think we are off the hook. On the contrary, I think this announcement is an attempt to talk up the market in preparation for a cash issue that will be used to cover the upcoming Covid-19 provisioning. The cash issue will be sold as a prudent response to the unknown flow on effect of Covid-19 as we move into 2021. Logically a cash issue would mean 'no dividend'. But Heartland has a history of paying dividends while raising capital in the same period. So we will see.

SNOOPY

[King1212]

HEartland is well managed and resilient....

[winner69]

Jeez Snoops you have good eyes being able to read all that between the lines ...your report longer than theirs lol.

Extension waivers was meant to cover the physical practicalities of finalizing reports like key staff working from home and auditors not getting to Heartlands office due to lockdown etc etc - as opposed to actually adding up things / impacts.

Never mind another month to see what eventuates bit I'd be very disappointed in Jeff in he produces say a $30m to $40m provision now

[Snow Leopard]

Bit of volume ( 2,688,000 ) @ $1.20 changed hands at the end of the day. :huh:

[Baa_Baa]

There’s a one bagger here, once things settle down a bit. If they can keep paying dividends that will allay the wait somewhat.

[iceman]

There’s a one bagger here, once things settle down a bit. If they can keep paying dividends that will allay the wait somewhat.

I think you are right BaaBaa and I feel a bit uncomfortable being out of this one since the beginning. But I sort of feel it would be a bit irresponsible of them to pay a final dividend with the RBNZ asking banks not to pay dividends and the profitable Aussie business needing a lot of new cash to keep growing.
At this stage I'm comfortable sticking to my plan of re-entering the SH register in late 2021 or 2022, subject to satisfactory results.