HGH - Heartland Group Holdings

[Baa_Baa]

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.

For sure iceman but heartland are a bit different from your regular bank, albeit the share price does fluctuate with the banks, so notwithstanding another ‘shock’ this should be about or around the bottom.

I’m a bit down on capital but well up overall including dividends so happy to continue to hold. I’ll be topping up if it goes much lower, I think it’s one of those buy low stocks and hold, Let time do the talking.

[King1212]

It is a good entry at current SP....

[percy]

Below is part of a letter my brother sent me a few days ago.He is a retired valuer,who valued farms,commercial and residential properties.He lives in Hobart and is currently on holiday in Queensland.OK deals with Australian issues.I see similar issues arising here.


We will never see the end of this mess. Last Saturday finance reported that mortgage holders , 8% were using the Bank holiday of interest only, 22% were on Jobkeeper ($750/week to firm then employee) ,15% on Jobseeker (the Dole) of $557.85/week which will return to normal of $282.85/week in January. Then 11% have cashed early superannuation. 3.3 million of the 6 million who have a mortgage will need to find a job within six months or they will default. The average mortgage is $467,700 so that is more than $1 trillion. The rescue package allowed company directors to trade while insolvent for six months. After the 25th September, unless there is more Federal money, there will be a ‘tsunami ‘ of insolvencies. Noted many shops vacant on our travels.
Ended Alexandra Beach and now at Broadbeach till 24th then direct flight Brisbane to Hobart. Having trouble with G2G form re entry to Tasmania and likely will l have to home isolate for 14 days.

[Beagle]

For what its worth for such a small accounting practice...I am seeing Covid 19 having a serious impact on a high percentage of my client's business's.
Many took wage subsidies and loan repayment holiday's. What happens when all the artificial support ends...that's the $64,000 question !

[King1212]

Oz job keeper extended till next year March 2021

https://treasury.gov.au/coronavirus/jobkeeper/extension

[percy]

Pushing the growing train wreck further down the track.

[Joshuatree]

Thanks for sharing your brothers observations, a sober reminder.

[Snoopy]

Oz job keeper extended till next year March 2021

https://treasury.gov.au/coronavirus/jobkeeper/extension


Old news (announced on July 21st).

It is winding down though. The $A1,500 per fortnight will reduce to $A1,200 per fortnight on 28th September and $A,000 per fortnight from 4th January 2021. In tandem with this the turnover test requires GST revenue to fall 30% with the prior comparative period for eligibility.

That is probably a more sensible approach than the NZ system for wage subsidies which is either 'off' or 'on', with the same 30% decline in revenue criteria for eligibility. The 'full time' worker subsidy is rather less generous over here too. 'Only' $NZ350 per week ($NZ700 per fortnight).

SNOOPY

[Beagle]

Below is part of a letter my brother sent me a few days ago.He is a retired valuer,who valued farms,commercial and residential properties.He lives in Hobart and is currently on holiday in Queensland.OK deals with Australian issues.I see similar issues arising here.


We will never see the end of this mess. Last Saturday finance reported that mortgage holders , 8% were using the Bank holiday of interest only, 22% were on Jobkeeper ($750/week to firm then employee) ,15% on Jobseeker (the Dole) of $557.85/week which will return to normal of $282.85/week in January. Then 11% have cashed early superannuation. 3.3 million of the 6 million who have a mortgage will need to find a job within six months or they will default. The average mortgage is $467,700 so that is more than $1 trillion. The rescue package allowed company directors to trade while insolvent for six months. After the 25th September, unless there is more Federal money, there will be a ‘tsunami ‘ of insolvencies. Noted many shops vacant on our travels.
Ended Alexandra Beach and now at Broadbeach till 24th then direct flight Brisbane to Hobart. Having trouble with G2G form re entry to Tasmania and likely will l have to home isolate for 14 days.

Yes sobering stuff and a bit spooky that less than 1 hour later we have the announcement of community transmission again within N.Z.
I'd be very pleasantly surprised, (I don't expect to be) if Level 3 is just for 3 days and just limited to Auckland. I don't like coincidences and reports of more than 1 retirement village going into lockdown in Chch on the very same day community transmission is acknowledged in Auckland and on the very same day Ashley Bloomfield gets a Covid test is all a bit to much of a coincidence for my liking. Another lockdown of any length will REALLY hurt a lot of business's that were just starting to feel that they might have scraped through this. Another extension to the wage subsidy scheme coming ? Just as well the Govt set aside another $14 Billion for another outbreak...I reckon they're going to need it.

[nztx]

Yes sobering stuff and a bit spooky that less than 1 hour later we have the announcement of community transmission again within N.Z.
I'd be very pleasantly surprised, (I don't expect to be) if Level 3 is just for 3 days and just limited to Auckland. I don't like coincidences and reports of more than 1 retirement village going into lockdown in Chch on the very same day community transmission is acknowledged in Auckland and on the very same day Ashley Bloomfield gets a Covid test is all a bit to much of a coincidence for my liking. Another lockdown of any length will REALLY hurt a lot of business's that were just starting to feel that they might have scraped through this. Another extension to the wage subsidy scheme coming ? Just as well the Govt set aside another $14 Billion for another outbreak...I reckon they're going to need it.

Just 3 days this time localised to Auckland with the rest all in Level 2

If this extends, or goes into other regions, then there could be even more fallout & carnage

Once again, fairly open on travel between the Supercity & elsewhere - opportunity for spread
depending on how widespread community transmission is

Like you Beagle a small practice, probably not the retail client component, but most have climbed out
the first lock-down very well - but overall the effects on the national economy & suggestions from
some (for example John Key) of recession ahead are worrying

Further C-19 Lockdown of any duration must surely suggest further Subsidy / Support package
needed to avoid more carnage to what is left standing after first round

[iceman]

Below is part of a letter my brother sent me a few days ago.He is a retired valuer,who valued farms,commercial and residential properties.He lives in Hobart and is currently on holiday in Queensland.OK deals with Australian issues.I see similar issues arising here.


We will never see the end of this mess. Last Saturday finance reported that mortgage holders , 8% were using the Bank holiday of interest only, 22% were on Jobkeeper ($750/week to firm then employee) ,15% on Jobseeker (the Dole) of $557.85/week which will return to normal of $282.85/week in January. Then 11% have cashed early superannuation. 3.3 million of the 6 million who have a mortgage will need to find a job within six months or they will default. The average mortgage is $467,700 so that is more than $1 trillion. The rescue package allowed company directors to trade while insolvent for six months. After the 25th September, unless there is more Federal money, there will be a ‘tsunami ‘ of insolvencies. Noted many shops vacant on our travels.
Ended Alexandra Beach and now at Broadbeach till 24th then direct flight Brisbane to Hobart. Having trouble with G2G form re entry to Tasmania and likely will l have to home isolate for 14 days.

Sobering reading percy. Thanks for sharing.

[King1212]

Read the news...the cases were known around 3pm to 3.30 Pm as the General director said....then u look at the market overall... around 3pm onwards, all shares started to trade lower...so.....insider news eh??

[thegreatestben]

I was wondering what was causing hgh to drop, the announcement didn’t seem to give reason. Equally suspicious here King

[King1212]

If u see broadly nz shares....all started to trade lower after 3pm then big buys at the end...so.....might be the fundies got the news....

[thegreatestben]

Another forum I frequent a member was told from an insider somewhere that a major city had cases and would be going into lock down. That post was a good few hours before the announcement so I have no doubt the news was circulating

[stoploss]

Another forum I frequent a member was told from an insider somewhere that a major city had cases and would be going into lock down. That post was a good few hours before the announcement so I have no doubt the news was circulating

Winston stated he was told earlier in he day there was a "suspected case", so it may have been early speculation .3 PM sounds like it was first confirmed and Ministers informed.

[Snoopy]

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'. 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?

For those who have been following this thread over the last few days, you will see that

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.


Today I believe marked an investment inflection point for Heartland. A day when New Zealand's greatest ever banker (Jeff) defied the market odds with the support of New Zealand's greatest ever banking sector investor (Heartland share price losses on the market trimmed to 2.5%). With the share price back within my buying range, thanks to the second Covid-19 shock I topped up today at $1.18. That little transaction averaged down my HGH buy in price to $1.37.

For those who want to reflect on the details of my future scenario modelling for FY2021, you need to look at my posts 13411, 13429 and 13438, But very roughly, my base case, with FY2019 as the base reference year, was motor loans down 10% by revenue, business loans down 15% by revenue and the reverse mortgage business flat. My thoughts now are that maybe the business loan performance will be a little worse, and maybe the reverse mortgage business will fare a little better. Bu those 'gut feel ' changes aren't 'fundamental enough' or 'certain enough' to require a full rework of my modelling.

The problem with all of these 'historical precedent' valuations is that they are all just that - historical. What investors on this forum want to know about is the future and it is here that the opinion of "New Zealand's greatest ever banking sector investor" becomes invaluable. And that dear fellow investors is what I intend to tell you, just as soon as I can figure out who "New Zealand's greatest ever banking sector investor" is (so I can ask them) ;-P

SNOOPY

[thegreatestben]

Snoopy you're obviously far cleverer than me when it comes to this (not hard) I appreciate your posts and I consider your points where I understand the context.
I go with my gut more than I should, but I'm in HGH at 1.08, if you're buying more at 1.18 I guess I'm doing ok!

[RTM]

Snoopy you're obviously far cleverer than me when it comes to this (not hard) I appreciate your posts and I consider your points where I understand the context.
I go with my gut more than I should, but I'm in HGH at 1.08, if you're buying more at 1.18 I guess I'm doing ok!

Great post TGB, I'm with you all the way. I'm in at 1.06 after holding for many years. Hopefully this COVID thing is not going to be to much more damaging.

[Beagle]

For my money Snoopy me old doggy mate, there's ten's of thousands of SME's in Auckland who have been hanging on by their fingernails. Another protracted lockdown will see widespread carnage.

[Snoopy]

For my money Snoopy me old doggy mate, there's ten's of thousands of SME's in Auckland who have been hanging on by their fingernails. Another protracted lockdown will see widespread carnage.


Are those the SMEs that Jeff has skillfully shepherded over to the IRD loan scheme?

SNOOPY

[nztx]

For my money Snoopy me old doggy mate, there's ten's of thousands of SME's in Auckland who have been hanging on by their fingernails. Another protracted lockdown will see widespread carnage.

Same thoughts here Beagle -- added to the large pile still just hanging in down south

[Cyclical]

With the share price back within my buying range, thanks to the second Covid-19 shock I topped up today at $1.18.

Well thanks Snoopy. With all the effort you put into analysing the banking sector, I was more than happy to take your cue today and dip back into HGH, after offloading the last lot too early at $1.27.

[Beagle]

Are those the SMEs that Jeff has skillfully shepherded over to the IRD loan scheme?

SNOOPY

Might be something in here worth getting your snout into. https://www.harbourasset.co.nz/research-and-commentary/shadow-banks-shine-light-on-mortgage-deferrals/

[Snoopy]

Well thanks Snoopy. With all the effort you put into analysing the banking sector, I was more than happy to take your cue today and dip back into HGH, after offloading the last lot too early at $1.27.


While your sell decision was probably made long before Covid-19 arrived on the scene Cyclical, your assessment of $1.27 as 'fully priced value' may yet prove correct. What I see going forwards is a fairly dull finance company, a bit more risk averse than in the past and consolidating around their reverse mortgage offering. Oh and rural lending will just 'chug along'. I see SBS entering the REM market in NZ as adding credibility to the Reverse Equity Mortgage business model. I don't doubt the difficult position of many small businesses throughout NZ. But new small businesses will spring up and someone has to fund them. I don't want to bang the same drum endlessly. But I think it might be instructive to see my three 'future scenarios' stacked up alongside each other.



Three Profit Forecast Scenarios
Pessimistic View (Post 13411)
Middle View (Post 13429)
Optimistic View (Post 13438)



FY2021FY2022
FY2021FY2022
FY2021FY2022


Baseline Reference Profit
$74.5m]

$74.5m
$74.5m
$74.5m
$74.5m
$74.5m
]


Reverse Mortgage Adjustment
$23.7m
$36.8m
$33.0m
$51.8m
$54.1m
$87.3m


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


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



Business Finance (Part 1) O4B Adjustment
($6.3m)
($3.6m)
($5.3m)
($2.1m)
($5.3m)
($2.1m)

Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment
($15.5m)
($15.5m)
($15.5m)]

($15.5m)
($10.9m)
($5.4m)

]

Rural Finance Adjustment]

$0m
$0m]

$0m
$0m
$0m
$0m


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


Total Forecast NPAT
$50.1m
$44.9m
$60.4m
$65.4m
$86.1m
$122.3m


No. Shares on Issue
581.0m
581.0m
581.0m
581.0m
581.0m
581.0m


Earnings Per Share
8.6cps
7.7cps
10.4cps
11.3cps
14.8cps
20.1cps



In the middle case, $1.27 would represent a PE of 11 by FY2022. That might be as good as it gets for the next few years. Yet a dividend of 10cps would be a gross dividend yield of 11%. That has be be pretty attractive against getting less that 2% in a term deposit.

For nztx and Beagle, I am forecasting a 'total profit hit' on business loans to be $19.1m (pessimistic), $17.6m (medium) and $7.5m (optimistic) by FY2022. So I am not trying to downplay your concerns. - they are real.

SNOOPY

[Snoopy]

Might be something in here worth getting your snout into. https://www.harbourasset.co.nz/research-and-commentary/shadow-banks-shine-light-on-mortgage-deferrals/


I hereby declare author Harbour Asset's Simon Pannet as an 'honorary Beagle'. That is a very good bit of sniffing!

Pannet is talking about 'more that 10%' of SMEs requiring an 'interest holiday'. In my 'middle scenario' I am talking about a 15% reduction in direct to customer 'Business Relationship' lending combined with a 10% reduction in lending through downstream 'Business Intermediaries' lending. This looks to line up with Pannet's thinking.

"How those borrowers restart their payment habits will have a material bearing on banks’ earnings."

I am assuming in my Heartland modelling that they will not restart payments at all. Between 10% and 15% of loan revenue will be permanently gone. Too pessimistic?

" are more interested in the potential for losses from the small business sector, especially in light of the data for Australian banks which shows that 16% of bank loans to Australian SMEs remain on deferred terms"

The Australian position, if you include Melbourne, is likely to be worse than NZ. So from an investment perspective, I am happy with my modelling of between 10 and 15 percent of SME lending (in my dominant medium and pessimistic scenarios) in NZ going to the wall. I am not happy about what happens to those individual business owners of course!

My $1.18 median buy price for FY2021 looks to line up with Harbour Asset Management's dark assumptions. So I have no regrets about purchasing HGH shares at that $1.18 price I did.

SNOOPY

[percy]

We must be aware of the ripple effect.
Two I know the history of.
1] Biggish motor repair business went into liquidation, after their major client went broke.
2] Auckland book distributor told me, that year's profit had gone, after two very large book shops went broke,owning him far to much.
Snoopy.Take a walk down to South City, and tell me if you think any shop, other than The Chemist Warehouse ,is profitable, and will still be in business this time next year.Same with "The Strip" bars.[Hate to think which bank financed their fit outs,] Check out Westpac Centre while you are there.First floor empty,Second floor empty,however Third floor has a tenant.
Eastgate is a disaster,Barrington has more empty shops,Northlands and The Palms have that decay look about them.
Job losses have yet to begin.Very few jobs advertised,and I doubt any bank is keen to help new businesses.

Trust Chris Lee does not mind me taking the following out of his this week's taking stock.
"As the stresses of Covid-19 lead to hardship or losses, weak, unfit, improper people will cover up their errors or misdeeds, rather than accept the responsibility of fixing the problems."
"Selfish, greedy people always try to avoid accountability, and will take risks with other people's money to evade detection. Their backbone is amoeboid."

[tommy_d]

We must be aware of the ripple effect.
Take a walk down to South City, and tell me if you think any shop, other than The Chemist Warehouse ,is profitable, and will still be in business this time next year.Same with "The Strip" bars.[Hate to think which bank financed their fit outs,]
trying to figure out a good buy price for MOA, any thoughts?

[Beagle]

Talk on the news tonight (if Auckland goes into a protracted lockdown) of Grant Robertson thinking of another extension to the wage subsidy program. Just keep on with the stimulus and printing money...what could possibly go wrong :eek2:

My sense is this virus is a really big problem that's going to come back and bite over and over and over again. My nose for trouble is telling me there's a heck of a lot coming. I hope I'm wrong.

To me Snoops me ol mate. Your optimistic view suggests you are fond of smoking a certain substance that we're supposed to be voting on whether to legalize or not.
Its fantasy land stuff mate, sorry, but I have to call it as I see it. There is no way in the world that's going to happen. I think your mid point scenario should be your optimistic one and your pessimistic scenario looks most realistic to me.

HGH currently trades a little over 1.1 times book value. I think that's about right at present but the risk is very much weighted to the downside if Covid bites over and over and over again...and I think it will. What I have seen at the coal face of the effects on my small client base deeply concerns me.
This dog is very glad he is close to retirement and has buried an ample supply of bones.

[+++++]

Maybe a Mars colony isnt such a bad idea.

[nztx]

Maybe a Mars colony isnt such a bad idea.

In consideration of that -- Take II:

The Yanks will probably get there first, along with their special strain of the Trumped Trumpet mutated C-19 going along for the ride to see if mutates further ;)

Of course NASA wont admit up to the fact, The US Military will eventually disclose it was new form of warfare deterrent in case the Russians or Chinese try anything fancy..

[nztx]

While your sell decision was probably made long before Covid-19 arrived on the scene Cyclical, your assessment of $1.27 as 'fully priced value' may yet prove correct. What I see going forwards is a fairly dull finance company, a bit more risk averse than in the past and consolidating around their reverse mortgage offering. Oh and rural lending will just 'chug along'. I see SBS entering the REM market in NZ as adding credibility to the Reverse Equity Mortgage business model. I don't doubt the difficult position of many small businesses throughout NZ. But new small businesses will spring up and someone has to fund them. I don't want to bang the same drum endlessly. But I think it might be instructive to see my three 'future scenarios' stacked up alongside each other.



Three Profit Forecast Scenarios
Pessimistic View (Post 13411)
Middle View (Post 13429)
Optimistic View (Post 13438)



FY2021FY2022
FY2021FY2022
FY2021FY2022


Baseline Reference Profit
$74.5m]

$74.5m
$74.5m
$74.5m
$74.5m
$74.5m
]


Reverse Mortgage Adjustment
$23.7m
$36.8m
$33.0m
$51.8m
$54.1m
$87.3m


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


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



Business Finance (Part 1) O4B Adjustment
($6.3m)
($3.6m)
($5.3m)
($2.1m)
($5.3m)
($2.1m)

Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment
($15.5m)
($15.5m)
($15.5m)]

($15.5m)
($10.9m)
($5.4m)

]

Rural Finance Adjustment]

$0m
$0m]

$0m
$0m
$0m
$0m


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


Total Forecast NPAT
$50.1m
$44.9m
$60.4m
$65.4m
$86.1m
$122.3m


No. Shares on Issue
581.0m
581.0m
581.0m
581.0m
581.0m
581.0m


Earnings Per Share
8.6cps
7.7cps
10.4cps
11.3cps
14.8cps
20.1cps



In the middle case, $1.27 would represent a PE of 11 by FY2022. That might be as good as it gets for the next few years. Yet a dividend of 10cps would be a gross dividend yield of 11%. That has be be pretty attractive against getting less that 2% in a term deposit.

For nztx and Beagle, I am forecasting a 'total profit hit' on business loans to be $19.1m (pessimistic), $17.6m (medium) and $7.5m (optimistic) by FY2022. So I am not trying to downplay your concerns. - they are real.

SNOOPY

Thanks Snoopy for your pointing out of these factors

- The nature of impairment may not necessarily fit into individual set reporting periods however.
- Most banks also carry (I understand) a general provisioning - so actual Loss would have to be above that general provision.
- A lot will depend on spread of that business lending exposure, how badly affected Borrowers were , security held, (if any held) & coverage for borrowing out there.
- The bank may also 'roll over' a certain amount presumably capable of being brough back from the cliff into new lending (not unheard of either - is it ?)
- Actual Losses (and any recoveries) may come into a number of periods forward

I remain quietly confident that HGH are actively managing their lending exposures. Even though the market may generally be exhibiting some mark downs and overly cautious tones in the current economic times..

To what extent do current market risk factors exceed those of pre Covid 19 times - that aren't 'insured by Govt guarantees on certain C-19 lending' and secondly usual general provisioning ; thirdly not already provided for in earlier periods ?
I'm picking that most banks have pulled their horns in on new lending, even with the Robertson Guarantee being biffed out into the financial markets -- we all have seen commentary on this & how little was utilised in recent past.

Granted - current times have allowed higher Lending % Margins in Lower Depositor rates prevailing now
Nevertheless going forward, any Losses take a lot more Lending activity & revenue thereon to recover now

[percy]

trying to figure out a good buy price for MOA, any thoughts?


Buy price?.Sorry I do not know,as I would avoid them until they are profitable.In the meantime there are a lot of unknowns.
Perhaps wait until the down trend stops and turns up.ie Watch their chart.

[King1212]

Be fearfully when people greedy ..be greedy when people are in fear....

E koro buffet bought in heaps of Bank of America....I think HGH is a good buy at current SP....60c off the current high....

E koro Orr also begging banks to lend out businesses and RNZB will back the banks

[ziggy415]

Well thanks Snoopy. With all the effort you put into analysing the banking sector, I was more than happy to take your cue today and dip back into HGH, after offloading the last lot too early at $1.27.
Remember also that mum and dad can take out a reverse mortgage with heartland to help pay sons business loan with heartland, probably at same interest rate...hell I think we,ve just discovered perpetual motion

[Snoopy]

Thanks Snoopy for your pointing out of these factors

- The nature of impairment may not necessarily fit into individual set reporting periods however.
- Most banks also carry (I understand) a general provisioning - so actual Loss would have to be above that general provision.


I may have more to say on your post later nztx. But for now I need to make an important distinction about talk on the future of Heartland. For Heartland to continue to prosper:

1/ Heartland needs to have an enduring ongoing operational model that works in tough times.
2/ Heartland needs to have sufficient capital to back up their loan book.

My comments of recent days have all been related to to point 1, not point 2. I am not forecasting any operational losses going forwards. If a 'loan market sector' can't be managed on a daily basis to be 'operationally positive' then Heartland should not be in it at all. I have no concern that Heartland have any unsustainable business sector models going forwards, except perhaps their little adventure into 'Harmoney'. This doesn't mean no more losses for Heartland going forwards. Sudden macroeconomic events can change sector outlooks in a way that cannot be foreseen by those working day to day at the coal face. But these events cannot be forecast because they are by their nature 'sudden' and 'unexpected'.

Right now Heartland has the big tick from me on point 1. But that doesn't mean I see Heartland getting back to the glory days of the share price approaching $2. I would be happy with the Heartland share price appreciating another 10c or so over the next year then holding that level for five years. I think that in Covid-19 times we need to suspend previous thoughts on share price levels we think of as 'normal'. Holding such a share price level of just shy of $1.30 will depend on the resumption of dividends. Heartland have built up a strong record of paying strong dividends so I do think dividends will be back.

Turning to point 2 which I have discussed before, albeit not recently, I think any new investor in Heartland today should come on board in anticipation of a capital raising. All the banks grizzled when the new ECL (Expected Credit Loss) system for managing the loan book was introduced last year. They said the provisioning was too high. They seem to have changed their tune in recent months though! I expect much of this new higher 'general provisioning' will have been eaten into. Yet, and this is the bit I am unsure about, I think the ECL rules will demand new even higher levels of provisioning to be made, even though there is no market evidence today that such extra provisioning will be needed. The new provisioning will be required for statistical probability reasons. That means frighteningly poor headline profit figures for FY2020 for almost all financial institutions, even if the underlying operational business model is sound. So despite my recent share purchase, I am expecting to have to stump up for a Heartland cash issue at some point. And the Heartland shares I buy in that will almost certainly be cheaper than those I bought on market this week, But then again I could be wrong and Heartland may get a tier 1 bond issue away to shore up their capital position. I am not saying that around $1.18 is necessarily the bottom. I am saying it is fair to good value, even given the current business outlook.

SNOOPY

discl: hold HGH, but despite my recent purchase it is still in an underweight position in my portfolio. IOW, I plan on buying more!

[Cyclical]

Remember also that mum and dad can take out a reverse mortgage with heartland to help pay sons business loan with heartland, probably at same interest rate...hell I think we,ve just discovered perpetual motion

Money creation 101, as some would have us believe.

https://www.youtube.com/watch?v=IzE038REw2k

[Snoopy]

We must be aware of the ripple effect.
Two I know the history of.
1] Biggish motor repair business went into liquidation, after their major client went broke.


With the greatest of respect, this sounds like a case of building a business to be too big around one customer. If the motor repair business wanted to expand maybe take on casual workers while the business builds up so that those workers can be shed if the expansion doesn't work. Negotiate a more flexible lease with your landlord. Hard to do before Covid-19 I know, but I think landlords should be more flexible now.



2] Auckland book distributor told me, that year's profit had gone, after two very large book shops went broke,owning him far to much.


Two very large book shops going under in quick succession is bad luck, although book shops have been vulnerable for the last few years. You probably can't blame this on Covid-19.



Snoopy.Take a walk down to South City, and tell me if you think any shop, other than The Chemist Warehouse ,is profitable, and will still be in business this time next year.Same with "The Strip" bars.[Hate to think which bank financed their fit outs,]


How much of Heartland's loan portfolio is in the wholesale and retail sectors? From AR2019 p50

( $11.520m + $18.048m ) / $4201.334m = 0.7%




Check out Westpac Centre while you are there.First floor empty,Second floor empty,however Third floor has a tenant.
Eastgate is a disaster,Barrington has more empty shops,Northlands and The Palms have that decay look about them.


How much of Heartland's loan portfolio is in the property and business sevices sectors? From AR2019 p50

( $88.744m ) / $4201.334m = 2.1%




Job losses have yet to begin.Very few jobs advertised,and I doubt any bank is keen to help new businesses.

Trust Chris Lee does not mind me taking the following out of his this week's taking stock.
"As the stresses of Covid-19 lead to hardship or losses, weak, unfit, improper people will cover up their errors or misdeeds, rather than accept the responsibility of fixing the problems."
"Selfish, greedy people always try to avoid accountability, and will take risks with other people's money to evade detection. Their backbone is amoeboid."


I think Covid-19 might mean it is harder to hide dishonesty. The default position for lenders would be a loan is in trouble until the owner of the loan can prove otherwise.

There is no way to sugar coat any of this. But consider this question. If you owned a finance company, where would you want to put your financing? The oldies have to be a good bet, via modestly geared reverse mortgages. That sounds a lot less risky than financing a new house bought on zero deposit. If you are financing a business, wouldn't you go after the tradies? Drains keep getting blocked, irrespective of the state of the economy. And with overseas travel out, for those that have a job, wouldn't customers like to instead treat thenselves to a new car? NZers likes a bargain and Holden is offering that! Finally, ask yourself how may farmers who buy and sell stock have an amoeboid backbone?

I think Heartland are pushing their financing into the right sectors. On the delivery mechanism, Heartland's push into digital seems to be the way to go for that younger target market. If Jeff died of a heart attack tonight and I was appointed to replace him I think I would leave the Heartland business strategy exactly the same. I am a little nervous about O4B in Australia, but that is about it. None of this will convince those who would not consider any investment in the finance sector. But despite the BBB credit rating, I am less nervous about my investment in Heartland than I am about any investment in those big Aussie banks.

SNOOPY

[percy]

Reverse equity loans should be very sound as should livestock lending.
The rest of their lending has too many unknowns, for me to try and guess the level of defaults
However I doubt we will get any clarity until late next year.


CLARITY.[saves guessing]
Bit of excellent clarity here.Easy to see why it is my largest investment.From PAZ's 6th August announcement.
' Sales have increased by more than 85% in the past
two years, profit has more than tripled and we continue to expand at pace,”
“We are in the right sector at this time. Demand continues to be strong, and we are confident this will
continue through an economic downturn. Historically in times like this, people have tended to focus
on health and wellbeing – so our natural dietary supplements and ingredients and strong New Zealand
brand should hold us in good stead.”

[Snoopy]

I think it might be instructive to see my three 'future scenarios' stacked up alongside each other.



Three Profit Forecast Scenariosscenario
Pessimistic View (Post 13411)
Middle View (Post 13429)scenario
Optimistic View (Post 13438)



FY2021FY2022
FY2021FY2022
FY2021FY2022


Baseline Reference Profit
$74.5m]

$74.5m
$74.5m
$74.5m
$74.5m
$74.5m
]


Reverse Mortgage Adjustment
$23.7m
$36.8m
$33.0m
$51.8m
$54.1m
$87.3m


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


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



Business Finance (Part 1) O4B Adjustment
($6.3m)
($3.6m)
($5.3m)
($2.1m)
($5.3m)
($2.1m)

Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment
($15.5m)
($15.5m)
($15.5m)]

($15.5m)
($10.9m)
($5.4m)

]

Rural Finance Adjustment]

$0m
$0m]

$0m
$0m
$0m
$0m


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


Total Forecast NPAT
$50.1m
$44.9m
$60.4m
$65.4m
$86.1m
$122.3m


No. Shares on Issue
581.0m
581.0m
581.0m
581.0m
581.0m
581.0m


Earnings Per Share
8.6cps
7.7cps
10.4cps
11.3cps
14.8cps
20.1cps





I have humoured everyone by cutting straight to the 'answer'. But this is a situation of considerable uncertainty as to which (or any?) scenario of the ones I have produced is realistic. To understand just how realistic any of these scenarios might be, you have to know what information i put into the model to come up with the answers I did. If I tell you that, and you realise that the profit projections I gave were a result of merely 'turning the handle on the sausage making machine' without any further input from me, then that will allow better judgement as to whether any of the profit projections that I have made make any sense. The table below shows the revenue changes that I have assumed for FY2021 and FY2022 that have changed from the 'base case' (EOFY2019). I am saying nothing about FY2020. I am 'looking through' the current year result because it is likely to be distorted by the advent of Covid-19. So it won't be a good 'base year' to work from.



Three Revenue Forecast Scenarios
Pessimistic View (Post 13411)Middle View (Post 13429)Optimistic View (Post 13438)


Reverse Mortgage Adjustment
Zero Growth => +6.7% compounding existing loans
2.5% Growth => 6.7% + 2.5% = 9.2% compounding of loans
8% Growth => 6.7% + 8% = 14.7% compounding of loans


Motor Vehicle Finance Adjustment (New)
45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022)
45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022)
45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022)


Motor Vehicle Finance Adjustment (Used)
10% reduction (FY2021) with a further 10% reduction (FY2022)
10% reduction (FY2021) with a further 10% reduction (FY2022)
10% reduction (FY2021) with revenue stabalising (FY2022)


Business Finance (Part 1) O4B Adjustment
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 15%[, not compounding (FY2021 & FY2022)
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 10%[, not compounding (FY2021 & FY2022)
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 10%[, not compounding (FY2021 & FY2022)


Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment
Relationship: 16% compounding loss over two years to EOFY2021, then stable
Intermediated: 10% loss from base level (not compounding)
Relationship: 16% compounding loss over two years to EOFY2021, then stable
Intermediated: 10% loss from base level (not compounding)
Relationship: One off 16% loss from base level to EOFY2021
Intermediated: 10% fall over FY2021, before recovering all of that fall in FY2022


]
Rural Finance Adjustment (None)]
Zero Growth
Zero Growth]
Zero Growth


Harmoney and Other Consumer Lending Adjustment
Collapse of Harmoney over a two year period
Harmoney halved in size from FY2021
Harmoney halved in size from FY2021



None of the above information is new. It has all been disclosed in various previous posts of mine. But something is added by reproducing all of this information together in one place.

SNOOPY

[King1212]

Great one Snoopy! Wonder what background u from? Banker or accountant?

[winner69]

Great one Snoopy! Wonder what background u from? Banker or accountant?

His signature is a clue kingie

[Snoopy]

Great one Snoopy! Wonder what background u from? Banker or accountant?


The background isn't important Kingie. To produce a bit of analysis like that my rules are.

1/ Have a clear picture of your end objective.

2/ Have the patience to follow through with the nuts and bolts that lead you to your objective (the objective is your strong motivation here).

3/ Don't get frightened if the whole thing starts to look too complicated. Realise it is all built on 'simple steps', that can usually be done one at a time (even if the whole thing takes a while).

4/ If it all starts to get too hard, 'step away for a day'. It is surprising what insights you can get by coming back to a problem.

5/ If you can summarize the whole thing in a single table or graph, that is often the best tool to use to explain it to others

SNOOPY

[Snoopy]

Reverse equity loans should be very sound as should livestock lending. The rest of their lending has too many unknowns, for me to try and guess the level of defaults
However I doubt we will get any clarity until late next year.

CLARITY.[saves guessing]
Bit of excellent clarity here.Easy to see why it is my largest investment.From PAZ's 6th August announcement.
' Sales have increased by more than 85% in the past two years, profit has more than tripled and we continue to expand at pace,”
“We are in the right sector at this time. Demand continues to be strong, and we are confident this will continue through an economic downturn. Historically in times like this, people have tended to focus
on health and wellbeing – so our natural dietary supplements and ingredients and strong New Zealand brand should hold us in good stead.”


I agree the thing that is missing at Heartland from an investment perspective is clarity Percy. But, strange as it may seem to you, I do not need clarity. Most human activities revolve around making definite decisions. What sort of job do you want? What do you fancy for dinner? What person do you partner up with? These questions tend to have singular answers. Because so many decisions require us to make a 'definite choice', not having to choose seems strange. With investments you can choose. But you don't have to -all the time. And I would argue there are occasions where you should not choose. This is one of them IMO. Choosing the path where you think Heartland will go is too difficult, at least it is for me. But I can imagine different paths that Heartland might go down. Each different path has a different consequence. So without choosing a path, I can do a separate thought experiment on all three paths (in this instance) without committing to any one. Then if I assess the likelihood of going down the alternative paths I can come up with a 'weighted probability combination' of my three scenarios without choosing any particular one. This is investing 'without clarity'.

Some might say why not just wait until the path forwards becomes clearer? That is a legitimate alternative investment approach. But my reason for 'going early' is to capture the market price discount that has arisen because of a lack of clarity. Remember, markets do not like uncertainty. The market price discount will disappear if I wait, but the risk will reduce as well. In the end it comes down to what kind of risk you are comfortable with. For example, investing on the 'Unlisted market', e.g. Paz, contains risks that are not present with putting money an NZX listed company. Different people have different appetites for different types of risks. And there is nothing wrong with that!

SNOOPY

[King1212]

Thanks Snoopy! To be honest...HGH is a well managed company. My first share investment. Sold before it crashed...now I am starting to accumulate

[Snoopy]

Talk on the news tonight (if Auckland goes into a protracted lockdown) of Grant Robertson thinking of another extension to the wage subsidy program. Just keep on with the stimulus and printing money...what could possibly go wrong :eek2:

My sense is this virus is a really big problem that's going to come back and bite over and over and over again. My nose for trouble is telling me there's a heck of a lot coming. I hope I'm wrong.

To me Snoops me ol mate. Your optimistic view suggests you are fond of smoking a certain substance that we're supposed to be voting on whether to legalize or not.
Its fantasy land stuff mate, sorry, but I have to call it as I see it. There is no way in the world that's going to happen. I think your mid point scenario should be your optimistic one and your pessimistic scenario looks most realistic to me.


Beagle, I invite you read my post 13540 which neatly summaries the driving forces behind my 'optimistic scenario'. This includes after a couple of years a 20% fall in the new car financing market, a 10% fall in the financing revenue of used cars. A short sharp 20% fall in business in O4B over FY2021, recovering to a 10% decline from the base case in FY2022. A 16% permanent fall in 'Business Relationship' funding. And a 10% permanent reduction in funding to downstream 'to business' lending customers. Oh and Harmoney is chopped in half, while there is no growth in rural lending. All this is in my optimistic scenario remember! This is the best result one might reasonably foresee. And of the three paths that might eventuate, I am only giving this a one in ten chance of happening.

There is one lending class though that drastically changes my 'optimistic outlook'. This is the 'reverse mortgage' business. I think it is worth spending some time explaining the extraordinary rise of 'reverse mortgages' in the 'optimistic scenario result'.



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.


The important point here is that my 8% real growth in the reverse mortgage portfolio is not a figure pulled out of thin air. It is the actual growth rate, locked down as a track record that Heartland has already achieved. The other factor that is driving the reverse mortgage business growth is that even if no new business is written at all, then the existing loan portfolio grows by 6.7% per year. Then growth is accelerated by paying 'interest on interest' in a way that compounds until the loan is eventually repaid. It really is an incredible business model. What other business model can you think of where 'strong growth' can be achieved by having no interaction with customers?




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


The last part of the puzzle is the return on equity figure '0.13' that I have used above.

Look at slide 15 in the presentation below.

https://shareholders.heartland.co.nz/media/1610/hgh-2019-annual-meeting-presentation.pdf

It shows here that 'reverse equity mortgages' are in the mid range of earnings for lending assets as part of an 11-15% range. So I picked a figure right in the middle at 13% on the incremental equity that Heartland accumulates as the growing loans feed into the system. Have I got any of that wrong? If not, then you have to accept the increase in profit figures that come out of my 'profit forecast' sausage machine as reasonable.

SNOOPY

[percy]

Unlisted.Those who do not trade on it think it is "the wild west".Yet those who do not share their view have no issues.
The main complaint I hear is lack of liquidity.This comment is valid,however it is also true of NZX companies such as AWF,Market cap $41.19 mil,SCT Market cap $137.044 mil, and many others.
Over the years I have owned shares in the following companies on Unlisted;
Rural Equities. Market Cap $137.7 mil.Owners of some of NZ finest farms,Controlled by the Cushing family.A very good company.
Rangatira.Market cap $212.7 mil.Investment company with a strong history of sound investments.Another very good company.
Currently I own shares in three Unlisted companies.
PAZ.Pharmazen.Market cap $126.892 mil.Nutritional ingredients for humans and animals.Right company in the right sector at the right time.
SFF.Silver Fern Farms Co-Op.Market cap $65.346.NZ's leading meat processor.Growing demand for NZ grass feed red meat.
SYF.Syft technologies.Market cap $81 mil.Manufacturer analytical instruments.Growing world wide demand.
PAZ,SFF,and SYF.I have found their reporting excellent.I have phoned each company and have found then honest,open and very forthcoming.Each company have strong boards,great CEOs and very strong balance sheets.Each company is doing what they said they would do.All seem to have very bright prospects.
I have a very large holding in PAZ,a big holding in SFF and a small holding in SYF.

PS Equity ratios,as at their last balance dates....Very interesting.
HGH 12.9% and wait for it........PAZ.....58.49%...Different sectors,different requirements,but four and a half times HGH's.?
Silver Fern Farms CoOp equity ratio was 81.93%.Over six times HGH's.
Syft's equity ratio was 77.51% just six times HGH's.

[winner69]

Please keep debate going ..esp the negatives

Good for share price next week

[percy]

Thanks Snoopy! To be honest...HGH is a well managed company. My first share investment. Sold before it crashed...now I am starting to accumulate

Warren Buffett's Berkshire Hathaway Inc said on Friday it has sold shares of some of the largest US banks, slashing its stakes in Wells Fargo & Co and JPMorgan Chase & Co and exiting an investment in Goldman Sachs Group Inc

[Snoopy]

Leftie ....percy probably got his numbers here

Another rbnz thingie

https://bankdashboard.rbnz.govt.nz/summary

Heartland stand out on the non-performing loans chart ...sort of says when you look at returns charts Heartland takes more risk for greater returns




The comparative bank profitability chart on Winners link makes HBH look ok, Snoopy will be happy. ;)


I have pinched these two posts from the 'Banks Stocks' thread, because they refer specifically to Heartland. I don't think there is anything wrong with going after the higher end of the loan risk spectrum if you charge a consummately higher margin to deal with the risk of loan failure. From the look of the bank dashboard, that is exactly what Heartland are doing. Furthermore if your bad debts are better covered by higher profits from other risky loans in the same class, perhaps there is less need for a hefty capital base to back things up as loans go bad? The answer to the 'shortage of capital' conundrum that sees Heartland at the bottom of the 'capital adequacy' chart at 12.9% (31st March 2020 figure)? We HGH shareholders have to remember that the actual capital position of our company may be a lot worse than this, because that chart only covers Heartland Bank, and excludes the lightly capitalised 'Heartland Australia' business unit. I remain braced for a capital raising at Heartland should Jeff deem it desirable, even if I don't believe he needs to do it..

I thought the dashboard position on credit concentration was particularly interesting. That shows by spread of loans, Heartland is far less risky that ANZ, Westpac and BNZ. Is it because those three go after big corporate clients whereas Heartland does not? I pay some attention to bank credit ratings. But I note at the top of that dashboard page that 'Moodys', which does not rate Heartland, gives all the NZ banks they do rate the same credit rating of A1. And that includes some NZ registered banks that I have never heard of including the 'Bank of China', the 'China Construction Bank', and the 'Industrial and Commercial Bank of China'. 'Fitch', who do rate Heartland, give 'Kiwibank' their highest credit rating, even above ANZ, Westpac ASB and BNZ. Yet S&P Global put Kiwibank two notches below these four. I do wonder how seriously I should take these agency judged credit ratings sometimes!

Moving on to 'core funding', the bank funding from 'stable sources', it is pleasing to see Heartland at 92.7, well clear of the 75% Reserve Bank hurdle, but also well clear of the big four banks as well. Is that the magic of Heartland's high interest call account? Westpac is the worst in this regard on a score of 82.2, albeit still above the 75 hurdle. We know that Heartland has contracted out all of their banking services to Westpac to the extent that Heartland Bank accounts are Westpac bank accounts, but under a Heartland brand. I wonder how the core funding figure of Westpac would look with the Heartland accounts removed?

I think Heartland comes out of the dashboard comparison very well, even if we shareholders know that Heartland 'Bank' are really a finance company with a bank badge stuck on for marketing purposes. Can I say that now that Percy is no longer on the Heartland share register?

SNOOPY

[nztx]

Please keep debate going ..esp the negatives

Good for share price next week

Interesting question - Winner:

Whilst I'm accumulating HGH particularly at current levels - I can't help but notice that the Reverse Mortgage
component of the business will long continue to be a draw on working capital being sent into that sector.

Sure retained earnings goes a certain extent towards funding it, further borrowings & Notes etc a further extent.
Obviously with no fixed date on realising the said Reverse Loans & Interest capitalised presumably to Loans
over their likely life -- this undoubtedly provides some interesting working capital balancing exercises for the very
capable & experienced HGH team working at the cliff face in this area.

Potential Loss Exposure in this sector I would imagine be very low.

I've looked at Snoopy's figure and compared to recent HGH Reports summarising the Loan exposures by sector

We look at "Growth" all too often

In Reverse Mortgages, and I guess with Developmental Margins in the Rest Homes Sector - we see growth
& Surpluses reported. But what is sometimes not always easily separated is the "Real Realised Growth"
ie - not locked in, realised - fluid & sitting in Current Assets / Working Capital, available to be spent or otherwise.

The Bean Counters of today's world (I'm probably one) have really not done everyone any favours by throwing yet another
puzzle into the equation with term lease payables, Lease Assets (hopefully more or less balancing out the other side)
notional interest factors on the said Lease equations etc

At the end of the day on a winding up these mysterious mythical figments of Bean Counter's imaginations will evaporate
into thin air - in the meantime the enterprises Assets & Liabilities are reported Grossly overstated by these imaginative
judgements of future asset & liability.

For goodness sake - a lease is a lease is a lease generally only payable periodically if there are assets sitting in kitty to do so

By similar token - an internally doctored up (or down) revaluation is just that - is it a gain, a profit (ie sale to outsiders) in the Property Accumulating & Developing Rest Home empires ?

This explains to all why most if not all Rest Homes pay little 'real tax', do not have Imputation credits to attach to dividends,
which means where one of these beasts decides to throw out a dividend, those on receiving end are likely to get wacked with the full 33% Dividend With holding tax to be passed to IRD

No wonder many (not used to certain bean counter creativity at work) get so confused with some of today's mysterious
accounting reporting by companies they are looking at .. ;)

[Snoopy]

Whilst I'm accumulating HGH particularly at current levels - I can't help but notice that the Reverse Mortgage component of the business will long continue to be a draw on working capital being sent into that sector.

Sure retained earnings goes a certain extent towards funding it, further borrowings & Notes etc a further extent. Obviously with no fixed date on realising the said Reverse Loans & Interest capitalised presumably to Loans over their likely life -- this undoubtedly provides some interesting working capital balancing exercises for the very capable & experienced HGH team working at the cliff face in this area.

Potential Loss Exposure in this sector I would imagine be very low.

I've looked at Snoopy's figure and compared to recent HGH Reports summarising the Loan exposures by sector

We look at "Growth" all too often

In Reverse Mortgages, and I guess with Developmental Margins in the Rest Homes Sector - we see growth & Surpluses reported. But what is sometimes not always easily separated is the "Real Realised Growth"
ie - not locked in, realised - fluid & sitting in Current Assets / Working Capital, available to be spent or otherwise.


Not sure I agree with you 'rolling up' non cash gains on reverse mortgages (interest earned but not yet paid back to Heartland in cash) and non-cash gains from property revaluations in retirement villages (based on market movement of property entirely outside the control of the property owner) and putting them in the same bucket:

1/ The interest earned on reverse mortgages is recognised by the IRD as 'taxable income', whereas the property value gains are not taxable, which is why retirement village shareholders get hit with resident withholding tax on dividends paid out of property valuation gains.
2/ Retirement villages can expand their capital base by simply waiting for their property assets to appreciate. But Heartland want to expand their capital base to allow them to take on more reverse mortgages. More mortgages over and above the turnover rate of existing mortgages and any retained profit earned from those (Heartland have ambitious reverse mortgage growth plans). That means Heartland must raise more capital, EITHER from shareholders, via cash issues and the DRP, OR raising long term bond money to finance such deals.

In fact Heartland have so far been unable to raise long term bond money. They are instead setting up medium term bonds of 2-3 year duration, then hoping they will be able to renew those to more closely match the 5, 6 and 7 year periods that reverse mortgages typically run for. This is a real weakness in the Heartland business model as I see it. Albeit one that Jeff is working on to try and set up those longer term supportive bonds. I am thinking that with the further collapse of interest rates worldwide, Jeff's job will be getting easier? Although if the housing market takes a severe hit, then those seeking cash income via a bond may balk at a security backed by property, even if, as in the case of Heartland the gearing on the properties that are being mortgaged is low.

I am unsure on the tax position of interest earned on reverse mortgages. Can anyone clarify? The profits on a reverse mortgage are not collected until the reverse mortgage is wound up, but a tax liability is incurred by Heartland every year. Does Heartland have to effectively borrow money every year to pay this tax or is it all bundled up in some kind of deferred tax arrangement with the income tax department? if the former, that is quite a large cash liability with no cash coming in to pay it. Yet another cash draw that must be added to the cash borrowed to fund outsized growth plans!

I was interested in your remark nztx on 'growth realised as cash' verses 'other growth'. Are you suggesting that if the growth realised is not in cash it should really be reclassified as a secondary inferior class of growth?

You are implying that growth realised - fluid & sitting in Current Assets / Working Capital, is better able to be spent on expansion, but this is not so is it? The retirement village model in New Zealand seems to have no problem growing without ever realising the results of their growth in cash.

SNOOPY

[BlackPeter]

...

I am unsure on the tax position of interest earned on reverse mortgages. Can anyone clarify? The profits on a reverse mortgage are not collected until the reverse mortgage is wound up, but a tax liability is incurred by Heartland every year. Does Heartland have to effectively borrow money every year to pay this tax or is it all bundled up in some kind of deferred tax arrangement with the income tax department? if the former, that is quite a large cash liability with no cash coming in to pay it. Yet another cash draw that must be added to the cash borrowed to fund outsized growth plans!

...

SNOOPY

Interesting point, and no tax specialist either.

However - why would anybody in our tax system need to pay tax on gains not yet collected? If you are a trader, you pay tax on realised trading gains (revenue minus cost), and I would assume it is the same with interest payments.

If & when you get the payment, you pay tax. If the payment is however outstanding (for whatever reason) you don't and you don't owe tax either. Why would there be a need for a deferred tax arrangement?

Anyway - keen to learn more about the hidden secrets of our tax system :);

[Ferg]

The Bean Counters of today's world (I'm probably one) have really not done everyone any favours by throwing yet another
puzzle into the equation with term lease payables, Lease Assets (hopefully more or less balancing out the other side)
notional interest factors on the said Lease equations etc

At the end of the day on a winding up these mysterious mythical figments of Bean Counter's imaginations will evaporate
into thin air - in the meantime the enterprises Assets & Liabilities are reported Grossly overstated by these imaginative
judgements of future asset & liability.

For goodness sake - a lease is a lease is a lease generally only payable periodically if there are assets sitting in kitty to do so

Hear hear! Great to see someone else thinking this. I have been looking at the impact on some businesses and it is nuts. Surely a "leased asset" doesn't meet the definition of an "asset" - unless they have been busily redefining that too. Not only does it make the return on assets wonky but it also muddies the FCF calculations whereby portions of lease payments will be classified as interest in the cash flow statement.

[nztx]

Once upon a time a very long time ago - Leased Assets (if memory serves correct) only hit Assets Schedule, if there was
opportunity for the party leasing the Asset as part of their lease contract to have option or opportunity to acquire the asset
at end of it's lease term. Everyone knew where they stood & then understood how the financials generally worked

Also a very long time ago - Assets being subject of Revaluation saw increases (or decreases) in fixed assets affected
taken directly to Shareholders Funds via the Revaluation Reserve - none of the fanciful take the revaluation movement
into P&L account as part of direct operating Surplus or Loss (as seems to be happening in today's wacky world now)..

Again - Everyone knew where they stood & then understood how the financials generally worked with this as well

Do users of today's Financial Reports really need to be half beancounters to disentangle these sort of mythical judgements
and Beany's magical formulas so as to be able to compare with the Reports of other businesses for example selling apples & recognising their profits on how many apples they manage to sell in any one period ?

[nztx]

Let's face it - is interest 'capitalised' and added onto a Reverse Mortgage Loan - but not received in Cold Hard Cash coming in "Real Income" or merely deferred interest income - to be actually received in a later point in time when the Reverse Mortgage gets settled out - from say a property sale etc ? ;)

What IRD decide in the circumstances (whether recognised as income at time it's charged to the Reverse Loan) and how the Market or Viewers / Investors may look upon it could well be two different things

- Interest, but not yet received
- Recognised as revenue but directly added to the Reverse Loan Book

- Real Cash Income or Not ?

- Somewhere the increasing Reverse Loan Book, plus Capitalised Interest into it needs to be funded from somewhere - presumably dividends are paid from it, maybe the tax man, overheads etc - if regarded as Income at time billed / charged ..

[winner69]

Re this tax ....don't speculate, just go to Note 9 last years Financial Statements

That'll show you what happens (and evenhelps if one looks at the Cash Flow Statements

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/341427/308226.pdf

[Snoopy]

Re this tax ....don't speculate, just go to Note 9 last years Financial Statements

That'll show you what happens (and even helps if one looks at the Cash Flow Statements

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/341427/308226.pdf


Those accounts you referenced Winner are for Heartland Bank. My question relates largely to Heartland Group Holdings which holds the Australian Reverse Equity Mortgage assets. So the accounts I need to look at are those for HGH, not those referenced above.

Moving on to the HGH accounts, and note 8 on taxation, the total tax expense is $27.896m, and that includes $3.306m of deferred tax for the current year. But is that anything to do with the reverse mortgage portfolio? Or is it something to do with the separation of Heartland Bank from HGH?

Moving onto the Cashflow statement, the actual cash paid was $25,895m. That is tax not paid in cash was $27.896m, - $25,895m = $2.001m. That difference is not the same as the deferred tax. So it looks like something complicated is going on.

Lastly moving onto the Segmented result, the Australian tax bill is $5.115m. So some of that must be deferred? But doesn't the Australian O4B business fit into the Australian category too?

The accounts look to be too mixed up to produce an answer to my question and there is no specific mention of any deferred tax liability on reverse mortgages. After studying the accounts, I am afraid I am none the wiser ;-(. Is my question unanswerable given the disclosures HGH have made?

SNOOPY

[winner69]

Sorry Snoops - should have realised needed group accounts

Current / Deferred Tax is complicated I agree

However I am pretty confident that interest on reverse mortgages (even though capitalised) are treated as taxable income in the year that it is earnt (not paid) and most of would be paid when due in current year. There no doubt will be some (minor) adjustments for impairments etc that could end up as deferred tax.

Do what percy would do and give Jeff a ring

[Snow Leopard]

Table in the accounts is headed.

"Deferred tax assets comprise...."

This is NOT difficult folks :ohmy:

[Snoopy]

Table in the accounts is headed.

"Deferred tax assets comprise...."

This is NOT difficult folks :ohmy:


No mention of any deferred tax on reverse mortgages in that 'Deferred Tax Asset' list, but then again there is no mention of any loan asset class. So it could be that such deferred asset tax, if it exists, is classified in another way.

I think this is one of those questions for which the answer is obvious provided you already know what the answer is. I am prepared to accept Winner's opinion that the tax must be paid before the loan is repaid. Another cashflow headache for Jeff.

SNOOPY

[Snow Leopard]

Tax to be paid at a later date would be a deferred tax liability.
Said table lists assets and liabilities and tax on reverse mortgages is not there cos' they ain't any.

"...Moving onto the Cashflow statement, the actual cash paid was $25,895m. That is tax not paid in cash was $27.896m, - $25,895m = $2.001m. That difference is not the same as the deferred tax. So it looks like something complicated is going on..."

The amount of tax you actually paid in one financial year and the amount due for the same financial year are not the same thing.

The world's tax men are forever asking me for extra or admitting that they owe me (and some of those even pay it back).

[King1212]

ANZ is paying dividend n saying it is profitable. So good chance HGh will pay dividend too

[peat]

announcement today strikes me as a bit advertorial.
I didnt get any sense of how much risk they are able to palm off to the govt which is surely what these schemes have to do otherwise bankers gonna be running a mile.

[Snoopy]

announcement today strikes me as a bit advertorial.
I didnt get any sense of how much risk they are able to palm off to the govt which is surely what these schemes have to do otherwise bankers gonna be running a mile.

This is the bit I liked

"The changes will enable Heartland Bank, and other participating banks, to assist more new and existing qualifying business customers to repay or refinance up to 20% of their existing debt."

I think that means the government just bailed out 20% of Heartlands bad debt, to a level of 80%. Has to be positive for Heartland shareholders, if not taxpayers. Let's hope Jeff gets his staff on the blower, to get all that refinancing done!

SNOOPY

[Cyclical]

Let's hope Jeff gets his staff on the blower, to get all that refinancing done!

SNOOPY

Could it be a bit of a balancing act between keeping them on higher paying legacy interest rates vs rewriting to today's new norm? Although maybe break/(re)establishment fees would ease the pain?

[Snoopy]

Could it be a bit of a balancing act between keeping them on higher paying legacy interest rates vs rewriting to today's new norm? Although maybe break/(re)establishment fees would ease the pain?


Could be Cyclical. But I would think at times like this, the return of the bank's capital would be more to the forefront of a bankers mind than the return on their capital!

SNOOPY

[Beagle]

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12360453

Hey Snoopy. Do HGH still own part of this ?

I think this gives a valuable insight that some need to see of what happens when you loan money unsecured to muppetts.

[Scrunch]

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12360453

Hey Snoopy. Do HGH still own part of this ?

I think this gives a valuable insight that some need to see of what happens when you loan money unsecured to muppetts.

The companies office shows that Heartland Group Holdings Limited (6937955) owns 13.06% of Harmoney Corp Limited (5177041). Snoopy can confirm if these are the correct entities to consider and what the impact on Heartland's P&L would be. I'm not sure if a proportionate share of the loss would go into HGH's accounts ($2m) or the loss would revalue the value of the holding for some unknown impact.

[winner69]

The companies office shows that Heartland Group Holdings Limited (6937955) owns 13.06% of Harmoney Corp Limited (5177041). Snoopy can confirm if these are the correct entities to consider and what the impact on Heartland's P&L would be. I'm not sure if a proportionate share of the loss would go into HGH's accounts ($2m) or the loss would revalue the value of the holding for some unknown impact.

That Harmoney performance shouldn’t impact Heartland that much. Their shareholding in Harmoney is shown Somewhere in The books as an investment.

Heartlands main exposure is how much of the $220m odd lending they have put through ( not in) Harmoney is impaired ....could be heaps based on Harmoneys experience.

If interested Harmoney report
https://app.companiesoffice.govt.nz/companies/app/service/services/documents/4AB83058E01FF4941B962D2A468D65A8

[KJMLimited]

Shouldn't the write off be looked at in relation to the size of the book though? I can't see the whole article as I refuse to pay the NZH premium, but if anyone who has access and can therefore enlighten me on the size of the Harmoney book I'd be grateful.

[Snoopy]

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12360453

Hey Snoopy. Do HGH still own part of this ?

I think this gives a valuable insight that some need to see of what happens when you loan money unsecured to muppetts.


I see Harmoney have shifted their balance date from March to June (now the same as Heartland bank), which is why they are reporting over a 15 month period.




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.


Information on Harmoney's FY2020 result can be found here

https://www.interest.co.nz/news/106789/review-things-you-need-know-you-go-home-friday-more-td-rate-cuts-sagging-consumer



Harmoney
Financial Year ending 31-03-2019Financial Fifteen Months ending 30-06-2020


Impairment Expense (A)
$0.830m$8.990m


Finance Receivables (B)
$367m$129m


Heartland Share (13.1%) of Finance Receivables (1)
$48m$17m


Impairment Expense to FR ratio (A)/(B)
0.23%7.0%


Period Profit
$7.22m-$15.4m


Heartland Share (13.1%) of Period Profit
$0.946m-$2.02m x(12/15)


Heartland Shareholding & Lending Operational Profit (2)
$8.2m$2.7m



Notes

(1) We don't know what portion of the loan book Heartland actually funds. i am just assuming they are funding an amount in proportion to their shareholding.

(2) Next we need to work out the return from the capital that Heartland has lent to Harmoney. If 7% of the loan book has gone bad then Heartland's share of this capital loss would be: 0.07 x $17m = $1.2m. However, they should have made a profit on the 93% of the loan book that did not go bad. The average size of the loan book over the period can be modelled as follows:

($48m +$17m )/2 = $32.5m

Subtract from this the $1.2m of bad debts as found at the end of the year and we get an averaged 'earning' loan balance of: $32.5m - $1.2m = $31.3m. This should provide earnings to Heartland of: 0.15 x $31.3m = $4.7m.

I estimate the overall profit for the year from Heartland's interest in Harmoney to be:

-$1.6m + $4.7m - $1.2m = $1.9m

In my most likely scenario in my three part scenario analysis I was expecting Harmoney to wind up by the end of FY2022. The way the loan book has shrunk would suggest it is winding down faster than I had thought. I was budgeting for a $7.2m loss in Heartland's share of the profit, courtesy of the decline of Harmoney, from FY2022 and it looks like we are getting near there in FY2020 (Down $8.2m - $1.9m = $6.3m)! Nevertheless it is all broadly consistent with my modelling. We still could get that recovery blip from here I was modelling for FY2021. So no change to my Heartland fair value target price of $1.18 on this news.

SNOOPY

[Cyclical]

Shouldn't the write off be looked at in relation to the size of the book though? I can't see the whole article as I refuse to pay the NZH premium, but if anyone who has access and can therefore enlighten me on the size of the Harmoney book I'd be grateful.

Yeah, I would have thought so. $1.7b I think I read, spread across 50k customers in NZ and OZ. In that context I dont find it too concerning, although could be the tip of the iceberg...

Edit - ignore me and run with Snoopy's figures. 1.7b is probably their total lending over the years they've been in business.

[Snow Leopard]

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12360453

Hey Snoopy. Do HGH still own part of this ?

I think this gives a valuable insight that some need to see of what happens when you loan money unsecured to muppetts.
https://media-assets-05.thedrum.com/cache/images/thedrum-prod/public-news-223017-muppets--2x1--940.jpg

[winner69]

I take solace that Heartland took advantage of the waivers and didn’t have to pull their fingers out to get their reports out by end of August like most other businesses. Slack bastards eh


But at least it gives them plenty of time to play around with the numbers to come up with a good result ....within and maybe near the top of guidance. That’ll be good.

Hope the team have enjoyed being more relaxed about things this time round.

[Beagle]

Yes it will give them more time to play around with their bad and doubtful debt modelling programs...but I suspect there is no predictive model for how the effect of Covid will play out, (simply because we've never had anything even remotely like this before), in terms of bad and delinquent loans so the process will involve even more guesswork than normal which could be why they bought themselves more time to make the numbers up they want to give the best bonus result possible in the circumstances.

[winner69]

Yes it will give them more time to play around with their bad and doubtful debt modelling programs...but I suspect there is no predictive model for how the effect of Covid will play out, (simply because we've never had anything even remotely like this before), in terms of bad and delinquent loans so the process will involve even more guesswork than normal which could be why they bought themselves more time to make the numbers up they want to give the best bonus result possible in the circumstances.

Yes indeed

Proactive provisioning is an art form (not science or maths) and like most art creativity rules

Suppose the huge rainy day fund might take a bit of a hiding

I reckon whatever Jeff comes up with it will be so ‘artistic’ that even Snoops won’t be able to work it out.

[Beagle]

Yes indeed

Proactive provisioning is an art form (not science or maths) and like most art creativity rules

Suppose the huge rainy day fund might take a bit of a hiding

I reckon whatever Jeff comes up with it will be so ‘artistic’ that even Snoops won’t be able to work it out.

It sure it, a real art form and this year's special creativity is almost certain to be award winning. http://www.stuff.co.nz/entertainment/arts/2844191/Waikato-art-award-winner-just-rubbish-artists

[winner69]

It sure it, a real art form and this year's special creativity is almost certain to be award winning. http://www.stuff.co.nz/entertainment/arts/2844191/Waikato-art-award-winner-just-rubbish-artists

The ripped up paper I put on the worm farm is more artistic than that. Maybe I could enter next year with the worms included and call it live art

Most Annual Reports at the moment are rubbish

Amazes me some keep updating their spreadsheets with years of numbers in it and produce total meaningless historical CAGR %ages

[Beagle]

Don't know about most financials' being rubbish but banks and finance companies trying to model up future estimates of bad and doubtful debts on all existing loans when nobody has any idea how long Covid 19 will wreck havoc on the economy...and the effect on borrowers. Lets just say the other Beagle should stop wasting his time. We'll only know what bad debts really are once Covid is all over.

[Snoopy]

Don't know about most financials' being rubbish but banks and finance companies trying to model up future estimates of bad and doubtful debts on all existing loans when nobody has any idea how long Covid 19 will wreck havoc on the economy...and the effect on borrowers. Lets just say the other Beagle should stop wasting his time. We'll only know what bad debts really are once Covid is all over.


I was thinking that if Harmoney could come up with a result in quick time, the Maori/Pakeha Girls/Boys, tasked with the equivalent job at Heartland are doing a piece of cake exercise. But after checking out the BDO paper on what to do:

https://www.bdo.global/getattachment/Services/Audit-Assurance/IFRS/Need-to-Know/NTK_IFRS9_print-(1).pdf.aspx?lang=en-GB

it seems I am wrong. Wrong, because most of those Harmoney loans are relatively short term. So there isn't much 'forecasting' involved. Harmoney already know whether their loans have gone bad.

I did find this gem in the BDO report that have direct relevance to Heartland's motor vehicle loan portfolio. From p11

---------------

BDO comment
"For loans with ‘front loaded’ loss patterns such as car loans, where a majority of the losses tend to occur in the first couple of months after a loan is advanced, applying the 3 stage model would be likely to result in a substantial loss on initial recognition for 12-month expected credit losses. This would be followed by recognition of actual credit losses, and a release of the provision."

----------------

So it does appear that 'write backs' on previously impaired motor vehicle loans are almost expected,

Now this from p13:

-----------------

DETERMINING SIGNIFICANT INCREASES IN CREDIT RISK

"The transition from recognising 12-month expected credit losses (i.e. Stage 1) to lifetime expected credit losses (i.e. Stage 2) in IFRS 9 (2014) Financial Instruments is based on the notion of a significant increase in credit risk over the remaining life of the instrument. The focus is on the changes in the risk of a default, and not the changes in the amount of expected credit losses. For example, for highly collateralised financial assets such as real estate backed loans when a borrower is expected to be affected by the downturn in its local economy with a consequent increase in credit risk, that loan would move to Stage 2, even though the actual loss suffered may be small because the lender can recover most of the amount due by selling the collateral."

I read that as saying that just because a loan moves up the risk scale , that says nothing necessarily about the likelihood of recovering the debt. For example those legacy sharemillker loans that Heartland has may be listed as impaired even though there is a ready market for cow meat if the cows could not be sold as milk producers. Shoot the cows and consequently the loan can be fully repaid.

-----------------

Now we move to p19

----------------

"Various sources of data can be used to estimate expected credit losses. Entities should consider both borrower specific factors, macroeconomic conditions, and internal and external information such as internal historical credit loss experience, internal ratings, and external reports and statistics. Entities should also take into account both the current and future forecast direction of conditions at the reporting date.An entity is not required to incorporate forecasts of future conditions over the entire remaining life of a financial instrument. For long dated instruments, the standard does not require a detailed estimate for periods that are far in the future – for such periods, an entity may extrapolate projections from available, detailed information"

------------------

That last sentence is interesting. How I read it is that if you can make a reasonable estimation of medium term losses, say one to two years out, you can then extrapolate those losses forwards. You don't have to worry about guessing what will happen much further out than twelve months, as there will be no comeback if your longer term write off guesses are wrong.

So where does this leave Heartland? We can predict big write-downs because the shorter term loans, like Harmoney, have already shown how bad the near term downturn is, for some types of loan at least. Beyond that the writedowns will be worse than many expect (including me) because bankers are inherently conservative once the bad debt baby comes back to hit them. And given they have documented problems with short term loans, it would be a brave banker who would say that bad debt rates in the ensuing twelve months are going to get substantially better. We also know they can extrapolate beyond the medium term to the longer term. This means a picture of maximum gloom and doom should get bank directors 'off the hook'. A cash issue would get the directors a bonus point for risk mitigation too. So I am going to change my mind on this issue and say a cash issue is imminent, even though it probably isn't needed, except for 'butt covering'.

On a brighter note, the outlook two to three years down the track should be much better than expected as the write backs start to come through. So no need to throw your investment hands in the air. Wasn't it Warren who said: "Be fearful when others are greedy and greedy when others are fearful."?

SNOOPY

discl: continuing to hold and bracing myself for more headline bad news than I previously expected and a sharper rebound that I previously thought.

[winner69]

March 18th when the **** started hitting the fan
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.

Nothing since - solid result coming up in a couple of weeks .......





.......or if he’s read Snoopy prognosis Jeff better come clean on Monday and say he’s been living in hope and npat is nowhere near $77m ...




....and then we can have a debate about disclosure obligations

[nztx]

March 18th when the **** started hitting the fan
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.

Nothing since - solid result coming up in a couple of weeks .......





.......or if he’s read Snoopy prognosis Jeff better come clean on Monday and say he’s been living in hope and npat is nowhere near $77m ...




....and then we can have a debate about disclosure obligations

well they've been continuously consistent in not varying the earlier release..

Maybe they've got some hidden reserves to trot out to negate a few bad pennies or already have provided
for a few harmonious things hitting the fan along the way..

[Snoopy]

March 18th when the **** started hitting the fan
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.

Nothing since - solid result coming up in a couple of weeks .......

.......or if he’s read Snoopy prognosis Jeff better come clean on Monday and say he’s been living in hope and npat is nowhere near $77m ...

....and then we can have a debate about disclosure obligations


Just to be clear. I have made no overall numerical prognosis for FY2020. It is all historical anyway and share markets are always forward looking. I am interested in the FY2020 result in that it feeds into what happens in FY2021 and beyond. So if the downturn in Harmoney comes earlier and is no larger than I predicted, that won't invalidate my prediction for FY2022 (as an example). But if the downturn in Harmoney in FY2020 is already greater than I am predicting in FY2022, then I may have a modelling problem. Yet since I am already modelling a complete shut down of Harmoney by 2022, I don't think this is likely!

If there is any discrepancy between the $77-$80m forecast for FY2020, and what is declared, I am sure Jeff will run out the old line that the $77-80m referred to 'operational profits' and any extra write downs are 'non-cash items'. I reckon the Holden lion might come roaring to Jeff's rescue this year. Holden may be a zombie company. But Holden is a solid product. Kiwis love a bargain and they have been second only to Toyota in at least one sales month. Some areas of business do better than expected and others do worse. It is usually the way.

SNOOPY

[Marilyn Munroe]

A single point of data.

I have an acquaintance in a heavily impacted tourist related business.

He has a vehicle on hire purchase with Heartland and has stopped making payments.

From his comments it appears Heartlands approach is nurturing rather than "Tony Soprano".

Boop boop de do
Marilyn

[RTM]

I see Xero have bought a lending company to provide short term finance for companies against receivables.
Wonder how much this might impact Heartland? Seems like a pretty neat add on for Xero,

[Beagle]

Some will resort to receivables factoring...sometimes though of as lending of last resort. Xero would be in an excellent position to run analytics on customers to determine safe lending level's and advance money on receivables based on very current data.

Meanwhile the wall of insolvencies looms. https://www.interest.co.nz/business/106883/chartered-accountants-say-government-covid-support-measures-have-had-unintended?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Friday+4+Se ptember+2020

The other Beagle better tune up his doubtful debt model because what this dog is sniffing at the coal face is very worrisome. Lots of business's just hanging on by their fingernails...

[winner69]

Some will resort to receivables factoring...sometimes though of as lending of last resort. Xero would be in an excellent position to run analytics on customers to determine safe lending level's and advance money on receivables based on very current data.

Meanwhile the wall of insolvencies looms. https://www.interest.co.nz/business/106883/chartered-accountants-say-government-covid-support-measures-have-had-unintended?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Friday+4+Se ptember+2020

The other Beagle better tune up his doubtful debt model because what this dog is sniffing at the coal face is very worrisome. Lots of business's just hanging on by their fingernails...

Good comment posted after that article

"We looked at the books, and yep, you're insolvent."

Hope they don't have a Heartland quickie

Sad thing though there are a few who are too scared to look at their books

[KJMLimited]

Big volume yesterday of 3.5m shares, well above the daily average. Didn't UDC recently note an increase in lending volumes? Maybe the buyers sense a 'better than expected' report next week.

[sb9]

Big volume yesterday of 3.5m shares, well above the daily average. Didn't UDC recently note an increase in lending volumes? Maybe the buyers sense a 'better than expected' report next week.

Did notice the big volume crossing y'day afternoon, added a few more on Friday.

[Snoopy]

Big volume yesterday of 3.5m shares, well above the daily average. Didn't UDC recently note an increase in lending volumes? Maybe the buyers sense a 'better than expected' report next week.


Or sellers expect a worse than expected result as they quit near the recent share price base?

Harmoney aside, I think the result will be better than expected. The wage subsidy should have helped a lot of the small business customers and both Kia and Holden have had good years in terms of generating financing opportunities. Nevertheless the key issue is the outlook. Without the same government support for business and without Holden in the future, new small business loans and new motor vehicle funding will have to be lower going forwards. And I really don't know how REL is going in Australia. It will be interesting to see if Heartland support a Harmoney float, or if they will use the float as an opportunity to exit. Without 'peer to peer', I am not sure what the point of difference of Harmoney is, The outlook is the key. I don't think Heartland need to do a capital raise right now, but that in itself could be a reason to do one. A capital raising now at a good price will see Heartland through what will be a very uncertain year over FY2021.

SNOOPY

[Beagle]

Best time to raise new capital is well before you need it, always has been and always will be the case.

[sb9]

Bodes well for HGH..
Labour promises $1.5b extension of small business loan scheme and cap paywave feeshttps://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12363141

[Cyclical]

Without 'peer to peer', I am not sure what the point of difference of Harmoney is

Agreed. I think there peer to peer model was a pretty neat business model...offload the risk and clip the ticket on the way through, plus it meant really quick approval for borrowers. It seems a shame they've effectively dropped that model and are now just another lender.

[winner69]

Bodes well for HGH..
Labour promises $1.5b extension of small business loan scheme and cap paywave feeshttps://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12363141

Loans through IRD

Hope many take the IRD loan and payoff their overdue Heartland loans.

[Snoopy]

Loans through IRD

Hope many take the IRD loan and payoff their overdue Heartland loans.


If I were Jeff, and with the IRD offices unfathomably being closed nationwide under Level 2, I would be on the phone to IRD management 'quick smart' offering to set up an IRD consultant desk in each Heartland branch 'for free'. It would be a convenient conduit through which to steer some of those expiring Heartland business loans, and to add to Heartland's reputation for 'first class customer service'. I don't think Heartland shareholders would object either :-).

SNOOPY

[winner69]

Heading sub $1 again by the looks of it

Seems market reckons September 17th is going to be a bad day

[Beagle]

Here's a question for you guys. Riddle me this.

How does one reconcile the new IFRS standard that's forcing banks to be proactive with their bad and doubtful debt provisioning, (which has had a major effect on the reported profit of every other bank) with the fact that Heartland must comply with its continuous disclosure requirements and still has a profit forecast in the market of (forgive me isn't it somewhere around $75 - $80m) ?

I think "Blind Freddy" can tell you that the reported profit soon to be announced is going to be at a major variation to the forecast so how are Heartland not in breech of their continuous disclosure requirements ?

Riddle me another question if you dare. How on earth will Heartland have any idea what future bad and doubtful debts might look like seeing as previous provisioning models cannot possibly be useful in the unique Covid situation we all find ourselves ?

Doesn't it follow that at very best the pending reported profit is nothing but a best guess and how do we know that their best guess of provisioning isn't going to wildly inaccurate ?

Are the pending financial statements (in these unprecedented times with no certain way of accurately forecasting bad and doubtful debts under the new IRFS reporting standard) even worth the paper they're printed on ?

One supposes we will get an even more thorough Te Reo lesson with them this year so that might be be useful to some people.

For those that have no idea what I am talking about perhaps reflect on the recent "Harmoney" result and ask yourself if there's anything harmonious about that.

I've been saying it for years...all this reckless unsecured lending will come back to bite them sooner or later...

[Snoopy]

Here's a question for you guys. Riddle me this.

How does one reconcile the new IFRS standard that's forcing banks to be proactive with their bad and doubtful debt provisioning, (which has had a major effect on the reported profit of every other bank) with the fact that Heartland must comply with its continuous disclosure requirements and still has a profit forecast in the market of (forgive me isn't it somewhere around $75 - $80m) ?

I think "Blind Freddy" can tell you that the reported profit soon to be announced is going to be at a major variation to the forecast so how are Heartland not in breach of their continuous disclosure requirements ?


Jefff is on the ball and from what I have seen goes out of his way to keep investors well informed. He won't be wanting to anger nzx regulators so I am 100% sure that Heartland's profit guidance for FY2020 will be met. What you may have forgotten Beagle is that during the lock down, no-one could flit off overseas, or even drive around the town visiting liquor shops. So all the middle and even the bad ass class were stuck at home paying off their vehicle loans, as there was nothing better to spend their money on. Business owners were offered temporary tax relief, zero interest IRD top up loans, and subsidies for staff wages. That might not have saved all of Heartland's business loans. But it does buy business owners time to plan (and time for Jeff to transition some Heartland loans to alternative IRD loans). There would have been few new loans written over lock down. But all the existing loans written over the previous three years would have been carrying on using previously contracted terms. I am encouraged by Marilyn's example of Heartland working with a troubled borrower rather than trying to bankrupt them. People remember how banks treat them in troubled times.

Of course that doesn't mean that the picture will be rosy in FY2021. So you can expect low or even no guidance for the current year.



Riddle me another question if you dare. How on earth will Heartland have any idea what future bad and doubtful debts might look like seeing as previous provisioning models cannot possibly be useful in the unique Covid situation we all find ourselves ?

Doesn't it follow that at very best the pending reported profit is nothing but a best guess and how do we know that their best guess of provisioning isn't going to wildly inaccurate ?

Are the pending financial statements (in these unprecedented times with no certain way of accurately forecasting bad and doubtful debts under the new IRFS reporting standard) even worth the paper they're printed on?


I have already answered those questions, and I repeat the answers below.




https://www.bdo.global/getattachment/Services/Audit-Assurance/IFRS/Need-to-Know/NTK_IFRS9_print-(1).pdf.aspx?lang=en-GB

From p13:

-----------------

DETERMINING SIGNIFICANT INCREASES IN CREDIT RISK

"The transition from recognising 12-month expected credit losses (i.e. Stage 1) to lifetime expected credit losses (i.e. Stage 2) in IFRS 9 (2014) Financial Instruments is based on the notion of a significant increase in credit risk over the remaining life of the instrument. The focus is on the changes in the risk of a default, and not the changes in the amount of expected credit losses. For example, for highly collateralised financial assets such as real estate backed loans when a borrower is expected to be affected by the downturn in its local economy with a consequent increase in credit risk, that loan would move to Stage 2, even though the actual loss suffered may be small because the lender can recover most of the amount due by selling the collateral."

I read that as saying that just because a loan moves up the risk scale , that says nothing necessarily about the likelihood of recovering the debt. For example those legacy sharemillker loans that Heartland has may be listed as impaired even though there is a ready market for cow meat if the cows could not be sold as milk producers. Shoot the cows and consequently the loan can be fully repaid.

-----------------

Now we move to p19

----------------

"Various sources of data can be used to estimate expected credit losses. Entities should consider both borrower specific factors, macroeconomic conditions, and internal and external information such as internal historical credit loss experience, internal ratings, and external reports and statistics. Entities should also take into account both the current and future forecast direction of conditions at the reporting date.An entity is not required to incorporate forecasts of future conditions over the entire remaining life of a financial instrument. For long dated instruments, the standard does not require a detailed estimate for periods that are far in the future – for such periods, an entity may extrapolate projections from available, detailed information"

------------------

That last sentence is interesting. How I read it is that if you can make a reasonable estimation of medium term losses, say one to two years out, you can then extrapolate those losses forwards. You don't have to worry about guessing what will happen much further out than twelve months, as there will be no comeback if your longer term write off guesses are wrong.


People will still need to borrow to support new businesses in the future. Heartland will remain a 'go to' player in that lending space Of course there will be uncertainty going into a recession, but that is nothing new in this investment space. If you can't handle the uncertainty, then stick your investment dollars elsewhere. For me a modelled future gross dividend yield of 11% and an expected capital raise mitigates the uncertainty.



For those that have no idea what I am talking about perhaps reflect on the recent "Harmoney" result and ask yourself if there's anything harmonious about that.

I've been saying it for years...all this reckless unsecured lending will come back to bite them sooner or later...


Harmoney was a venture into peer to peer lending. Heartland have their fingers in many other 'frontier of finance' pies, and not all of those will leave a succulent taste in the mouth. My own modelling has Harmoney very likely a failure, but that doesn't mean Heartland shouldn't have tried. Indeed Harmoney kind of did work 'for a while'. I don't expect all of Heartland's toe dipping exercises like this to have come off and failure of Harmoney will not taint my view on the rest of Heartland. Heartland now has an exit route for their Harmoney shareholding via a mooted Harmoney IPO if they want to take it. So it shouldn't be a total loss.

SNOOPY

[winner69]

another down day .....nstill a while to the 21st so price probably close to a buck by the

[King1212]

Earning report on 17th Sept...

[winner69]

Earning report on 17th Sept...

You are correct

Must be something else on the 21st

[Snoopy]

You are correct

Must be something else on the 21st


Having fulfilled all his press obligations and had a nice weekend with his family, Monday 21st is the day that Jeff takes a deep dive from top and centre of the Auckland harbour bridge. I am sure that is the event you are thinking of Winner. I can't remember who it was that leaked the details to me, was it Percy, or Beagle?

SNOOPY

[King1212]

People will be surprised on how resilience HGH....the last time was exactly the same... people expecting capital raise..but it did not happen

[Ggcc]

People will be surprised on how resilience HGH....the last time was exactly the same... people expecting capital raise..but it did not happen
I think so as well. If all looks ok we will see a price spike and if figures show it has lost 20-30% in profit, I feel it is Built in with our current Share price. Either way I am not selling, unless figures are terrible....... Which I doubt.

[winner69]

Heartland used waivers to hold back profit release until Maori language week (Te Wiki o te Reo Māori)

[BlackPeter]

Heartland used waivers to hold back profit release until Maori language week (Te Wiki o te Reo Māori)

Maybe time to rebrand again ... wouldn't "ngãkau whenua parenga" (NWP) or maybe "mafatu whenua parenga" (MWP) sound better than the boring "Heartland Bank"?

Heoi ... just my contribution to Maori week :):

[nevchev]

Theyve just secured new funding

[percy]

They have been working on it for some time.
A great deal for them.
Certainly backs the REL's growth potential.

[KJMLimited]

It is safe to assume the new funders have seen the books of the parent Heartland Group (the listed entity) and are comfortable. Or maybe not - they may have organised themselves first dibs at the AU subsidiary if those super-large undisclosed bad NZ loans are written down further. But in any case this is good news. AU seems to be awash with funders wanting to back non-bank lenders.

[RTM]

They have been working on it for some time.
A great deal for them.
Certainly backs the REL's growth potential.

Sounds outstanding.
Waiting somewhat anxiously on if they will pay a dividend.
Our biggest holding. I guess we find out 17th whether its steak or sausages for dinner.

[iceman]

They have been working on it for some time.
A great deal for them.
Certainly backs the REL's growth potential.

Certainly they have done a very good job there and secured the huge growth in the Aussie REL business for some time now. Reduces need for CR but wouldn't write it off yet though

[nevchev]

They have been working on it for some time.
A great deal for them.
Certainly backs the REL's growth potential.
And derisks this arm of their Oz expansion

[suse]

Personally I'm expecting it will be a lower dividend than last years and that is fine (I'm with the school of anything is better than nothing).

Heartland will determine dividends (both interim and final) based on its net profit after tax, subject to maintaining a prudent level of capital for its needs. Heartland’s capital needs will vary from time to time, depending on a range of factors (including regulatory and credit rating requirements, general economic conditions, current and expected growth and the mix of business). A key objective is to ensure an appropriate balance between maximising shareholder returns, and protecting the interests of depositors through prudent capital management.

[winner69]

A billion will go a long way

[peat]

a billion used to be a really big number. :eek2:
Okay so its good but these days there's money awash so would we expect anything less? It hasnt done much to the share price.
But its just par for the course really BAU even.

There will be serious money to be made in REL's over coming decades I reckon. They attract a premium margin cf standard mortgage (not sure why exactly - but I'm not complaining). Ownership equity remains high in all but a few cases and despite longevity increasing lenders risks are low and can be managed comfortably in the odd hiccup. Aussie property market is huge compared to here and for many of those approaching agedness with their super or their govt sponsored annuity aka pension it is a perfect solution.

[winner69]

a billion used to be a really big number. :eek2:
Okay so its good but these days there's money awash so would we expect anything less? It hasnt done much to the share price.
But its just par for the course really BAU even.

There will be serious money to be made in REL's over coming decades I reckon. They attract a premium margin cf standard mortgage (not sure why exactly - but I'm not complaining). Ownership equity remains high in all but a few cases and despite longevity increasing lenders risks are low and can be managed comfortably in the odd hiccup. Aussie property market is huge compared to here and for many of those approaching agedness with their super or their govt sponsored annuity aka pension it is a perfect solution.

Yes peat a billion is petty cash these days

George Bush like talking brazillions

[Beagle]

Sounds outstanding.
Waiting somewhat anxiously on if they will pay a dividend.
Our biggest holding. I guess we find out 17th whether its steak or sausages for dinner.

Any local farmers got a bit of watercress growing on their farm that they don't mind you helping yourself too.
Steamed it comes out okay with a fair bit of salt and butter, or so I have heard :)

[RTM]

Any local farmers got a bit of watercress growing on their farm that they don't mind you helping yourself too.
Steamed it comes out okay with a fair bit of salt and butter, or so I have heard :)

Different crop up here Beagle !

[RTM]

a billion used to be a really big number. :eek2:
Okay so its good but these days there's money awash so would we expect anything less? It hasnt done much to the share price.
But its just par for the course really BAU even.

There will be serious money to be made in REL's over coming decades I reckon. They attract a premium margin cf standard mortgage (not sure why exactly - but I'm not complaining). Ownership equity remains high in all but a few cases and despite longevity increasing lenders risks are low and can be managed comfortably in the odd hiccup. Aussie property market is huge compared to here and for many of those approaching agedness with their super or their govt sponsored annuity aka pension it is a perfect solution.

Doesn’t stop them going back for more when they need it. As long as it all still stacks up well. Yes, I am surprised the share price has not responded more favourably as well.

[jimdog31]

Doesn’t stop them going back for more when they need it. As long as it all still stacks up well. Yes, I am surprised the share price has not responded more favourably as well.

I believe it will in the next few days

[Beagle]

Different crop up here Beagle !

Some people reckon that it gives you more of a lift than steak, sausages or watercress ;)

[unhuman]

It hasnt done much to the share price.

Sharesies crowd mustn't be big into HGH.

Someone needs to go post some memes on their facebook page now that SKT is banned.

[thegreatestben]

Finding a bit of traction this afternoon, I'm expecting a modest/safe result on Thursday and no divvy.

[Baa_Baa]

Finding a bit of traction this afternoon, I'm expecting a modest/safe result on Thursday and no divvy.

It’s only the divvy that keeps this above water, with such a weak sp, testing my patience for sure. If I had any fortitude with this company maybe I should buy the yield now, but with the uncertainty over the divvy and the forthcoming depression, maybe quit now. Unsure 😐 I’ve never quit at a bottom and I don’t think heartland is going out of business, but it better show some resilience or I won’t be by myself at the exit. Cut your losses or buy the future, big call with heartland imo atpit

[Joshuatree]

Any local farmers got a bit of watercress growing on their farm that they don't mind you helping yourself too.
Steamed it comes out okay with a fair bit of salt and butter, or so I have heard :)

Farmers grow the biggest watercress in their drains and its all organically grown from cow pats and urine.Add a bit of butter to complete the virtuous circle, yum!

[Jantar]

No market update seems to confirm that the result will be in line with previous guidance. And the last guidance we did see specifically mentioned

"The prohibition does not prevent Heartland from paying dividends to its own



shareholders, and Heartland continues to consider whether it will pay any



final FY20 dividend. Heartland's decision will be announced at the time of



Heartland's FY20 results announcement. "

I am expecting a result in the high $70s and dividend will be paid, although much reduced.

[Snoopy]

They have been working on it for some time.
A great deal for them.
Certainly backs the REL's growth potential.


Why are Heartland announcing this new funding arrangement just two days before they release their annual result? Why not hold off just two more days and let shareholders have the big picture from all angles? The cynic in me suggests they are going for the pump (to get the cash issue price higher) before the annual announcement arrives as a dump. I hope I am wrong. But Jeff is surely too clever to not stage manage the release of the Heartland result like this.

SNOOPY

[KJMLimited]

Under the continuous disclosure rules, material matters have to be announced immediately to the market. It doesn't matter whether the annual result is due in 2 days or 2 months.

[Beagle]

Farmers grow the biggest watercress in their drains and its all organically grown from cow pats and urine.Add a bit of butter to complete the virtuous circle, yum!

We have some growing on our farm...the locals of a certain ethnicity help themselves to it...ask me if I care lol

Anyway back to HGH. Got to admit I am confused despite the other Beagle's attempts to explain it. In line with the new international financial reporting standard concerning doubtful debt provisioning and a much more forward looking stance regarding same we have seen every other bank report results materially affected by this new standard in the context of this Covid environment and its impact on customers and the economy.

HGH have clear obligations regarding continuous disclosure and have a forecast in the market in the late $70m range.

I struggle to see how they can report a result within such a range that's consistent with this new IFRS standard and their continuous disclosure requirements. They must be in breech of one or the other.

In any event I cannot fathom how they can possibly make any sort of reasonable judgement about what bad and doubtful debts will be going forward seeing as Covid and its effects on customers and the economy is unprecedented and any attempt to use previous modelling such as during the GFC might be wildly inaccurate.

They might as well print the entire annual report in Te Reo this year as far as I am concerned.

[KJMLimited]

I assume they talk to customers, use the feedback as one input, discount some more based on other inputs, make further assumptions, discount some more just to acknowledge the uncertainty and get to a number. Any decent lender will be doing this on a daily basis. As to whether the new number (or further write down of loans) is material enough to tell the market, 10% is a rule of thumb. They've had ample time to tell the market if that was the case so if they turn up tomorrow with a new level of write-offs then they will be in trouble won't they?

[Snoopy]

https://www.bdo.global/getattachment/Services/Audit-Assurance/IFRS/Need-to-Know/NTK_IFRS9_print-(1).pdf.aspx?lang=en-GB

-----------------

DETERMINING SIGNIFICANT INCREASES IN CREDIT RISK

"The transition from recognising 12-month expected credit losses (i.e. Stage 1) to lifetime expected credit losses (i.e. Stage 2) in IFRS 9 (2014) Financial Instruments is based on the notion of a significant increase in credit risk over the remaining life of the instrument. The focus is on the changes in the risk of a default, and not the changes in the amount of expected credit losses. For example, for highly collateralised financial assets such as real estate backed loans when a borrower is expected to be affected by the downturn in its local economy with a consequent increase in credit risk, that loan would move to Stage 2, even though the actual loss suffered may be small because the lender can recover most of the amount due by selling the collateral."

I read that as saying that just because a loan moves up the risk scale , that says nothing necessarily about the likelihood of recovering the debt. For example those legacy sharemillker loans that Heartland has may be listed as impaired even though there is a ready market for cow meat if the cows could not be sold as milk producers. Shoot the cows and consequently the loan can be fully repaid.

-----------------

Now we move to p19

----------------

"Various sources of data can be used to estimate expected credit losses. Entities should consider both borrower specific factors, macroeconomic conditions, and internal and external information such as internal historical credit loss experience, internal ratings, and external reports and statistics. Entities should also take into account both the current and future forecast direction of conditions at the reporting date.An entity is not required to incorporate forecasts of future conditions over the entire remaining life of a financial instrument. For long dated instruments, the standard does not require a detailed estimate for periods that are far in the future – for such periods, an entity may extrapolate projections from available, detailed information"

------------------

That last sentence is interesting. How I read it is that if you can make a reasonable estimation of medium term losses, say one to two years out, you can then extrapolate those losses forwards. You don't have to worry about guessing what will happen much further out than twelve months, as there will be no comeback if your longer term write off guesses are wrong.

So where does this leave Heartland? We can predict big write-downs because the shorter term loans, like Harmoney, have already shown how bad the near term downturn is, for some types of loan at least. Beyond that the writedowns will be worse than many expect (including me) because bankers are inherently conservative once the bad debt baby comes back to hit them. And given they have documented problems with short term loans, it would be a brave banker who would say that bad debt rates in the ensuing twelve months are going to get substantially better. We also know they can extrapolate beyond the medium term to the longer term. This means a picture of maximum gloom and doom should get bank directors 'off the hook'.




Anyway back to HGH. Got to admit I am confused despite the other Beagle's attempts to explain it. In line with the new international financial reporting standard concerning doubtful debt provisioning and a much more forward looking stance regarding same we have seen every other bank report results materially affected by this new standard in the context of this Covid environment and its impact on customers and the economy.

HGH have clear obligations regarding continuous disclosure and have a forecast in the market in the late $70m range.

I struggle to see how they can report a result within such a range that's consistent with this new IFRS standard and their continuous disclosure requirements. They must be in breech of one or the other.

In any event I cannot fathom how they can possibly make any sort of reasonable judgement about what bad and doubtful debts will be going forward seeing as Covid and its effects on customers and the economy is unprecedented and any attempt to use previous modelling such as during the GFC might be wildly inaccurate.


Well as you said Beagle I answered this before and, for those who haven't taken things in, I repeat my answer again (above). There is a difference between being able to pay the interest on a loan and the ability to repay the principal of that loan. If interest payments stop then the underlying loan asset can still be sold to recover any debt and deferred interest payments. It wouldn't surprise me in the least if Jeff after delivering his AGM address, pulled a butchers knife out of his trousers and when straight down to the farm to slaughter a few dairy cows. The meat would pay the loan capital off, and there would probably even be enough money left to get any errant blood stains off Jeff's business suit at the dry cleaners. Despite many loans being in possible default, and the new 'predictive standards' requiring them to be reported as such , that doesn't mean the debt will have to be written off.

My memory of how the Australian banks are playing this Covid-19 situation is rather different to yours. Yes there were big write offs. But it was also clear these write offs were backward looking and it was made very clear that as Covid-19 ravaged its way through the loan books more write offs would likely be required. No provision was made for these 'next stage' write offs. The most glaring example I remember was those homeowners who had taken a mortgage payment holiday yet were not being recorded as any bad debt risk. There is no such equivalent risk with the Heartland reverse mortgage loan book, which is one reason that I think Heartland is in a better position than the big four Aussie banks to withstand Covid-19.

I agree that forecasts for FY2021 may end up being 'wildly inaccurate'. But directors must only be able to demonstrate that they have put their best efforts into forecasting the future position and have acted prudently in line with those reasonable beliefs. The law appears to allow them to forecast future bad debts as a linear extrapolation of current bad debts. They can forecast something that turns out to be wrong and still fulfill their legal obligations is my reading of those BDO report comments. Of course as time goes by and their forecasts look wrong, the directors do have an obligation to update their forecasts and keep shareholders informed. But I don't think you can criticise directors for not being able to forecast three years in advance in this business climate.

SNOOPY

[peat]

In any event I cannot fathom how they can possibly make any sort of reasonable judgement about what bad and doubtful debts will be going forward seeing as Covid and its effects on customers and the economy is unprecedented


And why is this different for any of the banks. I tend to think they are all just wildly guessing and I have my sneaking suspicions that many of the covid impairments being made by other banks are likely to come back into the normal books at some time. Who knows of course and we all have a-holes I mean opinions

[Beagle]

I assume they talk to customers, use the feedback as one input, discount some more based on other inputs, make further assumptions, discount some more just to acknowledge the uncertainty and get to a number. Any decent lender will be doing this on a daily basis. As to whether the new number (or further write down of loans) is material enough to tell the market, 10% is a rule of thumb. They've had ample time to tell the market if that was the case so if they turn up tomorrow with a new level of write-offs then they will be in trouble won't they?

I don't know. I've put it into the "too hard" basket.

[Snoopy]

Under the continuous disclosure rules, material matters have to be announced immediately to the market. It doesn't matter whether the annual result is due in 2 days or 2 months.


While I can't disagree with your comment KJM, I am not satisfied with that explanation. To start with you make the assumption that the announcement is material, but is it? It is not marked as 'price sensitive'. All that has happened is that a bundle of existing REL loans have been packaged up and sold off as one securitized loan. No doubt Heartland still have some unspecified risk exposure to this securitized loan in extremis. But Heartland have not seen fit to tell us what risk remains once the securitized loan deal is done. If this announcement was really material, I would have expected more detail than what was given. There is a promise that more securitized loans in the future are possible. But on a day to day basis, nothing much has changed with this announcement. Now, if there was a change in a substantial shareholder holding (as a completely different event example), that would have to be notified to the market too - but not immediately. I think there is something like a month's grace before a notice has to be posted. So I have real doubts that this announcement was 'material'.

Nevertheless, for the sake of argument, let's assume the new lending arrangement announcement was material. I would assume that the board has met, probably today, to sign off the annual result presentation for tomorrow. It would seem quite logical for the board to sign off this new loan deal as well at the same board meeting. The securitized loan deal could have been done 'subject to board sign off'. That would have been a legitimate way to delay, by a few days, the announcement of the new lending facility. But perhaps the board met on the 14th to sign off the loan deal for announcement on the 15th. If that happened, wouldn't the board have also signed off Thursday's profit release at the same time? So if the new loan arrangement was material, why has the profit announcement, which was surely even more material, been kept under wraps for three days?

I guess the proof of all this could come out in the wash with tomorrow's profit announcement. A cash issue would come as no surprise for shareholders who have seen other banks do the same to shore up their balance sheets. A cash issue would certainly be material, but it would only have been signed off at the last minute to avoid running foul of continuous disclosure rules. That means the board meeting was this afternoon. And that means the new loan arrangements, if material, were not signed off at the same board meeting. And that means the new loan arrangements were constructed in such a way that they:

1/ Were not material after all OR
2/ Did not need final board approval - by design, IOW one way or the other, the board deliberately chose to release details of the new loan arrangements two days ahead of the annual result.

SNOOPY

[Waltzing]

if interest rates stay under 1% for the next (n) years, what price will you pay for 3%.

THATS THE QUESTION.

[winner69]

if interest rates stay under 1% for the next (n) years, what price will you pay for 3%.

THATS THE QUESTION.

HEAPS and HEAPs

I suppose you saying a company paying a 10 cent share is worth $3.33 ...or if you i count imputation credits $4.50

Better to own the bank instead of investing in the bank they say ...probably same result if it goes bust.

[Waltzing]

"HEAPS and HEAPs"

YOUR THE WINNER!!!

Im not an economist but even with my accounting background not financial maths. We have discussed bold methods of direct government debt funding. Mr O has not been had his offer taken up and therefore he will have to try to keep interest rate low if he wants to support the high NZ debt.

Which assets classes are going to be in demand, buy those. In fact thats why anything on the any market paying 4.5% is still undervalued.

https://www.cnbc.com/2020/09/16/singapore-summit-cppib-ceo-on-zero-bound-interest-rates.html

https://www.cnbc.com/2020/09/16/blackstone-warns-of-lost-decade-with-anemic-stock-market-returns.html

[winner69]

Waltz ....cnbc is bad for your health

[Waltzing]

well its not behind a pay wall for most here for most people to read.

Bloomberg is also in use but the site we download the most is the US economic research site. Yahoo's free API was closed off a few years ago.

we use another site but thats on a VPN only.

you have to down load special OS software.

and remember we arnt always in residence in these lovely isles.

we have our own languages to use far better at interlinking software than python and javascript and accessing raw data.

and we have no idea what the local news here is.

[Snoopy]

HEAPS and HEAPs

I suppose you saying a company paying a 10 cent share is worth $3.33 ...or if you i count imputation credits $4.50

Better to own the bank instead of investing in the bank they say ...probably same result if it goes bust.


As of right now Heartland has not promised to pay any dividend. Whether we get a token dividend tomorrow is unknown. But I would argue with all the capital raising over the years AND the market listed bond issues that Heartland have tapped NZX investors for, that Heartland has never paid out any net cash anyway. If you think of Heartland shares as a net zero coupon bond which nevertheless might go bust, how much are they worth? With that viewpoint, $1.20 does not look so cheap!

Even before interest rates got to their ridiculous lows of today, I had a long term policy of getting rid of almost all of my NZ fixed interests investments. I am not sure that the general investing public realise that NZ is one of the few countries where bank deposits are not guaranteed. But even that doesn't mean I will chase sharemarket yield at any price. Earning 1% at the bank is still better than losing 30% with an ill timed share purchase. I just have to keep telling myself to be disciplined and patient. And with most yield shares already overpriced in my view, the value that is still in the market is with those companies that have suspended dividends now but are poised to restart dividend paying. And with NZ banks, Grant Robertson holds the key as to when that can happen.

SNOOPY

[RTM]

Waiting less and less patiently !

[winner69]

Waiting less and less patiently !

You should have learnt by now - bankers are not early starters

Snoopy has another word for them

[winner69]

Maybe a 5 o'clock job and hope nobody notices

[winner69]

i think the NZX is broken again ...they can't load announcements

[777]

Last year it came out at 1725.

[winner69]

Even Chris Castle got up early enough to send through an announcement

Maybe heading off to golf course

[RTM]

Last year it came out at 1725.


Sounds outstanding.
Waiting somewhat anxiously on if they will pay a dividend.
Our biggest holding. I guess we find out 17th whether its steak or sausages for dinner.

That would be annoying !

[fish]

i think the NZX is broken again ...they can't load announcements

HGH website says announcement at 0930
Cannot find it
Has anyone or is it my ineptitude?

[Beagle]

You should have learnt by now - bankers are not early starters

Snoopy has another word for them

Does it start with a W :lol:


Maybe a 5 o'clock job and hope nobody notices

Snoopy will be tearing his hair (fur) out in frustration all day.

Me, I think any number they produce is just a wild guess. Pretty cynical for a bean counter eh !

[Filthy]

https://www.nzx.com/announcements/359897

• NPAT of $72.0 million.
• Adjusted NPAT of $78.9 million (removing the economic overlay of $9.6 million pre-tax), up 7.2% ($5.3 million).
• Gross finance receivables (Receivables) of $4.6 billion, up 4.9% ($215.0 million).
• Return on equity (ROE) of 11.4%, up 31 basis points (bps).
• Net interest margin (NIM) of 4.33%, flat on FY2019.
• Net operating income (NOI) of $235.3 million, up 13.2%.
• Cost to income ratio (CTI) of 45.4%, up 3.8 percentage points (pp). After allowing for changes in the accounting treatment and one-off impacts, the underlying CTI is 44.5%, up 4.6 pp as a result of significant investments in areas of strategic importance.
• FY2020 final dividend of 2.5 cents per share (cps), taking FY2020 total dividend to 7.0 cps – a decrease of 3.0 cps (as a consequence of restrictions imposed by the Reserve Bank of New Zealand (RBNZ) on distributions by banks in New Zealand).
• A dividend yield of 8.2% (8.6% in FY2019).
• Earnings per share (EPS) of 13.7 cps, up 5.2%.

[percy]

https://www.nzx.com/announcements/359897




That's Incredible.

[iceman]

The highlights indicate a very solid result once again. ROE +11.4%, EPS +5.2% (new capital being put to work) and NIM staying high at 4.33% and paying a reduced but healthy dividend..
This is a very well managed and well diversified company.

Not holding and will stick to waiting on the sidelines another 6 months to see how things pan out before entering the share register again.

[peat]

That's Incredible.

you sound dubious haha

[mfd]

NPAT for 21 forecast at 83-85 million, approx 16% growth expected. What covid recession?

[suse]

Dividend lower than I thought, but hey, at least we get one. Good work Heartland.

[Beagle]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/359897/330902.pdf

First impressions - This actually looks really good. I am very surprised by their outlook forecast of $83-85m.

[jimdog31]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/359897/330902.pdf

First impressions - This actually looks really good. I am very surprised by their outlook forecast of $83-85m.

Banks love recessions dont they?!

[jimdog31]

Banks love recessions dont they?!

Now what happens to the share price!

[Beagle]

https://www.youtube.com/watch?v=z9SK4l2ibvM Guess what I did at market open :)

[Jantar]

Now what happens to the share price! Up 4c on yesterday, and 8c this week. Looks like still climbing.

Edit: Add another 2 c while I was typing this post.

[peat]

https://www.youtube.com/watch?v=z9SK4l2ibvM Guess what I did at market open :)

well I added at 1.22
but I will say I've never made any money from HGH lol . seriously never. always paid too much ....
averaging down now with this result though.

[Beagle]

well I added at 1.22
but I will say I've never made any money from HGH lol . seriously never. always paid too much ....
averaging down now with this result though.

I had to jump back in and rescue Snoopy :D

[King1212]

Love u heartland...u never disappointing me

[nevchev]

https://www.youtube.com/watch?v=z9SK4l2ibvM Guess what I did at market open :)
Me to😎Great result under the circumstances

[RTM]

Hmmmmm looking forward to tonights dinner.
Might even go and have a look for some scallops !

[steveb]

I topped up on tuesday,and of course you never top up enough on a good result and you over top up when it's bad news! U suspect sharesies will push the SP up today,but I also suspect some profit taking.Should be an interesting day

[Beagle]

Hmmmmm looking forward to tonights dinner.
Might even go and have a look for some scallops !

Be careful you don't garnish them with too much of the local "herb" ;)

[sb9]

Hmmmmm looking forward to tonights dinner.
Might even go and have a look for some scallops !

Good on ya, I double down on Friday at 1.17. Very pleased with their results and outlook, should see them head back to $2 mark over next 6 months, which was basically where it was heading to in Feb this year before COVID hit.

[trader_jackson]

Couldn't help but pick up more at $1.23 - especially when one is going to get nearly 3% (gross) back within a month.

[bullfrog]

Been averaging down for sometime and finally, I'm back in the green. Last time I was above water was in March.

[Snow Leopard]

You all finished reading (& understanding) Note 8 of the Financial Statements?

[peat]

You all finished reading (& understanding) Note 8 of the Financial Statements?

thats what supports their use of their overlay method of impairments as clearly noted even in the summaries.

[Bjauck]

https://www.youtube.com/watch?v=z9SK4l2ibvM Guess what I did at market open :) What a great video - I would need about four beagles to get my blubber to safety! I have short hair so nothing for the determined hound to yank on at the end!

Are you the hound do the rescuing?

Better result and dividend yield than I feared.

[Beagle]

Must admit the inherent cynic in me thinks they pulled off a pretty creative accounting trick meeting profit guidance and still within 10% of guidance on the Covid adjusted figure so they met their ongoing continuous disclosure requirements too. First impressions were "yeah right" its time for a Tui but its hard to argue with the fact that they're one of only two Australian banks that have not had their credit rating downgraded and they must be confident going forward to forecast $83-85m for FY21.

I'll give them the benefit of the doubt for a modest stake as part of a well diversified portfolio.

Mid point of forecast at $84m will give 14.5 cps so at $1.28 as I type that's a forward PE of 8.8.

[SCOTTY]

I’m very happy and relieved with the result and divi as HGH is a major holding for me.

The projected 2021 year also looking good.

Would be interesting to know what proportion of the next years npat would be eligible for dividend payment considering the Reserve Bank restrictions?

[BlackPeter]

You all finished reading (& understanding) Note 8 of the Financial Statements?

Yeah, noticed that - it feels their assumptions are quite optimistic (well, more optimistic than the scenarios I've seen the bigger banks using, but this was 3 months ago).

The old saying is that optimists are not more often correct than pessimists, but optimists do live longer, which is good for them (I suppose).

Are their assumptions re impaired assets too optimistic? - I recon we will see that over the next 2 to 3 years, won't we?

[KJMLimited]

To date all lenders have been too bearish, but that's OK as no-one knew what was going to happen with Covid. It now seems that the NZ economy is doing much better than everyone thought and the AU economy has been OK for bad debts because a lot of individual super funds have been used to reduce debt. I am going to assume that HGH management will continue to be cautious on their provisioning, which is fine with me as there is much more chance of an upward surprise.I am a very happy holder sub $1.20.

[peat]

I’m very happy and relieved with the result and divi as HGH is a major holding for me.

The projected 2021 year also looking good.

Would be interesting to know what proportion of the next years npat would be eligible for dividend payment considering the Reserve Bank restrictions?

this justification of not paying full divi due to RB restrictions sounds like a bit of a crock to me. Hadnt they specifically stated they werent affected because they werent a bank they're a holding company that owns a bank. I get they may not want to pay out a divi - at least there is no cash raise huh! - but I didnt think they were restricted from paying one, and yet here it appears they are fobbing us off with that excuse

[Panda-NZ-]

I'm usually not interested in banks with low interest rates projected forever but this result looks good :)

[Cyclical]

Nice one. I love how Snoopy has been patiently sitting back, humble as can be, content in his modeling, refusing to be baited by those other hounds over the last few weeks who were seemingly discarding HGH like it was some rotten piece of meat. Woof, woof!

[Beagle]

Nice one. I love how Snoopy has been patiently sitting back, humble as can be, content in his modeling, refusing to be baited by those other hounds over the last few weeks who were seemingly discarding HGH like it was some rotten piece of meat. Woof, woof!

:lol: I had that coming, guilty as charged :blush:...but to my credit as soon as I sniffed that the dog food wasn't rotten I jumped in boots, (paws) and all.
https://www.youtube.com/watch?v=z9SK4l2ibvM

I should probably sniff and make up with the other Beagle...so here you are Snoopy, my gift to you, enjoy https://www.tvnz.co.nz/shows/dog-squad-puppy-school

[Greekwatchdog]

And good on you for eating humble pie (little bone in your case) and backing it with dollars...I am happily surprised with result and have added more..

[RTM]

52-Week Range: 89 - 193
Wished I'd sold at 193 and bought again at 89.
Gosh....I'm stupid. It seems so obvious.

[thegreatestben]

I'm holding and happy with the result, kicking myself for not topping up yesterday but was probably the right decision for us.

[King1212]

one of my top companies to park my money.....very resilient!!!

[winner69]

Hey beagle me old mate ...no more relativity exercises v Australian banks allowed.....yep,not allowed now.

Jeff says -

Current bank price-to-earnings ratio multiples are below many of those for finance companies and fintechs, and Heartland recognises that its current share price may not appropriately reflect the price of underlying nature of its businesses. Consequently, the Board has asked management to explore this and identify means of optimising value.


Even that ultimate dog FXL trades on a PE of 20 .....Jeff must have noticed :t_up:

[KJMLimited]

I'm not sure of I like the sound of this. Management need to focus on the core business and pay no attention to the share price, which will take care of itself eventually. Mr Buffet would have kittens! Potentially a big distraction for management. Let Harmoney get the high multiple in the IPO and look to sell some down would be the way to play it.

[percy]

Hey beagle me old mate ...no more relativity exercises v Australian banks allowed.....yep,not allowed now.

Jeff says -

Current bank price-to-earnings ratio multiples are below many of those for finance companies and fintechs, and Heartland recognises that its current share price may not appropriately reflect the price of underlying nature of its businesses. Consequently, the Board has asked management to explore this and identify means of optimising value.


Even that ultimate dog FXL trades on a PE of 20 .....Jeff must have noticed :t_up:

Just what we would expect from a board whose members are substantial shareholders.It is called "the owners eye."

Disc.I am again a shareholder.[45% of what I used to hold].

[winner69]

I'm not sure of I like the sound of this. Management need to focus on the core business and pay no attention to the share price, which will take care of itself eventually. Mr Buffet would have kittens! Potentially a big distraction for management. Let Harmoney get the high multiple in the IPO and look to sell some down would be the way to play it.

Don’t agree there mate

They’ll concentrate on the business ....but they need to tell a story that they are not a bank

The bank story did what they wanted it to do years ago ...remember the chief financial guy saying becoming a Bank was only an advertising ploy and gave them ‘credibility’ ..... now they’ve grown up and a essentially a finance company.

If fintechs get rated at greater multiples then a fantastic story to tell the story they are more than a boring bank

I’m all for it ...great move

Maybe jeff has listened to some shareholders ...some been saying that for a while

[Beagle]

Hey beagle me old mate ...no more relativity exercises v Australian banks allowed.....yep,not allowed now.

Jeff says -

Current bank price-to-earnings ratio multiples are below many of those for finance companies and fintechs, and Heartland recognises that its current share price may not appropriately reflect the price of underlying nature of its businesses. Consequently, the Board has asked management to explore this and identify means of optimising value.


Even that ultimate dog FXL trades on a PE of 20 .....Jeff must have noticed :t_up:

Does look super cheap on a forward PE of 8.8 that's for sure. Normal range is 11-17. Once we're on top of this virus it'll be back to 17 again as growth surges back into the economy. Heck 14.5 cps x 17 = $2.47...easy double your money stuff when the coast is clear. What could possibly go wrong lol


Just what we would expect from a board whose members are substantial shareholders.It is called "the owners eye."

Disc.I am again a shareholder.

Welcome back on board. Better to be on the right side of the investment ledger eh mate, 8.2% yield > 1.5% on term deposit ;)

[KJMLimited]

Don’t agree there mate

They’ll concentrate on the business ....but they need to tell a story that they are not a bank

The bank story did what they wanted it to do years ago ...remember the chief financial guy saying becoming a Bank was only an advertising ploy and gave them ‘credibility’ ..... now they’ve grown up and a essentially a finance company.

If fintechs get rated at greater multiples then a fantastic story to tell the story they are more than a boring bank

I’m all for it ...great move

Maybe jeff has listened to some shareholders ...some been saying that for a while

I hope you're right. I'm staying long but I'm not resting that easy with it.

[King1212]

Great...all the masters are back on holding...all aboard!!!!! The ships ia ready to sail!

[Benny1]

Does look super cheap on a forward PE of 8.8 that's for sure. Normal range is 11-17. Once we're on top of this virus it'll be back to 17 again as growth surges back into the economy. Heck 14.5 cps x 17 = $2.47...easy double your money stuff when the coast is clear. What could possibly go wrong lol



Welcome back on board. Better to be on the right side of the investment ledger eh mate, 8.2% yield > 1.5% on term deposit ;)

Had a T/D mature last week..Got a phone call from Heartland offering me 1.65% for 6 or 9 months..
Politely declined the offer...bought shares today instead!

[Beagle]

Had a T/D mature last week..Got a phone call from Heartland offering me 1.65% for 6 or 9 months..
Politely declined the offer...bought shares today instead!

Good move mate. Just got to get Iceman back on board now and all the good old boys will be back. Toot Toot Iceman...the train is leaving the station :)

[tim23]

Had a T/D mature last week..Got a phone call from Heartland offering me 1.65% for 6 or 9 months..
Politely declined the offer...bought shares today instead!

Good move - makes perfect sense, happy long term holder, pleasing result.

[Baa_Baa]

Like RTM I had some concerns about whether the divvy would be retained, so today there were two orders on market, the buy if it was good, the sell if it wasn’t.

Happily I have a few more of heartland and for me the results and divvy ticked all the boxes, the outlook was the icing on the cake.

As some would say, and apologies for stealing this … we are well positioned.

🤣

[King1212]

Yesterday is history, tomorrow is a mystery, and today is a gift... that's why they call it present'

HGH was unloved stock till this morning. A lot u guys said doom n gloom....

No one can predict the future...But we all can be assured now...HGH is well positioned

[Scrunch]

https://www.youtube.com/watch?v=z9SK4l2ibvM Guess what I did at market open :)

Entered at a price of $1.20, well that's the price I got as I topped up in the open trade. Putting the announcement on at 9.50am did however mean it was only a short window to read, consider if it would be a good feed and put in the buy order.

[Panda-NZ-]

I hope the dividends will resume soon, it will be faster than other companies who you'd expect to recover faster than a bank (or innovative fintech ;) )

From the 2020FY presentation:

96% of Consumer loans and 98% of SME and Business loans are on usual (pre-COVID) repayment schedules or have taken up Heartland Extend.

I imagine the rural loans will be doing well given our strong export numbers.

[Beagle]

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12365628

[Bjauck]

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12365628
Final dividend was cut from last year's 6.5c to 2.5c
My TD was recently rolled over from 3.2% to 1.2%

Which income stream will recover more quickly?

[Snoopy]

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12365628

"It operating expenses rose 24.5 per cent to $106.8m largely due to increased staff expenses after it hired 23 new people during the June quarter."

(Old Operating Expenses) x 1.245 = $106.8m => 'Old Operating Expenses" = $85.8m

Incremental Increase in OE was: $106.8m - $85.8m = $21m. But those 23 new people were only hired during the fouth quarter, so the equivalent annualised increase was: 4 x$21m = $84m. So spread over the 23 new employees, the average amount spent on each new employee was:

$84m / 23 = $3.65m per person

WOW! I certainly chose the wrong profession. Even Jeff must be looking over his shoulder at the pay rates of those 23 new guys and gals. Even allowing for not all of that money going straight to salary, those new people are on a good wicket. Maybe Jeff just employed the whole 'black cap' squad without telling anybody?

Is this really good journalism from the Herald?

SNOOPY

[Beagle]

Hey Snoopy, the only plausible explanation is the the N.Z. Herald shed 23 good quality journalists in the same period...which sadly, is probably not far from the truth...

[peat]

I wrote a few things about why this company's share price performs so badly but lost them when I didnt fire them through and my token got dropped. (I hope someone remembers to pick it up)

Is it tainted by the NZ Finance Company failure era
Is it the poor cash flow Snoopy despairs over
Or is it all smoke and mirrors ?

Lets face it the graph is poo
11948

massive resistance at 1.50
though if it could get through that it would be positive and then act as strong support.

sorry I forgot to remove all my indicators , currently having a bit of a play with them....

[Snoopy]

this justification of not paying full divi due to RB restrictions sounds like a bit of a crock to me. Hadnt they specifically stated they werent affected because they werent a bank they're a holding company that owns a bank. I get they may not want to pay out a divi - at least there is no cash raise huh! - but I didnt think they were restricted from paying one, and yet here it appears they are fobbing us off with that excuse


I don't think it is a fob off Peat. The structure is that Heartland Group Holdings (HGH) are 100% owners of Heartland Bank (HBL). The NZ Govt has directed that banks registered in NZ are not allowed to pay dividends until further notice. So HBL cannot pay a dividend to HGH.

HGH can still pay a dividend by either:

1/ Paying the dividends from the profit of their Australian operations OR
2/ Borrowing to pay a dividend.

Given the non cashflow positive nature of the fast growing REL business, and the fact that they just two days ago HGH announced new beefed up loan facilities, I would guess they plan to do the latter. HBL looks nicely profitable for now. But they aren't allowed to pay out a dividend to HGH by law. And that means there is no way for Heartland shareholders to get cashflow access to HBL's profitability. I see no sop here.

SNOOPY

[Snoopy]

I wrote a few things about why this company's share price performs so badly but lost them when I didnt fire them through and my token got dropped. (I hope someone remembers to pick it up)


Your thoughts may still be there Peat. Did you know that Sharetrader periodically automatically saves posts as you are writing them? So if you get logged out, go back to the post you were replying to, hit 'Reply' and an option on the bottom corner of the page should come up. 'Restore Autosaved Content'. Has worked for me in the past.


SNOOPY

[Snoopy]

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


Above is my 'base case' Scenario 2b.

I have come to the conclusion during my Scenario Analysis' modelling that it is going to be the reverse mortgage business that drives the profitability of Heartland over the next couple of years. But it does fly under the radar a bit. We shareholders really don't know how it is going until the full and half year announcements.

As announced yesterday, at EOFY2020, the total NZ and Australian Reverse Mortgage Balance was: $560m +$958m = $1,518m. So we are almost at my modelled 'base case' reverse mortgage balance for EOFY2021 a year early.

Below is my 'optimistic' scenario 3




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



The above scenario is modelling a reverse mortgage portfolio growth rate of: $1,735m/$1,518m = 14.3% over FY2021. Even allowing for slowing portfolio percentage growth as the REL portfolio grows in absolute size, that looks believable when you consider the REL portfolio growth rate over FY2020

$1,518m/ $1,319m = 15.1%

and over FY2019

$1,319m/$1,115m = 18.3%

Switching the new 'base case' to the old 'optimistic' scenario for Reverse Mortgages equates to a boost of NPAT profit of $21m for FY2021, and that is significant. At the same time the old 'base case' becomes the new pessimistic scenario.

I will now need a new 'optimistic' scenario.

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 10% increment (for a total of 16.7%) 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 1.167 x 1.167 = $1,796.0m
Incremental Receivable Gain EOFY2019 to EOFY2021: $1,796.0m - $1,318.8m = $477.2m

Incremental Profit Gain from EOFY2019 to EOFY2021 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $477.2m = $62.0m

Reverse Mortgage Balance at EOFY2022: $1,318.8m x 1.167 x 1.167 x 1.167 = $2,096.0m
Incremental Receivable Gain EOFY2019 to EOFY2022: $2,096.0m - $1,318.8m = $777.2m

Incremental Profit Gain from EOFY2019 to EOFY2022 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $777.2m = $101.0m

SNOOPY

[RTM]

Final dividend was cut from last year's 6.5c to 2.5c
My TD was recently rolled over from 3.2% to 1.2%

Which income stream will recover more quickly?

Good question. I would bet on Heartland stock.
In addition your capital stands a reasonable chance of appreciating as well.
No chance with TD.
Good luck.

[RTM]

I don't think it is a fob off Peat. The structure is that Heartland Group Holdings (HGH) are 100% owners of Heartland Bank (HBL). The NZ Govt has directed that banks registered in NZ are not allowed to pay dividends until further notice. So HBL cannot pay a dividend to HGH.

HGH can still pay a dividend by either:

1/ Paying the dividends from the profit of their Australian operations OR
2/ Borrowing to pay a dividend.

Given the non cashflow positive nature of the fast growing REL business, and the fact that they just two days ago HGH announced new beefed up loan facilities, I would guess they plan to do the latter. HBL looks nicely profitable for now. But they aren't allowed to pay out a dividend to HGH by law. And that means there is no way for Heartland shareholders to get cashflow access to HBL's profitability. I see no sop here.

SNOOPY

Thanks for that Snoopy. I was wondering as well.

[peat]

yeh Snoops, I hear what you're saying but the bank could make a loan to its holding company at no interest etc....
I am not a highly paid merchant banker but would've thought this regulatory cash flow issue from bank subsidiary to holding co could easily be circumvented.

Its funny tho I dont actually want dividends that much, but I dont like to be misled either. Despite being a holder I do have a grudge against this company which might be ameliorated if the share price got back up to $2. haha

And thanks for the tech advice on retrieving lost posts, I will try it next time because there WILL be a next time.

[Greekwatchdog]

Some nice news...
https://www.scoop.co.nz/stories/BU2009/S00369/heartland-reverse-mortgages-recognised-for-commitment-to-customers.htm

[peat]

Some nice news...
https://www.scoop.co.nz/stories/BU2009/S00369/heartland-reverse-mortgages-recognised-for-commitment-to-customers.htm

doesnt it warm the cockles of yer heart.

[Greekwatchdog]

Indeed and compliments the Glenfiddich 18 year old that will certainly do it..Its been a good week.

[Snoopy]

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 ($74m-$11m=)$63m, or a 15% drop.





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.


The average growth rate in the 'motor receivables' portfolio between FY2013 and FY2018 was 11% (November 2018 investor day presentation p45). By end of FY2018 Heartland accounted for 7.3% of dealer to public sales (p47). Management sees a real growth opportunity here. So I have pumped up my pre-Covid-19 base figure by 11%:

$1,124m x 1.11 = $1,248m



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.


The Motor vehicle finance book totalled $1,089m at EOFY2019, and rose to $1,124m at EOHY2020 before topping out at $1.126m (+3.4% for the year ) at EOFY2020. I was predicting no Holden sales for FY2021, yet there are still some Holden badged American products (and rebadged Asian built Isuzu utes sold as Colorado) hanging around the dealerships. Holden have told us sales will cease by calendar year 2021. So the new vehicle downturn is certainly coming for Heartland. The other mainstream new vehicle brand that Heartland fund vehicle purchases for is Kia. Year to date to the end of August 2020 they rank second in sales only to Toyota. So Kia is definitely a brand on the rise, with their top sellers being the Sportage (medium size) and Seltos (small) SUVs (source www.mia.org.nz).

I am reworking my estimated Holden:Kia:JLR sales split from FY2019 of 45:45:10, to 20:50:5 for FY2021. That represents a forecast sales decline of 25%. A 25% decline from the EOHY2020 sales figures, assuming new vehicles represented $500m of a total of $1,248m of all modelled vehicle receivables balances, represents a sales decline in dollar terms of:

$500m x 0.25 = $125m

Motor vehicle finance has traditionally had some of the best margins at Heartland. Heartland's AGM FY2019 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 $125m = $19m

Of course the annual hit won't be this much, as finance typically has a three year cycle. Existing finance deals signed over FY2019 and FY2020 will continue on previously arranged terms. So the FY2021 hit will be about 1/3 of the life of contract total, about $6.3m.

I am guessing the FY2022 impact will be more or less the same at $6.3m, but unfortunately the financing effect from FY2021 is cumulative into FY2022 for a total effect of $12.6m.

Used vehicle sales for the whole NZ second hand market are down 6% for the calendar year.

https://autotalk.co.nz/news/the-bounce-used-imports-in-strong-recovery

However, I am still expecting used car sales to weaken further over FY2021 so I am sticking to my previous modelling framework.

SNOOPY

[King1212]

Heartland review aimed at boosting value

Jenny Ruth
Fri, 18 Sep 2020

Heartland Group Holdings chief executive Jeff Greenslade wouldn't be drawn on whether management's review of the company is likely to lead to a break-up of the group.
"It's incumbent upon businesses every now and again when you see where our share price has been to ask is there something that needs to be done to get a better recognition of value," Greenslade told BusinessDesk.
He acknowledged the announcement of such a review is often an euphemism for selling assets.
"I understand what you're saying. We need to decide to what extent it's a problem and then look at the solutions."
It may simply be a messaging issue, he said. "It's something we've got to look at … a range of options and that could be it." Or it may require a restructuring, he said.
In Heartland's annual results announcement, the company said its current share price "may not appropriately reflect the underlying nature of its business," so the board has asked management how to optimise value.
The shares rose as much as 9 cents, or 7.6 percent, to $1.28 after the announcement before ending the day at $1.26.
It's true Heartland's share price has suffered through the coronavirus crisis, troughing at 89 cents in March and still down 27 percent from a year ago.
Better than others
But that's still better than three of the big four Australian-owned banks have fared – the worst affected is Westpac, down nearly 44 percent from a year ago, while Commonwealth Bank of Australia, which owns ASB Bank, is the only one to have performed better but is still down 20 percent from a year ago.
Greenslade said that was a fair point "but within our business make-up, we have a lot of activities that they don't have."
Heartland specialises in niche areas where it faces little to no competition, such as reverse mortgages, motor finance and increasingly in digital lending products.
Heartland has also been backing away from relationship-based banking, where a business or farmer has a direct relationship with a bank officer looking after the gamut of their banking needs, because the major banks have been encroaching on that area and driving down margins.
Heartland has much fatter margins than the mainstream banks and they have held steady at 4.33 percent at a time when the four major Australian-owned banks and Kiwibank have reported steep margin declines.
Kiwibank's net interest margin shrank 19 basis points to 1.94 percent in the year ended June, while ASB Bank's contracted 12 points to 2.11 percent. The other three majors have Sept. 30 balance dates.
Greenslade argued Heartland's specialist positioning should "justify different and potentially better valuations."
No scandals
Heartland hasn't suffered the reputational and regulatory issues that have been dogging the Australian banks for several years now in the wake of Australia's royal commission into financial services.
Those scandals included money laundering, mis-selling products, charging fees for services that weren't delivered and, in Westpac's case, facilitating child exploitation in the Philippines.
Heartland's results were certainly strong and it is forecasting a profit increase of as much as 18 percent for the current year.
Net profit fell 2.2 percent to $72 million for the year ended June because of a $9.6 million charge against profit to cover potential covid-19-related credit losses.
And the company is forecasting net profit for its 2021 financial year will rise to between $83 million and $85 million.
The results also highlighted the very juicy yield available from Heartland's shares - at Wednesday's closing price of $1.19, the dividend yield was 8.2 percent.
The best return Heartland is offering on its own term deposits is 1.85 percent for three years and, by way of comparison, ANZ Bank is offering 1.3 percent for three years.
And the high yield comes at a time when the Reserve Bank has forbidden NZ banks from paying dividends. Heartland is able to get around this because its Australian reverse mortgage business sits outside the NZ banking group where all the rest of its operations reside.
That allowed Heartland to pay a fully imputed 2.5 cents per share final dividend, taking the annual payout to 7 cents, although the RBNZ's restrictions meant that was down from 10 cents the previous year.

[King1212]

the company said its current share price "may not appropriately reflect the underlying nature of its business," so the board has asked management how to optimise value.

Love it!

Hgh down to 1.30 on Feb 2019..fear of capital raising but nothing happened. It crashed to 90c in March..because covid. People were also scared this time will be a capital raising....nothing again!

Current result showed HGH is one of the best Nz listed companies...thier performance is undoubtedly. Thanks to excellent management.

Master Beagle....your favorite broker still put HGH a fair value of $.151

[Beagle]

HGH travelling a lot better than I expected....quite possibly the understatement of the week from me lol

[Snoopy]

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.



"Harmoney & Other Consumer Lending" had an OK year over FY2020 (p19 FY2020 presentation, PR2020) with the loan portfolio up 2% to $211m compared to FY2019. I am unclear as to exactly what has happened here. From the information in the link below:

https://www.interest.co.nz/news/106789/review-things-you-need-know-you-go-home-friday-more-td-rate-cuts-sagging-consumer

Harmoney are now a much smaller business. (Loan Book down from $367m to just $129m). Heartland own just 11.85% of Harmoney. (source NZ Companies Register below)

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

But 'ownership' and 'providing capital with which to make loans' are two different things, And I think Heartland do both of those things for Harmoney.

In direct contradiction to the 'interest.co.nz' Harmoney results reference above, p19 of PR2020 shows "Harmoney receivables increasing to $199m." Who can explain that discrepency? Whatever the explanation, it certainly sounds like the Harmoney loan book is being incorporated into the Heartland loan book. But the reason for doing that is another mystery in itself (question posed below). Despite the slightly bullish tone on p19 of the AR2020 presentation, I don't see sufficient information to override my (previously stated in the quoted bubble) bearish outlook for this sector.

The FY2020 presentation for Heartland, from pages 14 to 21 inclusive, gives the full whereabouts of Heartland's loan book:

1/ Australia,
2/ NZ Reverse Mortgages,
3/ Open for Business (O4B),
4/ Business Intermediated,
5/ Motor Finance,
6/ Harmoney & Other Personal Lending,
7/ Livestock Funding, and
8/ Relationship.

All of these categories come to a grand total of $4,610m in receivables. For comparison, if we go to the FY2020 accounts and add up the receivables on the balance sheet, I get $4,584m. There is a small difference of $26m between these two comparable totals, but I judge this not to be material (even though I can't explain it). So it does definitely appear as if Harmoney loans are listed in the 'Finance Receivables' in the Heartland balance sheet. However, a word search for Harmoney in the FY2020 accounts comes up blank. So I am not clear where Harmoney fits into the Heartland 'Finance Receivables'. One possibility: If I look in the Segmented Analysis of the AR2020 p98, we see the 'Other Personal' category having $214.759m in assets. This is similar to the $211m in assets figure listed on p19 of PR2020 for 'Harmoney and Other Consumer Lending' (again I can't explain the small difference).

I thought I might find Harmoney under note 11 'Investments' (AR2020 p106) under the equity sub header. But if Harmoney was an 'investment' based on the just 11.85% shareholding that Heartland held, then why have the Harmoney receivables -apparently - been consolidated inside the Heartland receivables? I don't follow how Harmoney has been treated in the Heartland accounts. So if anyone can unscramble it for me I will be all ears.

Heartland has created an 'overlay', in effect an extra bad debt buffer, to allow for as yet unspecified expected negative downstream effects of Covid-19. The bulk of Heartland’s $9.6m pre-tax overlay has been apportioned to the Consumer and SME portfolios. We can take from this that if problems do emerge over FY2021, then this 'Consumer' section of the loan book is more than likely where a hit will be felt.

Despite the slightly bullish tone on p19 of the AR2020 presentation (PR2020), I don't see sufficient information to override my (previously stated in the quoted bubble) bearish outlook for this sector.

SNOOPY

[RTM]

HGH travelling a lot better than I expected....quite possibly the understatement of the week from me lol

Reoccurring theme Beagle ?

[winner69]

Snoops

I think you will find that Heartland’s equity in Harmoney is treated as an Investment in Equities and that equity as such is ‘valued’ each year with any change in that value going through Income Statement.

Heartland don’t pick up their ‘share of Harmoney’s profit’ in their accounts. They do not equity account Harmoney’s earnings.

The lending done through Harmoney is done in Heartland’s name (just like others using the platform) and it is those loans that Heartland shows in their books. Harmoney is just a shopfront Heartland use.

I admit I haven’t delved too deeply into Heartland’s account to say that’s how it’s done but it appears so but willing to stand corrected if this is a load of the proverbial.

A2 investment in Synlait is a lot clearer to understand - have a quick look at their accounts to see.

[Beagle]

Reoccurring theme Beagle ?

Not a theme, although real estate prices have also really surprised. There's no question that the economy has been hit very hard with the Covid sledgehammer, (sharpest GDP decline since the great depression in the 1930's), and one has to be super careful with stock selection.

HGH seems to be weathering the storm pretty well so far...only time will tell if their bad and doubtful debt provisioning is adequate.

[winner69]

Not a theme, although real estate prices have also really surprised. There's no question that the economy has been hit very hard with the Covid sledgehammer, (sharpest GDP decline since the great depression in the 1930's), and one has to be super careful with stock selection.

HGH seems to be weathering the storm pretty well so far...only time will tell if their bad and doubtful debt provisioning is adequate.

That’s old new news

I read in the paper that THE RECESSIONS OVER

[Beagle]

That’s old new news

I read in the paper that THE RECESSIONS OVER

LOL wouldn't it be wonderful if that was the truth.

[Norwest]

Lot's of positives in this thread, I want to put another angle into the discussion

Four reasons why I'm not currently invested into HGH:

1. It's a BBB grade bank.

An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor's capacity to meet its financial commitments on the obligation.

I don't think that anyone could successfully argue that we are not meeting the two underlined situations right now.

source: https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352

2. OBR is in effect

Open Bank Resolution (OBR) is a long-standing Reserve Bank policy aimed at allowing a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than the taxpayer.

source: https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution

3. I wouldn't put my term deposits into Heartland Bank, even though their rates are some of the best on the market, given the current economic situation, and points #1 and #2 above, I would prefer less return on my cash with a much safer institution.

4. I know several businesses, who the big four banks would not lend to because of a multitude of factors, whilst heartland were quite happy to lend to them prior to 2020. Several of these businesses are now on deferred payment's with Heartland.

[fish]

[QUOTE=Norwest;845041]Lot's of positives in this thread, I want to put another angle into the discussion

Four reasons why I'm not currently invested into HGH:

1. It's a BBB grade bank.

I am a little confused-is HGH a bank ?

Personally I do not put deposits in banks-no return above inflation
I hate the idea of Banks of making yet more money out of me .

HGH lend money at high interest rates-some of it has good security(reverse mortgages ) and some with lower security but higher interest rates.
This mitigates the risk but increases the return
Hence I have no deposits with HGH but do invest in the stock .
When the risk appears too much I sell-eg this February .
When there is less risk I buy-eg just before and after the results annoucement.
Works for me

[King1212]

High risk high gain...

HGH is well managed finance company which own heartland bank.

Hobson wealth broker ....slap $1.88 target sp

[Beagle]

Thank you for your comments Norwest.
I believe the big four Aussie banks have plenty of their own problems and the recent credit rating downgrade has started to reflect some of them.
Credit rating is one thing, momentum in where the credit rating is headed is another thing as is the capital ratio and HGH has to the best of my knowledge a better capital ratio than any of the big Aussie 4.

Its one thing to, for example, invest on term deposit with say the BNZ and get 2.9% and I am grateful for small mercies that I still have a term deposit with them at that rate until February 2021 but their current rates here https://www.bnz.co.nz/personal-banking/investments/rates#rates-and-fees are a completely different story with a maximum rate regardless of term or amount of just 1.15% before tax and inflation. This as you quite rightly observe is before one takes account of the risks imposed by the Reserve Bank's open banking resolution.

It is beyond any doubt whatsoever that the current (negative real after tax rates and inflation) returns compensate in any way for the OBR risk or any other risk of default...so that begs the question of alternatives. I think HGH shares are a fair alternative and although there are clear risks one shouldn't also overlook the possibility of the recovery story being better than expected over the medium term seeing as both N.Z. and Australia (lowest Covid cases in Melbourne today since the new outbreak went rampant) are weathering the Covid risk much better than most other countries.

One shouldn't overlook the optimistic case for earnings of 14.5 cps in FY21 (mid point of HGH's forecast) and a vaccine for Covid sometime in late 2021 seeing HGH rerated to around the mid point of its historic PE range of 11-17, mid point 14, as the economy starts to recover. 14.5 cps at the mid point PE of 14 suggests a possible recovery price of something in the order of $2 perhaps as early as late 2021 or more likely sometime in 2022.

Risks and rewards appear to suggest to me that on balance HGH is quite probably a good recovery stock to take a modest position in so that's what I've done.
Sure there's some downside risk, no-one thinking objectively would not acknowledge that, but there's quite solid upside potential too.

If you want minimum possible risk the Reserve Bank has Kiwibonds, current rates are here and don't forget these rates are before tax and inflation https://debtmanagement.treasury.govt.nz/sites/default/files/application-form-kiwibonds-issue111-13jul.pdf

[nevchev]

Thank you for your comments Norwest.
I believe the big four Aussie banks have plenty of their own problems and the recent credit rating downgrade has started to reflect some of them.
Credit rating is one thing, momentum in where the credit rating is headed is another thing as is the capital ratio and HGH has to the best of my knowledge a better capital ratio than any of the big Aussie 4.

Its one thing to, for example, invest on term deposit with say the BNZ and get 2.9% and I am grateful for small mercies that I still have a term deposit with them at that rate until February 2021 but their current rates here https://www.bnz.co.nz/personal-banking/investments/rates#rates-and-fees are a completely different story with a maximum rate regardless of term or amount of just 1.15% before tax and inflation. This as you quite rightly observe is before one takes account of the risks imposed by the Reserve Bank's open banking resolution.

It is beyond any doubt whatsoever that the current (negative real after tax rates and inflation) returns compensate in any way for the OBR risk or any other risk of default...so that begs the question of alternatives. I think HGH shares are a fair alternative and although there are clear risks one shouldn't also overlook the possibility of the recovery story being better than expected over the medium term seeing as both N.Z. and Australia (lowest Covid cases in Melbourne today since the new outbreak went rampant) are weathering the Covid risk much better than most other countries.

One shouldn't overlook the optimistic case for earnings of 14.5 cps in FY21 (mid point of HGH's forecast) and a vaccine for Covid sometime in late 2021 seeing HGH rerated to around the mid point of its historic PE range of 11-17, mid point 14, as the economy starts to recover. 14.5 cps at the mid point PE of 14 suggests a possible recovery price of something in the order of $2 perhaps as early as late 2021 or more likely sometime in 2022.

Risks and rewards appear to suggest to me that on balance HGH is quite probably a good recovery stock to take a modest position in so that's what I've done.
Sure there's some downside risk, no-one thinking objectively would not acknowledge that, but there's quite solid upside potential too.

If you want minimum possible risk the Reserve Bank has Kiwibonds, current rates are here and don't forget these rates are before tax and inflation https://debtmanagement.treasury.govt.nz/sites/default/files/application-form-kiwibonds-issue111-13jul.pdf

Yes,pretty uninspiring rates alright.Even with decreased dividends i feel HGH is a good place to park my hard earned as i cant see the SP going south of here for a while and 8% is ok by comparisons(bloody good really)

[percy]

"Greenslade said Heartland did not have material exposure to the industries most profoundly affected by Covid-19 (tourism, hospitality, retail business) or the demographic most impacted by rising unemployment (15- to 24-year-olds)."

Well I would be asking which banks do have material exposure to the tourism,hospitaity and retail sectors,because they "appear to have a problem or two." Then we will see how good some credit rating companies are,knowing full well that history has shown they do not have a good reputation for being right.[GFC]

[winner69]

These are %age exposures

Tourism etc -
Heartland’s total exposure to the retail, accommodation and transport (excluding road freight transport) industries at 30 June 2020, based on borrower ANZSIC codes, was 2.84%, 2.17% and 1.15% respectively.




Young people - At 10 August 2020, Heartland’s exposure to customers in this age bracket is 2.9% in Motor, 0.7% in personal lending and 0.9% in Harmoney.

[percy]

These are %age exposures

Tourism etc -
Heartland’s total exposure to the retail, accommodation and transport (excluding road freight transport) industries at 30 June 2020, based on borrower ANZSIC codes, was 2.84%, 2.17% and 1.15% respectively.




Young people - At 10 August 2020, Heartland’s exposure to customers in this age bracket is 2.9% in Motor, 0.7% in personal lending and 0.9% in Harmoney.


Well which banks do have the problems.? ANZ,ASB,CoOP SBS,TSB,Westpac.Surely not your mate at Kiwi Bank.
I would think the bank, or banks that financed the fit outs in Anthony Gough's The Strip in ChCh would appear to have a problem/problems.And that is not even thinking about the problems in Queenstown , Wanaka,Tekapo,Blenheim,Picton,Timaru,Oamaru,TeAnau ,Westport,Greymouth or Dunedin.

[Beagle]

It was good to see HGH's rural lending down 10% in their report. Unwinding of their low margin lending in this very cyclical sector makes good sense when the dairy payout is over $7.

[winner69]

Hey beagle ...naughty of you to do comparisons against the big Aussie 4

Jeff says they are now fintech ...the advertising campaign of being a bank is over, it’s done it’s job.

You know do a relativity exercise against other finance stocks ...and not Aussie banks.

You might even get a fair value of $3 plus.

Look forward to it.

[Beagle]

LOL - I'd prefer to stick to my standard comparison which throws up some interesting numbers. Crickey some of them got smacked around the chops with Covid !!
Anyway off market screener forward FY21 PE's are as follows:-
BEN 11.6
BOQ 14.6
WBC 12
NAB 12.4
ANZ 11.6
CBA 15.7
Average 12.98

No wonder the board is upset that HGH is priced so low on a forward PE of just 8.75 and seem sure it doesn't reflect fair value, (normally a sign for me to run for the hills) but in this case I think they have a fair point.

12.98 on a forecast 14.5 cents suggests a fair price now is $1.88 !!

Crickey....it might be worth getting a few more ;)

[winner69]

But beagle ...didn’t you read this bit

Heartland has transitioned through a number of strategic phases to establish itself as a digitally-led financial services group, ‘a financial technology company(fintech) with a bank licence’.

Digital was mentioned 23 times in its AR

[Beagle]

But beagle ...didn’t you read this bit

Heartland has transitioned through a number of strategic phases to establish itself as a digitally-led financial services group, ‘a financial technology company(fintech) with a bank licence’.

Digital was mentioned 23 times in its AR

Did they mention it in Te Reo as well ;)

They can call it whatever they like...this is all I have to say about that
https://www.bing.com/videos/search?q=beagle+yawning&docid=608040307080496887&mid=32648E04BA9978C1C52232648E04BA9978C1C522&view=detail&FORM=VIRE

Seriously though I get it that they're trying to move everything to digital but so are all the other banks so I see this claim as not much more than window dressing.

[King1212]

Hobson wealth also put $1.80 ish

[nztx]

That’s old new news

I read in the paper that THE RECESSIONS OVER

probably a badly disguised puffed up party political feel good you saw .. ;)

[sb9]

Added few more this arvo, as its trading cum divvy with ex date only couple of days away.

[Panda-NZ-]

Heartland's internet banking UI could do with a bit of an update but other than that they're doing pretty ok in the digital area I think.

[Snoopy]

Snoops

I think you will find that Heartland’s equity in Harmoney is treated as an Investment in Equities and that equity as such is ‘valued’ each year with any change in that value going through Income Statement.

Heartland don’t pick up their ‘share of Harmoney’s profit’ in their accounts. They do not equity account Harmoney’s earnings.

The lending done through Harmoney is done in Heartland’s name (just like others using the platform) and it is those loans that Heartland shows in their books. Harmoney is just a shopfront Heartland use.

I admit I haven’t delved too deeply into Heartland’s account to say that’s how it’s done but it appears so but willing to stand corrected if this is a load of the proverbial.


This is what I have previously mused about the relationship between Heartland and Harmoney.



Heartland own just 13.1% of Harmoney. But 'ownership' and 'providing capital with which to make loans' are two different things, And I think Heartland do both of those things for Harmoney.


I think you have just said you agree with that statement at least Winner. But here is where my thinking on Harmoney has become a little confused.

When Harmoney was a 'peer to peer' lender, there was a very clear division between one set of customers supplying loan capital, another set of customers taking borrowing capital and Harmoney clipping the ticket for bringing the parties together and administrating the loans. Now the retail customers supplying loan capital have been discarded, but the retail 'borrowing' customers are still there. Big players, the likes of Heartland, have replaced retail customers as the supplier of loan capital. So as part owners of Harmoney, Heartland are supplying loan capital AND clipping their own loan ticket. When Heartland talk about 'Harmoney & Other Consumer Loans' they are talking about the former conduit of income, not the latter. I would argue it is misleading to report like this, just like it would be misleading to label 'Motor Vehicle Finance' as 'Kia & other Motor Vehicle Finance'. Because although Kia might now be Heartland's biggest motor vehicle loan customer, the Kia loans are in essence no different to other motor vehicle loans. Likewise from a 'Consumer Loan' perspective, there is nothing to distinguish a Harmoney consumer loan from any other consumer loan as far as Heartland is concerned from an operational perspective. 'Harmoney & Other Consumer Loans' should just be called 'Consumer Loans' and that simple 'switch of label' would make the accounts much easier to understand.

The actual Heartland earnings from the Harmoney entity, resulting from Heartland's 13.1% equity stake, are in fact hidden in Note 11 of the annual accounts for FY2020. Note 11 is labelled 'Investments' and a sub-category of that is labelled 'equity investments'. Heartland's 13.1% Harmoney sake is part of this $16.335m 'equity investment' total. We are further referred on to Note 20 for a description as to how this equity is treated:

"Fair value for details of the split between investments measured at fair value through profit or loss, fair value through other comprehensive income and amortised cost."

From Note 20 we learn

"The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair value using other valuation techniques."

Harmoney is not a listed entity as I write this. So it is the last sentence in the quote above that applies. Further on in Note 20 we learn that in valuing such assets Heartland use:

"Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs)."

It sounds to me on this basis that Heartland are able to make up the value of Harmoney on their books to be whatever they like, by choosing whatever 'unobservable inputs' they deem fit

"Investments in unlisted equity securities are classified as being fair valued through profit or loss and are valued under Level 3 of the fair value hierarchy, with the fair value being based on unobservable inputs."

No more explanation is given. But I am imagining that the unobservable inputs that cause an annual change in the value of the Harmoney stake are taken into the Heartland statement of Comprehensive income 'somewhere' but are not labelled as anything to do with Harmoney in the Heartland accounts. Is that how you see it working Winner?

SNOOPY

[Norwest]

Capital Adequacy and Risk
From each banks latest public reports (Basel III)


Date

Bank
CET1 %
Tier1 %
Total %

YoY Ratio Growth/Decline



12/08/2020
CBA
11.6
13.9
17.4
Positive


19/08/2020
ANZ
11.1
12.9
15.8
Positive


18/08/2020
WBC
10.8
12.86
15.99
Positive


31/03/2020
NAB
10.39
11.96
14.61
Negative


20/06/2020
HGH
12.67
12.67
12.67
Negative



I used the ASX parent companies for the above comparisons vs. HGH, these are all from the own banks most recent disclosure statements

Heartland quoted Tier 2 capital as zero in the past two years disclosures, this is where the discrepancies above are between the big four and Heartland.

Heartland specifically call out in page 64 of their latest disclosure statement that they may need to look at Tier 2 capital, or capital raising to meet the new 16% capital adequacy framework in the far distant future.



Bank

Credit Rating
(Fitch)
Current PE
(Yahoo)

Current Yield %
(Yahoo)

Pre-Covid19 Yield%
(SimplyWallSt)


CBA
AA-
12.17
3.04
6.4


ANZ
AA-
11.53
2.93
7.9


WBC
AA-
12.25
0
7.5


NAB
AA-
15.01
6.54
7.5


HGH
BBB
9.14
8.73
9



One thing that makes heartlands yield even more attractive is that the dividend is currently fully imputed, vs. the Australian banks which have historically only had small imputation credits attached.

Fun Fact: More MP's in Parliament own HGH shares than any other publicly traded company.

I'm not trying to fear monger, and I don't think anyone owning this stock should lose any sleep about owning it at present, just trying to add some balance to the discussion. Personally I believe HGH is significantly higher risk than CBA and quite a lot higher risk than WBC or ANZ.

I totally agree with comments from multiple people around higher risk vs. higher rewards for HGH.

[Beagle]

I added a few more today at $1.27 cum the 2.5 cent final divvy, fully imputed as always. I don't see it as any riskier than any of the Australian banks and the lack of any meaningful, (almost nothing or nothing at all) imputation credits from the Aussie banks means Kiwi's are ostensibly being taxed twice on the income the bank makes, (company pays tax in Australia at 30% and you pay it as well on the dividends often at 33% for many taxpayers). I'm not a big fan of double taxation as there's not much of a meal left after both the Australian and N.Z. Govt have both taken a big bite of the pie.

[peat]

I'm not a big fan of double taxation
So droll if you dont mind me saying so

You'll love the GST on your property rates

[Cyclical]

So droll if you dont mind me saying so

You'll love the GST on your property rates

GST on top of fuel taxes is my personal favourite :-)

[Snoopy]

Rural finance

No change





It was good to see HGH's rural lending down 10% in their report. Unwinding of their low margin lending in this very cyclical sector makes good sense when the dairy payout is over $7.


Heartland's rural loans consist of two distinct parts. There are the:

1/ 'Rural Relationship Loans' where Heartland is involved in financing the whole farm, and
2/ 'Livestock Finance' where Heartland is financing the acquisition of animals for seasonal fattening up, with no security pledge over any other assets bar the animals themselves.

Heartland have had a policy of reducing '1' and expanding '2'. Given the relatively positive outlook for farmed commodities (bar wool), the the continued reduction in farm financing in NZ by the big four banks (under instruction form their Australian parents to reduce NZ farm exposure), I am slightly surprised the 'Rural Relationship Lending' policy at Heartland has not been reversed (just as Heartland are once again offering regular house mortgages to city folk).

Rural Relationship Loans were $535m on the FY2019 balance date (p15 AGM PR2019), down to ($535m -$22m =) $513m (p9 HYPR2020) at the half year point and further down to $490m - minus 8% for the year- ($535m - $45m= $490m) on the FY2020 balance date. Over FY2019 these loans only offered an averaged 6% ROE. So the reduction in profit after tax from these loan losses, based on the $45m gross loan value reduction (p9 FYPR2020) over the year would be:

0.06 x $45m = $2.7m

Livestock loans have been more profitable on an averaged 13% ROE But Livestock Receivables are unfortunately down as well from $122m at FY2019 year end (AGM PR2019 p15), to $109m (p9 HYPR2020) at the half year bouncing back up to $116m - but still down 5% for the year- ($122m - $6m = $116m) at EOFY2020. So the reduction in profit on livestock loans based on a $6m loan reduction (p9 FYPR2020) over the year is estimated to be:

0.13 x $6m = $0.8m

This downturn cannot be blamed on the weather or Covid-19 either, as the likes of 'PGG Wrightson' with their 'GoLivestock' finance program, increased the value of animals funded from $47.8m to $48.1m over the same comparative period.

As you can see from my 'quote bubble' above, I hadn't accounted for either of these earnings reductions in my previous modelling projections.

SNOOPY

[sb9]

https://www.interest.co.nz/banking/107134/heartland-bank-ceo-chris-flood-says-online-home-loan-trial-proved-popular-and-bank

Heartland Bank CEO Chris Flood says online home loan 'trial' proved popular and bank will relaunch offers once interest rates settle down

[nevchev]

Heading back to $120.strange with divie coming up?

[Cyclical]

Heading back to $120.strange with divie coming up?

Markets are generally taking a well deserved breather at the moment. Dow was down 500 points last night. Nothing to see here.