Post Covid-19 Capital Adequacy for Heartland
Quote:
Originally Posted by
Beagle
For what its worth Snoopy, Westpac initial provisioning was 2.5% of market cap so on an adjusted basis that suggests ~ $17m for HGH.
As you suggest they have very different business models but I would suggest whatever level of specific and general provisioning banks bring to account in their books is nothing better than a very wild guess anyway as everyone is effectively just throwing darts at a dartboard while blindfolded as we're in unchartered waters and nobody has a playbook for this thing or how its going to affect their customers.
Concentrate of the level of their capital adequacy and liquidity, those are the more reliable indicators we have, right at the moment.
You are right to bring into the spotlight, the capital position of Heartland at this time Beagle. Here is what Heartland said about capital inflows with their 18th March 2020 announcement. I am not aware of this position being updated since.
"Heartland continues to forecast a result in line with the original NPAT forecast in the range of $77 million to $80 million, and expects that a result in the middle of that range is likely. (i.e. $78.5m)"
Now, so far in FY2020 there have been two dividends:
1/ On 06/09/2019 a 6.5cps dividend was declared for a total payment of $37.007m, of which $11.296m was clawed back via the dividend re-investemt scheme. That adds up to a net dividend payment of $37.007m - $11.296m = $25.711m. The DRP increased the number of shares on issue to 576,651,228
2/ On 11/03/2020 a 4.5cps dividend was declared. of $25.950m of which $5.600m was clawed back That adds up to a net dividend payment of $25.950m-$5.600m= $20,350m. The share DRP increased the number of shares on issue by 3,511,020 to 580,162,248.
This means the net increase in shareholder capital over FY2020 is therefore projected to be: $78.5m - $20.350m - $25.711m = $32.439m
Now how much capital is likely to be written off over FY2020?
The new ECL (Expected Credit Loss) method for provisioning, under IFRS9, is more conservative than the old standard it replaced. As of EOFY2018, the previous allowance from the older standard was increased by nearly $28m. Although the finance industry grizzled about this at the time, with Covid-19 emerging the increased provisions now seem prescient.
I have a big concern around small business debt. Small businesses are Heartland's customers. But the government has issued Heartland a big 'get out of jail free' card with the no interest IRD loan scheme. Jeff will no doubt be encouraging any knife edge loans that Heartland has on its books right now, to change to the IRD scheme asap! So I am picking the new ECL loan provisions on the books right now will cover any business debt write-downs.
Moving onto the motor vehicle portfolio, I have concerns on the lease deal residual values of the soon to be dead Holden marque. Now, over three years, lets say the Holdem loan book totals $225m. Let's say Heartland take a one off hit on the difference between the booked retained value (40%) and the actual retained value (maybe as low as 35%). This difference would result in a 'capital write down' of:
0.05 x $225m = $11m
Rural loans I am picking will be Okay, as Heartland continue their orderly wind back from relationship loans to more profitable seasonal lending.
Reverse Mortgages tend to be less highly geared than conventional mortgages. So I don't see any capital write downs here, even if house prices drop 10% overnight.
Harmoney must be a real concern with lots of unsecured lending to hapless consumers But the main downside to Harmoney, I believe, is to the downstream business that Heartland operates for Harmoney. IOW the wholesale money advanced by Heartland to Harmoney. This working capital, in the shadow of a probable default, should be largely protected by Senior Debt loan agreements. OTOH, what would be lost is any equity that Heartland has in Harmoney itself, about $5m as I have previously estimated.
This means the likely extra one off provisioning I am expecting from Heartland in FY2020 is a total of $16m.
The retained capital verses write-down situation looks more than manageable, and it will be boosted by the very likely non payment of any dividend in September. With all this in mind I am prepared to make a bold call. 'There will be no capital raising done by Heartland for the rest of this calendar year' Remember, you read it here first!
SNOOPY