During FY2016 'Heartland New Zealand Limited' and 'Heartland Bank Limited' combined into a single listed entity.
Heartland in their breakdown of the 'Asset Quality of Financial Receivables' (AR2016 Note 19a) list the following three mutually exclusive problem loan categories.
a/ Loans at least 90 days past due.
b/ Loans individually impaired.
c/ Restructured assets.
these loans are partially written off, and accounted for in the 'Provision for Impairment' (a separate listing category, d/).
My definition of a Heartland 'stressed loan' total can be calculated as follows:
'Stressed Loan Total' = (a)+(b)+(c)-(d)
The column (W) lists the actual dollar amount in bad debts written off over that period, as detailed in AR2016 note 19e.
Heartland |
Date |
'Stressed' Loans on the books (X) |
Net Financial Receivables (Impairments deducted) (Y) |
(X)/(Y) |
Write Offs (W) |
Gross Financial Receivables (Z) |
(W)/(Z) |
EOHY2012 |
$87.728m |
$2,075.211m |
4.23% |
$12.138m+$1.685m |
$2,104.591m |
0.66% |
EOFY2012 |
$90.489m |
$2,078.276m |
4.35% |
$14.636m+$3.180m |
$2,105.702m |
0.85% |
EOFY2013 |
$48.975m |
$2,010.393m |
2.43% |
$6.679m+$1.961m |
$2,060.867m |
0.42% |
EOFY2014 |
$41.354m |
$2,607.393m |
1.59% |
$35.258m+$3.260m |
$2,631.754m |
1.46% |
EOFY2015 |
$39.066m |
$2,862.070m |
1.36% |
$1.555m+$1.910m |
$2,893.704m |
0.12% |
EOFY2016 |
$37.851m |
$3,113.957m |
1.21% |
$12.010m+$6.653m |
$3,135.203m |
0.60% |
The objective here is to take the Heartland figures and compare those to the equivalent figures for UDC. There are little differences in reporting standards that make this difficult.
For example, Heartland have a class of loans called 'Judgement Loans'. They pass annual judgement on these loans by rating them on a scale of 1 to 9 plus 'default'.
There is a second broad category called 'Behavioural Loans' which are separately rated, not using a 1-9 scale.
UDC appear to rate all of their loans on a scale of 1 to 8 plus default (UDC Financial Statements 2016, note 11d). I have previously defined UDC 'Vulnerable Loans' as classes 6,7 and 8. But category 6 is very large. So I am now going to change my comparative and talk about 'Stressed Loans' which are calculated by:
Take loan total from categories 7 and 8
add 'Default' loans
less Provision for Credit Impairment.
I have redefined the 'Total Financial Assets' as listed in note 11d to be 'Net Financial Receivables'. I feel it is misleading because the previously defined total if 'Provision for Credit Impairment' has already been taken off the total.
UDC |
Date |
'Stressed' Loans on the books (X) |
Net Financial Receivables (Impairments deducted) (Y) |
(X)/(Y) |
Impaired Asset Expense (W) |
Gross Financial Receivables (Z) |
(W)/(Z) |
EOFY2011 |
$126.218m |
$2,007.012m |
6.29% |
$15.103m |
$2,049.504m |
0.74% |
EOFY2012 |
$96.670m |
$2,102.299m |
4.60% |
$10.164m |
$2,141.780m |
0.47% |
EOFY2013 |
$86.877m |
$2,161.193m |
4.02% |
$12.399m |
$2,198.653m |
0.56% |
EOFY2014 |
$95.364m |
$2,344.131m |
4.07% |
$18.633m |
$2,375.936m |
0.78% |
EOFY2015 |
$82.267m |
$2,429.695m |
3.39% |
$12.162m |
$2,461.224m |
0.49% |
EOFY2016 |
$85.475m |
$2,655.841m |
3.22% |
$11.055m |
$2,684.750m |
0.41% |
The key point to note here is that the
'impaired loan expense' / 'write offs' (represented by letter 'W' in each case) only occur:
1/ when that portion of the loan has gone through the whole loan review system and is 'done and dusted'. AND
2/ when a loan repayment has been missed, or a non payment is imminent
OTOH
'Stressed Loans' are very much a judgement call by management.
They may
1/ recover,
2/ stay stressed or
3/ have to be impaired, or worse, written off.
As a shareholder in either ANZ or Heartland, I would hope that management would have a robust process that identifies problem loans before they have to be written off. So as a shareholder I would hope such loans were seen as 'stressed' before an actual write off was declared. So how to check that this is what happens in reality? One way is to look at the 'stressed loans' for both companies on an annual trending basis and see how this compares with the equivalent trend in write offs.
In the case of both UDC and Heartland, the normalised stressed loan percentage is consistently going down. However, the actual write offs per year are not going down in proportion. One interpretation of this is that both companies are assuming a lower number of loan write offs will be necessary in the future (because stressed loans are reducing). However, because this is not happening, this could suggest that both companies are pumping their declared results by making insufficient stressed asset provisioning for the future.
Alternatively it could mean that both companies are getting much better at identifying what are really stressed loans, and that allows them to have relatively lower stressed asset monitoring.