Banks
For how long can HBL keep their RATES THIS HIGH??? it seems pretty ridiculous relative to other banks.
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Banks
For how long can HBL keep their RATES THIS HIGH??? it seems pretty ridiculous relative to other banks.
To complete my six monthly analysis, I am going back a year before the latest half year reporting period.
Updating these risk calculations based on the 31st December 2014 reporting date, using figures found here.
http://<br /> http://www.heartland.c...ment.pdf<br />
Our test requirement is:
Highest single new customer group exposure (as a percentage of shareholder funds) <10%
Regional Risk
From reference Note 15b, the greatest regional area of credit risk in dollar terms is Auckland, with $712.797m worth of assets. This represents:
$712.797m/ $2,471.156m = 29% of loans
This was five percentage points higher than HY2016! But I don’t rate that concentration of loans in Auckland as being an issue. Particularly so when ‘Auckland’ is such a varied catch all group.
The historical comparison point, FY2014, had Auckland loans at 25% of the total.
Industry Group Risk
From reference Note 15c, the greatest 'business group' risk in dollar terms is Agriculture, with $508.655m worth of assets. This represents:
$508.655m/ $2,471.156m = 21% of all loans
This was significantly up on HY2016, when agriculture was
$570.735m/ $3,237.047m = 18% of all loans
This HY2015 figure was above my 20% hurdle (just as well i didn't do this calculation in period!). Subsequently the Agricultural loan percentage fell. Now it is coming back to concerning levels.
The historical prior period comparison point FY2014, showed agriculture making up 16% of all loans.
Now a word on Asset Loan Quality.
In the half year result, ther is no breakdown of the 'judgement loan' category of lending. Judgement loans consist of business an rural lending, the latter in particular of interest in this climate of dairy industry turmoil. This means that accounting provisions on dairy loans are largely hidden in these half year accounts.
Loans that appear on the balance sheet, they are netted off against provisions for impaired assets already made. The provision for collectively impaired assets was $19.329m, up from $12.029m, at HY2016 balance date . This has risen largely because new provisions have exceeded actual write offs over the last six months.
The $1.401m ‘fair value adjustment for present value of future losses’ at EOHY2015, is slightly reduced compared to the $1.707m at EOFY2014. This provision relates to the Home Equity Release Loans acquired in FY2014. I believe this provision is a requirement of accounting standards and in the past has overestimated actual losses. So is this an indicator of HBL writing net less home equity release business going forwards? IOW their home equity release portfolio is unwinding as it shrinks, in real terms?
SNOOPY
I have run my ruler over the available historical data on the size of the rural loan portfolio relative to the size of the total loan book (with provisions on total loans already deducted.)
Snapshot Time Rural Loans (A) Total Loans (B) (A)/(B) EOFY2012 $530.440m $2,197.494m 24% EOFY2013 $499.942m $2,557.796m 20% EOHY2014 $462.564m $2,344.661m 20% EOFY2014 $469.020m $2,891.597m 16% EOHY2015 $508.655m $2,471.156m 21% EOFY2015 $537.286m $3,234.025m 17% EOHY2016 $570.735m $3,237.047m 18%
Total dairy exposure was declared to be $218m at EOFY2015, 40.6% of rural exposure (p20 full year result presentation).
You can see that at last reporting date rural loans were at an all time high, in gross terms. Yet in proportional terms they are not. I am wondering if some investors are overconcerned about the size of the rural loan book. One way to mitigate the 'rural loan risk' is to boost business in other areas. This means that whatever happens in rural will have a lesser effect on the Heartalnd business as a whole.
As an example, look at the comparison between the end of periods HY2015 and FY2015. Mostly it was a very significant increase in finance and insurance business, not related to Agriculture, that caused the Agricultural portfolio risk to fall.
SNOOPY
A bank requires a certain amount of 'tier capital', which in the case of Heartland is mostly derived from shareholder equity, to operate in a stable way 'day to day'. The legal minimum requirement is set by our Reserve Bank. But generally a "graded bank" doesn't work right down to the fine line of this reserve bank minimum requirement. This subject has been discussed often on this thread. Depending on what amount of equity an investor sees as 'acceptable', determines the answer that investor sees as acceptable.
Most investors will be satisfied with at least one of the answers below:
(1)/ 10.5%: This is the reserve bank minimum requirement of 8% for the 'total capital ratio' of the banking group, plus an obligatory 2.5% 'buffer margin'.
(2)/ 14%: This is the typical figure that Heartland has actually maintained over the last few periods.
(3)/ 17%: This is the figure chosen by Heartland managment when they were setting the size of the capital raising needed to make the Seniors acquisition in FY2014
(4)/ 20%: This is the figure that the banks set for PGGW Finance that was subsequently absorbed into Heartland, before it was sold by its former parent PGG Wrightson. PGW was in some financial distress when it made this sale. But the PGG Finance subsidiary was in no distress, enjoying good support from both borrowers and lenders post GFC.
My own minimum equity requirement falls under heading "(4)". Being the strictest criterion, investors happy with this will automatically be happy with all the other standards (1)-(3). Over the years I seem to have got into different robust arguments with investors who are satisfied with (1), (2) or (3).
Heartland has not managed to meet this standard (4) throughout its existance so far. This is one reason why I have never joined the share register. However, it usually takes more than one "measuring stick" to see if an investment case stacks up.
If, for example, Heartland is consistently more profitable than other banks
then I might consider a standard less than (4) satisfactory, even if it fails my investment criterion (4) above.
Effectively what I am saying here, is that a higher profit margin could justify a greater risk. But how high would such a profit margin have to be? This is a question I have not answer for myself (yet).
SNOOPY
Snapshot Time Rural Loans (A) Total Loans (B) (A)/(B) (B) for ? EOFY2012 $530.440m $2,197.494m 24% Bank Only EOFY2013 $499.942m $2,557.796m 20% All Group EOHY2014 $462.564m $2,344.661m 20% Bank Only EOFY2014 $492.020m $2,891.597m 16% All Group EOHY2015 $508.655m $2,471.156m 21% Bank Only EOFY2015 $537.286m $3,234.025m 17% All Group EOHY2016 $570.735m $3,237.047m 18% Amalgam
I have added an extra column (B) for ? to identify for which part of the Heartland Empire you numbers relate to.
The new 'Amalgam' Heartland Bank numbers are equivalent to the previous All [of] Group numbers (that you read from the Group FY statements] but your Bank Only numbers [which came from the Bank disclosure statements] are a sub-set of the 'All Group', most of the HER stuff being the major difference.
Best Wishes
Paper Tiger