The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.
The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.
1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities'.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.
Loan Maturity |
Expected Behaviour Multiple |
FY2014 Financial Receivables Maturity: Contracted/ Expected |
FY2015 Financial Receivables Maturity: Contracted/ Expected |
FY2016 Financial Receivables Maturity: Contracted/ Expected |
FY2017 Financial Receivables Maturity: Contracted/ Expected |
FY2018 Financial Receivables Maturity: Contracted/ Expected |
On Demand |
100% |
$50.254m / $50.254m |
$37.012m / $37.012m |
$84.154m / $84.154m |
$57.040m / $57.040m |
$49.588m / $49.588m |
0-6 months |
132% |
$477.190m / $629.445m |
$664.557m / $877.215m |
$743.389m / $961.274m |
$618.271m / $816.118m |
$609.268m / $804.234m |
6-12 months |
132% |
$367.564m / $483.727m |
$450.638m / $594.842m |
$484.420m / $639.962m |
$521.215m / $688.004m |
$469.632m / $619.914m |
Note that in the above table, a 'loan maturity' represents an expected
inflow of cash from a Heartland bank perspective.
Deposit Maturity |
Expected Behaviour Multiple |
FY2014 Financial Liabilities Maturity: Contracted/ Expected |
FY2015 Financial Liabilities Maturity: Contracted/ Expected |
FY2016 Financial Liabilities Maturity: Contracted/ Expected |
FY2017 Financial Liabilities Maturity: Contracted/ Expected |
FY2018 Financial Liabilities Maturity: Contracted/ Expected |
On Demand |
3.01% |
$629.125m / $18.922m |
$748.332m / $22.450m |
$718.587m / $21.630m |
$836.829m / $25.189m |
$924.072m / $27.815m |
0-6 months |
32.4% |
$748.129m / $242.431m |
$1,213.450m / $395.102m |
$892.944m / $289.314m |
$1,191.957m / $386.194m |
$1,345.316m / $435.882m |
6-12 months |
36.4% |
$538.050m / $195.682m |
$686.159m / $249.762m |
$837.844m / $304.975m |
$729.145m / $265.409m |
$572.731m / $208.474m |
Note that in the above table, a 'financial liability (debenture) maturity' represents an expected
outflow of cash from a Heartland bank perspective.
If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.
Loan-Deposit Maturity |
FY2014: 'Expected' combined Loan and Deposit Cashflow |
FY2015: 'Expected' combined Loan and Deposit Cashflow |
FY2016: 'Expected' combined Loan and Deposit Cashflow |
FY2017: 'Expected' combined Loan and Deposit Cashflow |
FY2018: 'Expected' combined Loan and Deposit Cashflow |
On Demand |
$31.332m |
$14.562m |
$62.524m |
$31.851m |
$21.765m |
0-6 months |
$387.014m |
$482.113m |
$691.960m |
$429.924m |
$368.352m |
6-12 months |
$288.045m |
$345.080m |
$334.987m |
$422.595m |
$411.440m |
Total |
$706.391m |
$841.755m |
$1,089.471m |
$884.370m |
$801.557m |
Once again lots of numbers here. Now there are five years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?
The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. The above table(s) are indicative of what might be expected to happen if Heartland management took a 'hands off the tiller' approach to cashflow management. Heartland management does not do this. Instead:
1/Heartland management is a frequent raiser of new capital. That boosts cashflow in.
2/ Heartland management can manipulate 'expected' behaviour of customers by offering higher interest rates for debenture depositors over time periods that cash is needed (for example).
So while the above tables will not be an accurate picture of what really happens to cashflow over the next twelve months, they are useful in hinting where deposit rates (a customer nudge factor) might be heading for 'current period' deposits.
A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.
If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.
The 'On Demand' net position outlook is the weakest since FY2015. This bodes well Heartland's 'on call' account holders who might expect the generous (with respect to finance industry peers) 'on call' rates to continue as a result.
The following current 'on call' rates, from institutions with comparable credit ratings, I have lifted from the 'interest.co.nz' website:
Heartland 'Direct Call' (no restriction) |
2.75% |
Co-Operative bank ($100,000 minimum) |
1.00% |
SBS bank ($100,000 minimum) |
1.00% |
UDC Finance ($100,000 minimum) |
1.00% |
However with Heartland now committed to raising a lot more wholesale funding in Australia post restructure and with 'cash' balances an expected source of long term funding (sounds ironic but it is true!) I wouldn't be surprised if Heartland call interest rates in New Zealand are reduced significantly over the next twelve months, back to the level of their peers. I doubt you shareholders who voted for the restructure realised you were voting for the end of your generous call account terms in New Zealand going forwards, but I am calling it. Remember you read it here first!
Expected cashflow for the 0-6 months is the weakest on record. Granted it is still significant in absolute terms. So once again we can expect Heartland's rates offered for six month term deposits to be toward the top end of their comparative peer group.
Heartland ($1,000 minimum) |
3.25% |
Co-Operative bank ($2,000 minimum) |
3.05% |
SBS bank ($5,000 minimum) |
3.25% |
UDC Finance ($5,000 minimum) |
3.35% |
And so it proves to be....