Post Covid-19 Liquidity for Heartland (Part 1)
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.
I want to reprise this topic, as it remains an operational risk for Heartland going into the future, albeit not a current one, The risk here is that Heartland will run out if money to pay their depositors back because of a mismatch in time between when a depositor wants their money back and when the lender , who the deposit money has passed through to, wants to pay it back. Heartland funding capital is approximately 75% term deposits from bank customers and 25% form various institutional bonds. These bonds at half year balance date are listed in order of maturity date.
Bond |
Amount |
Issue Date |
Repayment Date |
Two Year Unsubordinated Notes |
$A50m |
08-03-2019 |
08-5-2021 |
Medium Term Note (MTN) Debt Issuance |
$A100m |
13-11-2019 |
13-05-2022 |
Five Year Unsubordinated Notes |
$NZ150m |
21-11-2017 |
21-11-2022 |
Five Year Unsubordinated Notes |
$NZ125m |
12-04-2019 |
12-04-2024 |
Other Certificates of Deposits (1) |
$NZ69.811m |
??-??-???? |
??-??-???? |
Registered New Certificates of Deposits (1) |
$NZ20m |
16-03-2020 |
??-??-???? |
(1) Reported on 18th March market update.
Note that in contrast to previous years all Subordinated Notes and Bonds have been redeemed. Why is this important? Because a subordinated debt is an unsecured loan or bond that ranks below other, more senior loans or securities. That means in the event of a partial default, Heartland now only has to pay their unsubordinated back debt back ahead of most other creditors. I think that includes Heartland bank account depositors,
For those who have forgotten (I had) there is a particularly detailed summary of the Heartland Reverse Mortgage business from pages 15 to 33 in this Heartland Presentation.
http://nzx-prod-s7fsd7f98s.s3-websit...018/290747.pdf
On page 20 we learn that the weighted average length of a reverse mortgage turns out to be 6.1 years in Australia and 7.1 years in New Zealand. These are average figures at the discretion of the house owners, and it is the owners who decide when a reverse mortgage contact is terminated, not Heartland. Reverse mortgages are terrible for liquidity because Heartland has to stump up cash now, with no interest income or capital repayments to be collected until the reverse mortgage contract is terminated. The Heartland bond program is =time wise= out of step with the average repayment schedule for Reverse Mortgages However Jeff can patch up any holes in the mismatch by inducing NZ small scale depositors to put money into Heartland Bank accounts. All that is fine as long as depositors retain confidence in the bank. Confidence, however, can be fickle in tough times. IMO retaining the BBB credit rating, which Heartland has done, is crucial in maintaining customer confidence. Well done Jeff - so far! Where are those longer dated wholesale bond investors you were going to obtain for us though?
How worried am I about the liquidity mismatch at Heartland? I have to say that:
1/ I am not too worried, BUT
2/ I am also aware that he liquidity risk right now is way way higher than it ever has been over the whole existence of Heartland.
SNOOPY
Post Covid-19 Liquidity for Heartland (Part 2)
Quote:
Originally Posted by
Snoopy
How worried am I about the liquidity mismatch at Heartland? I have to say that:
1/ I am not too worried, BUT
2/ I am also aware that he liquidity risk right now is way way higher than it ever has been over the whole existence of Heartland.
I went to bed last night and woke up worried. So time to do a bit more work on this liquidity question. Looking just at the year ahead, from an EOFY2019 perspective, I have taken the contracted loan maturities from Heartland Group Holdings ( AR2019 p43 )and subtracted from that the equivalent figures for subsidiary Heartland Bank ( Heartland Bank Disclosure statement for June 2019 p64 ). The difference, of course, represents largely the Heartland Reverse Mortgage business in Australia.
Loan Maturity |
HGH FY2019 Financial Receivables Maturity: Contracted |
less HBL FY2019 Financial Receivables Maturity: Contracted |
equals Heartland Australia FY2019 Financial Receivables Maturity: Contracted |
On Demand |
$80.584m |
$45.228m |
$35.356m |
0-6 months |
$1,020.160m |
$1,003.319m |
$16.841m |
6-12 months |
$646.123m |
$618.563m |
$27.560m |
Deposit Maturity |
HGH FY2019 Financial Liabilities Maturity: Contracted |
less HBL FY2019 Financial Liabilites Maturity: Contracted |
equals Heartland Australia FY2019 Financial Liabilities Maturity: Contracted |
On Demand |
$895.290m |
$898.292m |
($3.002m) |
0-6 months |
$1,531.594m |
$1,512.358m |
$19.236m |
6-12 months |
$620.836m |
$611.382m |
$9.454m |
Loan-Deposit Maturity |
|
|
Loan-Deposit difference is Heartland Australia FY2019 Financial Receivables - Liabilities: Summation |
On Demand |
|
|
$38.358m |
0-6 months |
|
|
($2.395m) |
6-12 months |
|
|
$18.106m |
So what does this table mean?
The loan maturity is ostensibly the money that is coming in, and the deposit figure is the wholesale loan supporting the Reverse Mortgage that has to be repaid. When the difference figure between loans and deposits becomes negative Heartland Australia has a problem. Because that means there isn't enough money coming in to pay the depositors back. The 0-6 month period in the tables represents the time period starting 1st July 2019 and finishing 31st December 2019. Heartland obviously survived this negative difference period, because they are still trading. I imagine some small change from Heartland Bank (it was only a $2.350m deficit after all) must have been shuffled off to Australia to meet the contractual shortfall. But this was pre-Covid. And right now the NZ Government has legislated that 'dividends' from NZ banks have been ordered not to be paid. So what would have happened if this shortfall had occurred within the current 1st January 2020 and 30th June 2020 time frame? I think Heartland Australia, and by extension Heartland Group Holdings could have been in trouble. With Heartland Australia now 'out on a limb' seemingly cut off from Heartland Bank funding, I think the monitoring of the liquidity of Heartland Australia is something that we shareholders will now have to watch closely.
SNOOPY
Heartland Profit Forecast: FY2021 & FY2022 (Scenario 2)
Quote:
Originally Posted by
Snoopy
Let me reprise what assumptions I have built into my own valuation modelling for Heartland (under Scenario 1)
1/ Reverse Mortgage market flat.
2/ A 45% reduction in New Vehicle funding, coupled with no reduction in used vehicle funding. A lot of that is due to the end of Holden, which was by far the largest new vehicle funding partner for Heartland.
3/ The effective closing down of O4B small business funding for three months (because O4B can't compete with 0% interest rate loans from the IRD) with O4B recovering to 90% of base level after that.
4/ 'Business Intermediated' loans will likewise shrink by 10%.
5/ Business Relationship loans will decline by 16% for two years, because Heartland indicated pre-Covid they were wanting to wind back this side of the business.
6/ Rural earnings steady.
7/ The collapse of Harmoney, the unsecured consumer loan lender, in about a year's time.
I have been thinking about alternative future earnings paths, and have decided to re-run my earnings model using different input parameters. I am not withdrawing what I have retrospectively labelled as 'Scenario 1'. I am just putting an alternative view forward, acknowledging that alternative future profit paths are possible. Rather than repeat previous workings that do not change, I will report in detail only on the changes I am making.
Reverse Mortgages
I have used FY2019 as a base level of business. However the reverse mortgage business has continued to grow over HY2020 (Australian +9.5% to $887m, New Zealand +4.9% to $536m => Whole portfolio now $1,423). I am going to assume zero growth for the second half of FY2020. Consequently I intend to use these half year figures to create a new base level of activity. Furthermore I intend to model the whole reverse mortgage portfolio showing incremental gains of 2.5% over both FY2021 ( $1,423m x 1.025 = $1,459m) and FY2022 ( $1,459m x 1.025 = $1,495m), This means the incremental increase in turnover for our years of interest are:
FY2021: $1,459m - $1,319m = $140m
FY2022: $1,495m - $1,319m = $176m
We can now use the average ROE for Reverse Mortgages (Heartland AGM 2019 Presentation p15) of 13% to forecast the incremental earnings in our years of attention.
FY2021: $140m x 0.13 = +$18m
FY2022: $176m x 0.13 = +$23m
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. 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 = -$11m
Because I am modelling finance deals with a three year life, this annual loss compounds.
Business Finance
No change
Rural finance
No change
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.
|
FY2021 |
FY2022 |
Baseline Reference Profit |
$74.5m |
$74.5m |
Reverse Mortgage Adjustment |
$18m |
$23m |
Motor Vehicle Finance Adjustment (New) |
($11.4m) |
($17.1m) |
Motor Vehicle Finance Adjustment (Used) |
($11.0m) |
($22m) |
Business Finance (Part 1) Adjustment |
($5.3m) |
($2.1m) |
Business Finance (Part 2) Adjustment |
($15.5m) |
($15.5m) |
Rural Finance Adjustment |
$0m |
$0m |
Harmoney and Other Consumer Lending Adjustment |
($3.6m) |
($3.6m) |
Total Forecast NPAT |
$45.7m |
$37.2m |
No. Shares on Issue |
581.0m |
581.0m |
Earnings Per Share |
7.9cps |
6.4cps |
SNOOPY