Tier 1 and Tier 2 Lending covenants HY2017 (Period Ended 31/12/2016)
Quote:
Originally Posted by
Snoopy
Tier 1 or Tier 2 capital adequacy is noted under section 19A (Capital Ratios) in the Heartland HY2016 report.
$2,928.621m of loans are outstanding. 20% of that figure is:
0.2 x $2,928.621m = $585.7m
Heartland has total equity of $485.688m. But from note 19A, only $427.084m is Tier 1 capital. The difference is because intangible assets, deferred tax assets, hedging reserve effects and defined benefit superannuation fund assets on the books must be adjusted for.
On top of the Tier 1 assets, there is a subordinated bond of $1.455m
Nevertheless, however the total tier capital is added together, it is still below the "20% of loan" target no matter what the tier classification of capital buffering any potential problems with the loans.
Result: FAIL TEST
PS I do note that while other posters have protested at my 20% of equity to back up the loan measuring stick in the past, it is not too far away from the 17% which by implication is judged acceptable by management under the watchful eye of Reserve Bank chairman Graeme Wheeler.
Using current period Tier 1 capital and loan book figures:
$427.084m/$2,928.621m = 14.6%
So it seems Heartland's position has deteriorated significantly, compared to when it qualified as a bank.
The reserve bank further qualifies their views that a company of Heartlands credit rating still has a 1 in 30 chance of going broke in any year. I prefer to think in business cycles and 30 years will contain around five of those. So you could restate the Reserve Bank's view as saying that HNZ has a one in five chance of going broke at the bottom of the business cycle. For me that investment risk is too high. So I am sticking to my 20% equity requirement, even if the Reserve Bank will settle for less.
Note that in comparison to last year, I have revised my standard so that Heartland should carry 17% of sharehiolder equity in relation to the value of its loan book. This change of standard is in recognition of Heartland now being able to be thought of as a 'middle tier' finance player, insyead the smaller rather more risky player that it started out as.
Tier 1 or Tier 2 capital adequacy is noted under section 19A (Capital Ratios) in the Heartland HY2017 report.
$3,334.800m of loans are outstanding. 17% of that figure is:
0.17 x $3,334.800m = $575.4m
Heartland has total equity of $528.002m. But from note 18A, only $457.631m is Tier 1 capital. The difference is because intangible assets, deferred tax assets, hedging reserve effects and defined benefit superannuation fund assets on the books must be adjusted for.
On top of the Tier 1 assets, there is Tier 2 Capital: a subordinated bond of $0.970m, offset by a $2.095m 'Foreign Currency Translation Reserve' adjustment. Somewhat bizarrely, this results in a negative Tier 2 equity balance of $1,125m being declared on the books.
Nevertheless, however the total tier capital is added together, it is still below my "17% of loan" target no matter what the tier classification of capital buffering any potential problems with the loans.
Result: FAIL TEST
Note: Post balance date, Heartland has raised an additional $20m capital from shareholders which will go some way to fixing this issue. If the loan book has not enlarged further since balance date, this would result in a loan book to total equity ratio of:
($528.002m + $20m) / $3,334.800m =16.4%
This brings the 'Total Tier Capital' to loan book ratio back to the level it was at FY2016 balance date (30/06/2016). If this is the level of capital that Heartland are comfortable with and the loan book continues to grow, then logic would suggest further capital raising initiatives could be required by Heartland in the near future.
In fact, a new offer of approximately A$15m of Tier 2 regulatory capital to wholesale investors in Australia, has already been signalled in p13 of the half year results presentation.
SNOOPY
Bad credit people are usually declined by Banks and major finance companies.
Quote:
Originally Posted by
kiwico
Some of the discussion on this thread is about how much of a bank HBL is. The RBNZ has HBL as a registered bank and so HBL is subject to different regulation than a Non Bank Deposit Taker. But HBL was born out of NBDTs (finance companies, building societies, credit unions and the like) so is it still run as one?.
Secondhand car retailers like
this bunch promote finance for those with bad credit and beneficiaries and bankrupts, with HBL one of two the lenders listed on their
finance page.
Being involved with activities and customers like this to me places HBL more in the NBDT / finance company area even if they are registered bank (the duck test again).
I hold but only as a small part of my portfolio because we know what happened to finance companies and the like the last time the economy slowed down. :(
Yes many lost skin in the finance company collapses but I am sure you will have noted that car dealers like that have a wide range of finance companies with whom they work.
I note Geneva finance are one of the companies they use and I think you will find that people with bad and poor credit records are referred to one of the, (putting this as kindly as I can), third or fourth tier lenders.
Iceman - Mate I can't see any issues but I am sure the other hound will find something to pontificate about at quite some length and "intrigue" us with.
Liquidity Buffer Ratio aka 'Meads Test' FY2016
Quote:
Originally Posted by
Snoopy
The following information for FY2016 is derived from note 20 in AR2016 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 dervied from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.
Loan Maturity |
Expected Behaviour Multiple |
FY2016 Financial Receivables Maturity: Contracted/ Expected |
On Demand |
100% |
$84.154m / $84.154m |
0-6 months |
132% |
$743.389m / $961.274m |
6-12 months |
132% |
$484.420m / $639.962m |
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 |
FY2016 Financial Liabilities Maturity: Contracted/ Expected |
On Demand |
3.01% |
$718.587m / $21.630m |
0-6 months |
32.4% |
$892.944m / $289.314m |
6-12 months |
36.4% |
$837.844m / $304.975m |
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.
Deposit Maturity |
FY2016: 'Expected' combined Loan and Deposit Cashflow |
On Demand |
$62.524m |
0-6 months |
$691.960m |
6-12 months |
$334.987m |
Total |
$1,089.471m |
Time to update the "Liquidity Buffer ratio" for FY2016.
When dear old Colin told us all those years ago that a certain finance company was 'solid as' with reference to investing debenture money, the end result was that this cash became tied up in illiquid property developments. So although the company had enough money to pay out their debenture holders 'on paper' and appeared to be operating profitably, the debenture holders could not get their cash back. The 'Meads Test' (as christened by Snoopy) is one method of finding out if a finance sector company really is 'solid as'. The basic date I need to check this out has already been calculated (see above). So let's get going.
To check out the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:
(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%
On the numerator of the equation, we have borrowings.
HNZ BORROWINGS
1/ Term deposits lodged with Heartland. |
$2,282.876m |
2/ Bank Borrowings |
$429.304m |
3/ Securitized Borrowings total |
$284.429m |
4/ Subordinated Bonds |
$3.378m |
Total Borrowings of (see note 13) |
$2,999.987m |
Note 13 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.
Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are, I believe, in relation to the Australian part of the 'Seniors Reverse Mortgage Portfolio'. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These CBA loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. Heartland can’t rely on CBA Australia as a source of short-term funds.
The information given in note 13 on the securitized borrowing facilities is as follows:
|
Total FY2016 |
Total FY2015 |
Facility Maturity Date FY2016 |
Securitized bank facilities total all in relation to the Heartland ABCP Trust 1 |
$350.000m |
$350.000m |
1st February 2017 (*) |
less Current level of drawings against this facility |
$284.429m |
$258.630m |
equals Borrowing Headroom |
$65.571m {A} |
$91.370m |
(*) I do not expect any problem in rolling this facility over for another year.
HNZ LENDINGS vs HNZ DEBENTURES
Customers owe HNZ 'Finance Receivables' of $3,113,957,000. There is no breakdown in AR2016 (note 11) as to what loans are current or longer terms. However, if we look at note 20, we can derive the expected maturity profile of total finance receivables due over the next twelve months.
|
On Demand |
0-6 Months |
6-12 Months |
Total |
Expected Receivables Due |
$84.154m |
+ $961.274m |
+ $639.962m |
= $1,685.390m |
less Expected Deposits for Repayment |
$21.630m |
+ $289.314m |
+ $304.975m |
= $615.919m |
equals Net Expected Cash Into Business |
$62.524m |
$671.960m |
$334.987m |
$1,069.471m {B} |
If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for debenture holder liquidity. That is the case here.
Summing up:
(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding)
= $65.571m / $1,069.471m
= 6.1% < 10%
=> Fail Short term liquidity test
On the surface this is an odd result. The expected cashflow outstanding is hugely positive, much greater than the pcp. So how can I fail Heartland on this liquidity test? One answer is that getting more net money in than in previous years could mean that Heartland might have difficulty applying that money into new loans.
|
FY2016 |
FY2015 |
Amount lent to Customers (Receivables) |
$3,113.957m (+8.8%) |
$2,862.070m |
Total Borrowings |
$2,999.987m (+6.2%) |
$2,825.245m |
Amount borrowed from Customers (Debentures and Deposits) |
$2,282.876m (+8.8%) |
$2,097.458m |
Securitized borrowing facilities have gone up by $25.799m over the same annual comparative period, while the $350m borrowing ceiling remains the same. So Heartland have upped their current period risk profile yet again by having a smaller declared available loan buffer to cover any mismatch between maturing borrowings and maturing receivables.
SNOOPY