An Investment Story - Geneva/Turners/Heartland

[Snoopy]

	Provision for Impairment (A)	'Net Receivables' + 'Provision for Impairment' (B)	(A/B)
Heartland Bank FY2015	$25.412m	$2,887.482m	0.88%
Heartland Bank FY2016	$21.161m	$3,135.118m	0.68%
Heartland Bank FY2017	$25.865m	$3,571.762m	0.72%
Heartland Bank FY2018	$29.671m	$4,014.612m	0.74%
Heartland Group Holdings FY2019	$58.491m	$4,406.541m	1.33%
Turners Finance (Division) FY2015	$6.986m	$149.813m	4.7%
Turners Finance (Division) FY2016	$6.776m	$174.374m	3.9%
Turners Finance (Division) FY2017	$6.028m	$213,171m	2.8%
Turners Finance (Division) FY2018	$11.294m	$301.093m	3.8%
Turners Finance (Division) FY2019	$19.595m	$300.612m	6.5%
Geneva FY2015	$29.631m	$71.464m	41%
Geneva FY2016	$29.448m	$84.024m	35%
Geneva FY2017	$29.889m	$93.966m	32%
Geneva FY2018	$25.643m	$93.307m	27%
Geneva FY2019	$17.793m	$98.734m	18%

Notes:

1a/ For Heartland refer to note 19e in the Annual Report on Asset Quality. (AR2016)
1b/ IFRS9 adopted in FY2019 has resulted in a change to the way the 'provision for impairment' is measured. This is due to the adoption of the 'Expected Credit Loss' (ECL) model. For FY2018, this has resulted in an increase from the former $29.671m to $57.756m (details AR2109 p26). There is currently no fair value adjustment to the transaction price of the reverse mortgage portfolio. (AR2019 p32).
2/ For Turners refer to note 14 on Finance Receivables. (AR2016)
3a/ For Geneva refer to note 17 on Provision for Credit impairment (AR2016)
3b/ Over FY2018 (in September 2017) the collective provision at Geneva was reduced by $4.708m due to the sale of impaired debt to 'Jade Financial Services' (unrelated to the Geneva group).
3c/ Over FY2019 (in April 2018) the collective provision at Geneva was reduced by $12.646m due to the sale of impaired debt to 'Desktop Management Limited' (unrelated to the Geneva group). The adoption of NZ IFRS 9, which includes a predictive model of assessing risk, has seen the impaired loan provision rise by $1.687m.

Note that NZIFRS 9, which was applied for the first time in FY2019, had the effect of significantly increasing the provision for impairment in FY2019 and subsequent years.

This is one way to inspect the quality of the 'financial receivables' asset book.

It is very evident that the 'expected' quality of loans of our three protagonists are very different from this table!

SNOOPY

[Snoopy]

	Impaired Asset Expense (A)	EBT + 'Impaired Asset Expense' (B)	(A/B)
Heartland Bank FY2015	$12,105m	$76.304m	+16%
Heartland Bank FY2016	$13.501m	$87.689m	+15%
Heartland Bank FY2017	$15.015m	$99.568m	+15%
Heartland Bank FY2018	$22.067m	$116.361m	+19%
Heartland Group Holdings FY2019	$20.676m	$120.253m	+17%
Turners Finance (Division) FY2015	$0.020+$0.207m= $0.227m	$6.394m(*)+$0.227m=$6.621m	+3.4%
Turners Finance (Division) FY2016	-$0.544m+$0.526m = -$0.018m	$12.071m(*)-$0.018m=$12.053m	-0.15%
Turners Finance (Division) FY2017	+$0.282m+$0.285m = +$0.567m	$12.527m(*)+$0.567m=$13.094m	+4.3%
Turners Finance (Division) FY2018	+$0.619m+$5.300m = +$5.919m	$14.672m(*)+$5.919m=$20.591m	+28.8%
Turners Finance (Division) FY2019	+$0.914m+$6.890m = +$7.804m	$12.635m(*)+$7.804m=$20.439m	+38.2%
Geneva FY2015	-$0.855m	$0.693m	-123%
Geneva FY2016	-$0.234m	$2.145m	-10.9%
Geneva FY2017	$0.351m	$4.166m	+8.4%
Geneva FY2018	$0.363m	$4.887m	+7.4%
Geneva FY2019	$1.697m	$6.947m	+24.4%

The aim of this exercise is to compare the quantum of 'impairment expense' with a measure of earnings (in this case EBT) before that 'impairment expense' was deducted.

(*) These Turners Finance Division EBT figures are not to be found in the annual report. I have used my own spreadsheet modelling to create these. As part of this process I have allocated head office costs between the various Turners Limited divisions. (added 01-09-2017: I have now further revised Turners Finance Earnings to include finance earnings diverted to the Automotive Retail segment as derived from Automotive Retail 'interest income')

Note that the 'Impaired Asset Expense' figures for Geneva for FY2015 and FY2016 were negative (as was Turners for FY2016) because there was an impaired asset release from all the previous provisioning in both years FY2015 and FY2016.

The impaired asset expense treatment looks very different between Heartland and Turners. In the case of Heartland, there is an annual impairment provision. This provision is then taken into the impaired asset account. Within the impaired asset account there is an annual 'write off' of bad loans. This means the annual write offs are not reflected directly in the annual accounts. The provisioning system is used by Heartland to massage extreme movements in the impaired asset account over several years. Contrast this approach with Turners Limited.

In the case of Turners, the full change in value of the impairment account is reflected in the annual result each year. Noteworthy is the observation that the actual impaired asset expense each year (Note 7, AR2016) is very low as a percentage of the overall loan book.

Geneva seems to follow the Turners example of bringing the total change in the value of the impairment provision account (Note 12, AR2016) into the profit and loss statement each year.

SNOOPY

[Beagle]

	Provision for Impairment (A)	'Net Receivables' + 'Provision for Impairment' (B)	(A/B)
Heartland Bank FY2015	$25.412m	$2,887.482m	0.88%
Heartland Bank FY2016	$21.161m	$3,135.118m	0.68%
Turners Finance (Division) FY2015	$6.986m	$149.813m	4.7%
Turners Finance (Division) FY2016	$6.776m	$174.374m	3.9%
Geneva FY2015	$29.631m	$71.464m	41%
Geneva FY2016	$29.448m	$84.024m	35%

This is one way to inspect the quality of the 'financial receivables' asset book.

It is very evident that the 'expected' quality of loans of our three protagonists are very different from this table!

SNOOPY

The long run provisioning estimates by Geneva finance have been notoriously inaccurate. That company has destroyed vast sums of shareholder wealth since its inception well over a decade ago and I remain unconvinced their business model has any merit whatsoever. I am also of the view that the auditing methodologies used by the auditors cannot be relied upon to determine the veracity of the provisioning assumptions underpinning Geneva's stated profit. Vast numbers of their customers would simply enter a no asset procedure to extinguish their debt if hard economic times hit again.
Please refer to post #7 above.

[Major von Tempsky]

Glad to see Geneva basically coming top! Now it can be updated for another year for Geneva with Geneva's latest results.

[Beagle]

One of there companies does not go with the others. Refer my posts in the Geneva thread. If you must compare them then based on their truly appalling track record of shareholder wealth destruction I think Geneva should trade on a PE of less than half the other two companies, (assuming you think Geneva have provided for bad and doubtful debts correctly and that they really are making a profit at all).

Glad to see Geneva basically coming top! Now it can be updated for another year for Geneva with Geneva's latest results.

Barge pole material, not to be trusted under ANY CIRCUMSTANCES, my opinion expressed above remains unchanged.

[Snoopy]

	Provision for Impairment (A)	'Net Receivables' + 'Provision for Impairment' (B)	(A/B)
Geneva FY2015	$29.631m	$71.464m	41%
Geneva FY2016	$29.448m	$84.024m	35%

The long run provisioning estimates by Geneva finance have been notoriously inaccurate.

It is very unusual for a company, in this case Geneva, to have such a large amount of provisioning in relation to their loan book size.

I am also of the view that the auditing methodologies used by the auditors cannot be relied upon to determine the veracity of the provisioning assumptions underpinning Geneva's stated profit. Vast numbers of their customers would simply enter a no asset procedure to extinguish their debt if hard economic times hit again.

I wonder if this is the explanation? Management know they are in a high risk area of the loan market. They know many of their loans will be unrecoverable in an economic downturn. So they are being extremely prudent in their approach to the loan book. Evidence of extremely good planning and foresight?

Mind you this same prudence could be used to manipulate profit. All Geneva need to do is to reclassify some of their 'provisions' as 'good loans', and this number immediately flows through to the bottom line. Geneva posted that the unaudited profit for FY2016 is up 61% on FY2015. But there is not enough detail on where this profit increase has come from to judge the result in my opinion.

"The profit growth was primarily attributable to the growth in interest income from the receivables ledger (which increased +17% on last year), the maintenance of interest yields, control of asset quality and the growth in revenues of our insurance operations where net premium income was 60% up on March 2016.”

'Control of Asset Quality' could simply mean writing back the value of previously impaired assets, that flows straight to the bottom line. Doing that might grossly distort the assumed operational performance if you just read the headline profit figure. But until the detail comes out, no-one knows what the real operational improvement performance for Geneva has been.

SNOOPY

[percy]

Bit like buying oats.
Oats that has been through the horse, comes a little cheaper.

[Beagle]

Snoopy...what Percy said sums it up perfectly. Talk more about it after the weekend if you want too but the guts of it is Geneva have played loose with their provisioning ever since their inception and have destroyed many millions of dollars of deposit holders, shareholders and unsecured capital note holders wealth.

I am not at all convinced their business model has any merit whatsoever.

[Major von Tempsky]

Geneva's results are prepared by chartered accountants and audited by chartered accountants and accepted by the NZX. If you think there is fraud involved you should complain to the Serious Fraud Office.

But you (Roger) won't, because you know your complaint won't be accepted or validated. And because you are much happier just continuing to whinge.

My portfolio on Direct Broking shows that I have made a 79.4% profit, unrealised, of $62,155.07 on Geneva Finance Ltd.

[Beagle]

FYI I did indeed complain to the Securities Commission who were the regulator at the time. Geneva were the subject of a long running investigation by them and I liaised with the lead investigator at some length. The lead investigator was extremely disappointed that SC didn't prosecute and resigned in protest. The reality at the time as he explained it to me was that SC had extremely limited funds to prosecute cases and dozens of finance companies to investigate so only the most overt criminal cases were pursued.

I stand by my comments in the Geneva thread and will only add this, the only reason I didn't personally sue the directors of Geneva finance is we arrived at settlement with them and the only reason I didn't sue the auditors for our remaining family losses is that the cost to bring an action in the high court would have run to several hundred thousand dollars, more than our losses after above mentioned settlement.

I prefer not to say any more other than these three things. I hope you are happy making profits off the back of investors who collectively lost many millions in this company. My free caution to you is if you build your house on sand then when the storm comes...
Provisioning involves the exercise of due professional care and proper prudent judgement in assessing the likely level of future loan delinquencies.
To invest in Geneva you have to believe that the current management and directors have proven themselves in their ability to make those extensive judgement calls appropriately. Their long term track record suggests the veracity of their delinquency modelling is fundamentally flawed.