HGH - Heartland Group Holdings

[Beagle]

I guess I am still a bit struggling to quantify the risks.

Plenty of doomsday scenario's if one wants to let their mind wander but for me several of the directors have serious skin in the game and as Percy keeps reminding us the average reverse equity loan is very small and only a tiny percentage of the value of retiree's homes, (unlike other banks which are lending as high as 95% loans again). Maybe other banks are actually higher risk in any of the doomsday scenarios one cares to conjure up ?

[percy]

Exactly.
Big difference between REL lending at 12% of LVR .and mortgage lending up to 95% of LVR.
Worth thinking about.
Heartland have.

[BlackPeter]

Just received the NZSA voting intentions for undirected proxies.

By the way - a useful document with company background and reasoning for every voting recommendation. They prepare these for every ASM they are attending. If you join the NZSA (https://www.nzshareholders.co.nz/members.cfm) you will be able to read them and get future copies as well :

Anyway - they say that "NZSA has met with the company and is satisfied the grounds for the restructuring are justified. " They will vote in favour of the proposal.

[minimoke]

Exactly.
Big difference between REL lending at 12% of LVR .and mortgage lending up to 95% of LVR.
Worth thinking about.
Heartland have.

Though realistically, the 95% (greater than 80%) LVR risk exposure is limited to 15% of a banks loan book. Still can add up to a tidy sum of problems though.

[percy]

Though realistically, the 95% (greater than 80%) LVR risk exposure is limited to 15% of a banks loan book. Still can add up to a tidy sum of problems though.

Fun happened in UK a number of years ago.
Can't remember the exact details,but property values dropped over 10%.
Hundreds of thousands of people with no equity in their house,as they owed more than it was worth.
Banks did not sell them up,as it would have depressed values further,and meant they would have had to realise their losses.
Fun would be if Sydney,Melbourne and Auckland house prices fell more than 15%.
Think Heartland would be the last bank standing.

ps 15% [of most banks] would be their equity.
pps.Thanks Blackpeter for letting us know NZ Shareholders Assn are in favour.Positive.

[freddagg]

70% of RELs are repaid early.
Snoopy says HBL can grow REL business in Australia 100% under existing structure.
HBL say they need new structure to grow the Australian REL business.
Difficult choice,believing Snoopy, or HBL board and management,who actually have shares [ a lot] in the business,and know the business better than anyone.
Tough decision..? ,,,lol.

I think all the first three sentences are true because it is very likely HBL want to grow the business by a lot more than 100%.

[percy]

I think all the first three sentences are true because it is very likely HBL want to grow the business by a lot more than 100%.

Agree.
Their growth is gaining momentum.
Maybe over 40% in the coming year or more.?

[minimoke]

F
Think Heartland would be the last bank standing.
.

I think you would be dead right there. I was quite surprised when I look at HBL's REL at little you could actually borrow against equity - there was a grand canyon chasm of head room between the two.

Contrasted with banks residential lending I am horrified how much people can borrow (80% in a "flat market) where there is a risk of properties devaluing, relative to their income and the long length of term of the loan. Came across a person the other day. Aged 54, earning $21 an hour. Got a $400k loan on a property with an RV of $475. (must have got a $500k valuation). How is that not high risk?

[Snoopy]

I wonder if this understates the opportunities for HBL in Aussie.

Yes it does. My 100% growth in Australian REL comment was based on what Heartland can do with their current structural arrangements. It wasn't a comment on the potential of the market.

From the Scheme Booklet, HBL reckons the Aussie reverse mortgage business hits 35% annual growth.

On page 6, HBL notes that RBNZ limits wholesale funding to 20% and overall Aussie assets not to exceed 33% of the assets.

Absolutely, based on the HBL's current size, the reverse mortgage business has 100% growth. Assuming continued 35% growth, HBL's going to hit that upper limit within a couple more years.

Yes that's how I read it too. So why not vote for the restructuring in a couple of years, when it may actually be needed? Why the big rush to put through the restructuring now?

Growth may be bigger if HBL can also increase its access to wholesale funding by restructuring away from the 20% wholesale funding limit.

Thoughts?

Yes I imagine the Oz REL market could get a lot bigger than anyone is speculating here. But if that happens it will fundamentally change the nature of the Heartland Group. Provided Heartland keeps growing REL Australia out of proportion, the cashflow issue remains. Keep REL roughly the same size in proportion to the NZ loan book as they are now and the rest of Heartland could probably bail out any REL trouble in Australia. But once REL in Australia grows to 50% of all of the Heartland Group's business, that will no longer be an option.

SNOOPY

[hamish]

I attended the Wellington Shareholder presentation last night. Spoke with CFO, Deputy CEO, Investor Relations. Anyone else there?

Based on the presentation and conversations..

The plusses
- Heartland team members spoke very well, clearly understand their business model. Expertise seems high. Strong line of sight of their revenue streams, capital sourcing and capital efficiency.
- Were able to articulate what Heartland does in terms of value for their customers and their segments
- Strong revenue growth in some products such as Motor/RELs and they demonstrated a clear way of thinking about products (eg rural livestock) and how they meet customer needs.
- Appear to do very well with intermediary relationships - from who they Partner with, why, and when in the value chain
- Soon to launch App mass market, via TV advertising their "O4B - Open For Business" SME loan origination and fulfilment. 3 mins origination (apply and approve) based on AI, credit risk logic of 100 or so data points, through their mobile app for loans $50,000 (I think they were meaning on average there). Seeking to drive 40% increase in SME base (not stated the current baseline).
- I asked about relationship with RBNZ in terms of transparency, trust etc (I have shares in CBL - so would not want a repeat with HBL) and risk of any negative review, impositions, etc resulting from proposed restructure or in general. Response was that great relationship with RBNZ, low risk of interventionism, who 'support' the proposed structure (take that with a grain of salt I think as not sure Govt Agency would 'support'..HBL might 'comply')

The minuses

- EPS Growth - Notwithstanding the predicted revenue and profitability growth, EPS likely to remain flat. Due DRP and (I assume) capital raise(s). The response here is that they are paying out more in net dividend $$ each year
- Their core IT system replacement was north of $20m. Had significant impact on their service centre, which in turn had impact on their collections and impairments resolution (as call centre staff pre-occupied with IT issues). When pressed, not an entirely convincing response that this is all put to bed..and also that the 'integration' between this core platform and the 'digital' solutions is streamlined / easily scaleable. So, was not clear if any remnant costs for this to occur in FY19
- Harmony business overall profitability and business model perhaps not where it was expected to be (by Harmony themselves). Heartland have 11% slice of this and returns are 'as expected'. However, the tone was lukewarm

Questions from the floor
- Why don't you promote further the 'kiwiness' of Heartland (Kiwibank do this) for awareness etc - Answer, we do this in our Annual Report and Corporate material. Not a key 'push' message with the current marketing budget
- Is Heartland still interested in UDC - Answer, we're not sure if it's for sale or not... but we'd be delighted to buy it
- "What are the biggest risks ahead for FY19 and mitigations".. The response ended up circular talking about the opportunities..not the risks. Deflected entirely, which was disappointing. Growth is easy to be positive about... what about regulatory, liquidity, political, GDP risks...?
- A few others, but I can't now recall.

There was a strong message for shareholders to (1) vote as 50% shareholders are needed to vote for resolution to pass and (2) to vote in favour for the restructure.

My personal take - I'm left reflecting and mulling it all today still. With a fairly decent shareholding now, I'm honestly erring towards halving it post receiving DRP, allocating this elsewhere, and buying back at some point.. The year ahead seems to me, that while there will be revenue and profit growth.. the EPS and SP may well just remain steady until such time as the new business model (if approved) is embedded. There's also increase risk (as I see it) with some of the product lines as they scale and possibly NZ economy .. their modelling for impairments and impacts are just that, modelling vs fully proven. Another unknown , I wish I had asked in hindsight, was what their plan for their people and resource looks like in the next 12 months. Investment in knowledge and training in particular, along with ability to scale and service customer needs should they grow as intended.

Oh - I asked if HBL read this forum.... Answer, YES and they even are familiar with some of the usernames...