sharetrader
  1. #11471
    Speedy Az winner69's Avatar
    Join Date
    Jun 2001
    Location
    , , .
    Posts
    37,738

    Default

    Quote Originally Posted by Snoopy View Post
    I think Heartland have been quite clever in that their business model meets the needs of two types of shareholders.

    1/ Dividend Hounds: These are catered for by offering a decent dividend yield, well above what those shareholders would get if they took that money and put it in a bank term deposit.

    2/Growth Hounds: These are catered for by having a DRP that allows shareholders to accumulate shares at a discount to market price in lieu of a cash dividend. This discount then expands with future share price growth leaving the growth hounds happy.
    Weren’t you saying (or implying) shareholders have been fronting up with cash (new capital) and then getting that cash back in a few months(dividend)....isn’t that like buying your dividend?
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  2. #11472
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,222

    Default

    Quote Originally Posted by winner69 View Post
    Weren’t you saying (or implying) shareholders have been fronting up with cash (new capital) and then getting that cash back in a few months (dividend)....isn’t that like buying your dividend?
    Yes, I guess that is another way to look at what I was saying. I am also saying that in some circumstances this does not matter.

    But I am additionally saying that the DRP will only work with 'growth' investors if the share price keeps going up. And it will only work with 'dividend' investors, if the new capital issued is deployed so that 'eps' does not decrease.

    All companies are looking to increase their 'eps'. There is nothing unique to Heartland here. But the path to 'eps' increase that Heartland have mapped out is to increase in a disproportionate way their Australian REL business. A side effect of going down that path is a 'new investment capital' squeeze. Up until now there has been no problem in raising new investment capital. But a change in the global financial environment could change the ability of HBL to raise capital. And that could unravel the business strategy going forwards as I see it.

    SNOOPY
    Last edited by Snoopy; 25-09-2018 at 08:20 AM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  3. #11473
    ShareTrader Legend bull....'s Avatar
    Join Date
    Jan 2002
    Location
    auckland, , New Zealand.
    Posts
    10,993

    Default

    actually i think there model is really smart in regards to reverse mortgage.

    make little money now as snoopy says , but as they build scale the borrowed money today will be dwarfed by the cash flow received in future years when these reverse mtges mature. so in future hbl should end up having huge csahflows.
    one step ahead of the herd

  4. #11474
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,222

    Default

    Quote Originally Posted by bull.... View Post
    actually i think there model is really smart in regards to reverse mortgage.

    make little money now as Snoopy says ,
    I need to be quite precise with my language here. I believe that the Australian Reverse Mortgage Business is very profitable right now. But the profits are paper profits in the sense that they cannot be cashed up by Heartland until the loan is ultimately cashed in.

    but as they build scale the borrowed money today will be dwarfed by the cash flow received in future years when these reverse mtges mature. So in future hbl should end up having huge cashflows.
    'Building scale' is all about growing the size of the reverse mortgage portfolio. Growing the REL portfolio means that HBL will always have poor cashflow, because as 100 loans are paid back in the future (say), Heartland will have to fund 200 new equivalent loans to keep the growth going. So I see no end to the cashflow issue, provided the REL portfolio keeps growing.

    Of course if the REL portfolio stops growing, then, at some time in the future (say ten-fifteen years) the cashflow situation will resolve itself. If Heartland were to decide to wind down their reverse mortgage portfolio in the future it would then become a cashflow generating engine for the company, the exact opposite of the situation now. But if the REL growth is halted, the earnings multiple that investors are prepared to pay for Heartland will go down. At that means the share price will shrink. Therein lies the 'balancing act' and the dilemma.

    SNOOPY
    Last edited by Snoopy; 25-09-2018 at 12:19 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  5. #11475
    percy
    Join Date
    Oct 2009
    Location
    christchurch
    Posts
    17,221

    Default

    Bit like the problems Warren Buffett's Berkshire Hathaway would have had, if they had started paying dividends years ago.!!
    Good sort of problem to have.
    Think it is best understood by those who understand how compound interest works...…………….lol.

  6. #11476
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,222

    Default Jargon on a new level

    Quote Originally Posted by Snoopy View Post
    Heartland ABCP Trust 1, are still part of Heartland's accounts (despite Heartland ABCP Trust 1 being independent) , because there must be some guarantee that I don't remember ever reading about (has it ever been disclosed?) that means "Heartland Bank" must share a significant part of any shortfall should the independent 'Heartland ABCP Trust 1' ever get into trouble. Thus even though the 'Heartland ABCP Trust 1' has been sold, it cannot be deconsolidated from Heartland bank.
    Just re-reading an old Heartland report on the ABCP Trust 1, and found the admission of potential liability I had been seeking:

    To give "a receipt of deferred purchase consideration" to be passed on to Heartland Bank.

    I believe 'a receipt of deferred purchase consideration ' simply means the end line customer has not paid their bill! It certainly sounds much better than getting a bad debt though!

    SNOOPY
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  7. #11477
    Missed by that much
    Join Date
    Jan 2014
    Posts
    898

    Default

    Quote Originally Posted by Snoopy View Post
    ...

    'Building scale' is all about growing the size of the reverse mortgage portfolio. Growing the REL portfolio means that HBL will always have poor cashflow, because as 100 loans are paid back in the future (say), Heartland will have to fund 200 new equivalent loans to keep the growth going. So I see no end to the cashflow issue, provided the REL portfolio keeps growing.....

    SNOOPY
    I think you may be treating this issue as too much of binary situation rather than as a variable scale. Inflation alone would mean that simply replacing 100 matured loans with 100 new ones that there would be growth in absolute terms, not not in real terms, however the cashflow would be the equivalent of the compounded interest over the period of those loans. Increasing the number or value of loans by an amount equal to say half of the cash generated would achieve both cashflow and growth.

  8. #11478
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,222

    Default

    Quote Originally Posted by percy View Post
    Bit like the problems Warren Buffett's Berkshire Hathaway would have had, if they had started paying dividends years ago.!!
    Good sort of problem to have.
    If you take the example of 'Berkshire Hathaways'' insurance business, then what we have compared with Heartland's REL business is exactly the opposite. Berkshire accepts cash up front in insurance premiums, in the hope they won't have to pay it out later. Heartland takes on a property debt up front and hope that they will get paid back later.

    Warren takes the insurance premiums and uses that free cashflow to invest in all sorts of other businesses.

    Heartland takes on the immediate cashflow obligation, then has to scratch around to find the money to pay it.

    The two comparative business models are polar opposites from a cashflow perspective.

    Think it is best understood by those who understand how compound interest works...…………….lol.
    Compound interest will certainly mean more 'cash back' to Heartland once those reverse mortgages are discharged to be sure. But it will do nothing to improve cashflow in the interim for Heartland shareholders.

    SNOOPY
    Last edited by Snoopy; 25-09-2018 at 01:50 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  9. #11479
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,222

    Default Buffett Point 1/ FY2018: Top Three Position in Chosen Operating Markets

    Quote Originally Posted by Snoopy View Post
    Scale is important for any business wanting to maintain a strong position in whatever market they operate in. If you don't have scale, you can carry on developing a business until the point that the 'big boys' notice you. If you continue to push ahead, those already dominating the market will act aggressively against you. This can severly limit any future growth and may end up being fatal for that part of the smaller expanding business. I am not saying that a small business can never match and get on equal terms with a bigger one. I am saying that when a small player starts to tread on the toes of a big player, then this introduces a significantly higher risk for those invested in the smaller player. if as an investor you can avoid such a risk, this is a good thing.

    Heartland in their December 2016 presentation say that their mission statement is to:

    "Pursue opportunities where they can provide innovative products in niche areas within the household, business and rural sectors, that are under-serviced by the major banks"

    The Heartland mission statement is sensible, because the big four Aussie Banks are absolute gargantuans by Heartland standards. It wouldn't be too far of a stretch to say that to take on the big Aussie banks directly would be a suicide mission. But how secure is Heartland really in these market niches in which they choose to operate?

    The specific target markets are listed below:

    Millennials (People Reaching your Adulthood in the early 21st Century => Aged 25-35 today):

    Provide a frictionless digital experience to the emerging millennial market, who value speed and ease.
    e.g. Harmony joint venture, Motor Vehicle Loans, Online personal loans. Growing the consumer loan book has a lower ROE (because more capital is needed to support such loans) which needs to be balanced by a higher margin.

    Current Gross Receivables: $844m, Average Loan Size $14k

    Heartland vs Competitors (Motor Vehicle)
    1/ Marac (Heartland Subsidiary): 12.95% to 19.95%: Finance and Insurance Loan Book $340m
    2/ Motor Trade Finance: 13.75%: Finance Book $535m
    3/ Turners Vehicle Finance 12.95%. Finance book $144m

    Heartland vs Competitors (Consumer Peer to Peer)
    1a/ Harmony (Heartland investment 10% equity): Loans from $1,000 to $35,000 (all unsecured). Interest rates depends on net assets, income and credit history. Loan Book Size : Up to $100m (approx)
    2a/ Squirrel Money: target A and B grade borrowers (only approve 21% of land applications). Loans $3,000 to $30,000 (unsecured) OR $70,000 (secured). Interest rate - market base plus individual risk profile. Loan Book Size: $5m

    Retired:

    Provide a personalised service to the 65+ via reverse mortgages. This requires an accessible and friendly branch structure, as the retired like to be able to eyeball their bank manager. Nevertheless the information is there on line too. ( https://www.seniorsfinance.co.nz/ )
    e.g. Seniors Finance (Australia and New Zealand). Growing the reverse mortgage business will result in higher ROE (lower Reserve Bank risk weighting for housing, less capital applied) but a more compressed margin.

    Current Gross Receivables (NZ only): $374m, Average Loan Size (NZ Only) $94k

    Heartland vs Competitors:
    1/ Heartland Seniors current loan rate is 7.5%, compounding monthly, $10,000 minimum loan. 15% of house value available at age 60. 35% at age 80. 40% at age 85. maximum Loan amount $500,000
    2/ SBS Bank ('Retirement Loan' floating rate of 6.74% (fixed rate no longer available). Total loan balance $61m (September 2013) Amount of loan offered from 5% of the value of your home at age 60, to 30% at age 80 (to a maximum of 50%).)
    3/ ASB (closed down their HomePlus business to new customers on August 3rd 2015),

    Small and Medium Enterprise:

    To be a smart streamlined on-line lender in this neglected market, where 'big banks' prefer to deal with 'big companies.' Plant/Equipment and Working Capital Finance. The web portal for SMEs is https://openforbusiness.heartland.co.nz/

    Current Gross Receivables: $942m, Average Loan Size $107k

    Heartland vs Competitors:
    1/ Heartland Business Funding rate 10%, Property and Business Services book: $405m
    2/ ANZ Business Indicator rate 9.4% plus lending margin. Business and Property Services book: $14,275m
    3/ ASB Business Lending fixed rate 10.15%. Property and Business Services: $7,439m
    4/ Westpac Base rate of Interest + 'Customer margin.' (Indicative 13.95%) Property and Business Services book: $2,284m


    Rural:

    Livestock Finance, Farm transition loans, Intermediate Finance with partner PGG Wrightson, Term loans to farmers in the sheep beef and dairy sectors whose debt needs are modest (my emphasis). The web portal for livestock loans is https://openforlivestock.co.nz. However farm equipment funding is only accessible by dealers. https://ofb.heartland.co.nz/ofadappl...application%2F

    Current Gross Receivables: $619m, Average Loan Size $209k

    Heartland vs Competitors:
    1/ Heartland Livestock: 100% finance available (for sheep, cattle, deer) secured against livestock purchased (not other farm assets). On line approval up to $500,000.
    2/ ANZ $19,787m on loan ( 32x larger than Heartland! ) Agri Current Account "7.60% + (Lending margin)"
    3/ Westpac $8,432m, Base rate of Interest + 'Customer margin.' (Indicative 13.95%)
    4/ BNZ $2,210m on loan (includes fishing and forestry) Farm First rate 9.2%, secured over farm OR stock OR farming assets


    Conclusion: Yes (see neighbouring discussions for reasoning)

    SNOOPY

    PS Base borrowing rates for various lenders can be found here

    http://www.interest.co.nz/print/69150

    on a page that appears to be regularly updated.
    At the FY2018 AGM, the soon to be 'Heartland Group' articulated their vision: a core focus on markets where they have a 'best product' or the 'only product'. Three areas in particular that Heartland see their growth coming from are:

    1/ Reverse mortgages,
    2/ Small business lending, AND
    3/ Motor vehicle finance.

    The objective is to keep Heartland remote from big bank competition. A substantial sum has been invested in a new Oracle 'Flexcube' (cost $22m to be amortised over 10 years) computer platform over the last two years. The aim is to expand reach through this new digital platform and growing intermediary networks.

    Reverse Mortgages

    On 31st October 2018, Heartland Group is planning to de-consolidate the The Reverse Mortgages Australia business into a new subsidiary 'Heartland Australia'. The Australian REL business has had asset growth of 31% over FY18. The consolidation into an entity separate from the NZ registered 'Heartland Bank' is to allow for a more aggressive funding regime than would be allowed under NZ Reserve Bank oversight of 'NZ banks'. Heartland is continuing to broaden their intermediary network of brokers in Australia. The Australian Reverse Mortgage business receivables ledger totals $NZ677m (+31% yoy) on balance sheet date. The Australian subsidiary will also administer Personal lending and small business lending, through 'Harmony Australia and to SMEs through 'Spotcap Australia' and Heartland's own digital platform O4B (more details on this later in this post). Heartland is the third largest player in the Australian reverse mortgage market with a market share of 11.5% (researched by IBIS World).

    Heartland make much of their 'Canstar' provider of the year win over all other Australian reverse mortgage providers. But what features allowed them to take out this award? In no particular order of importance canstar noted:

    1/ The loan has no ongoing fees.
    2/ Potential customers were offered an 8 hour approval turnaround (typical industry time 25 hours).
    3/ Allow a partner who is not the lead person named in the loan to remain living in the property even if the property owner has passed away.
    4/ Offer an 'equity protection option', where you could choose to protect a percentage of the eventual net sale proceeds of your home.

    How does Heartland Seniors Finance in Australia compare with other reverse mortgage providers? An excellent overview of the Australian Reverse Mortgage market may be found here:

    https://download.asic.gov.au/media/4...ugust-2018.pdf

    Percentage of House Value Available, age 60 Percentage of House Value Available, age 80 Maximum Available New Loan Market Share (2013-2017)
    Commonwealth Bank (var 6.37%) 20% 35% 40% 68%
    P&N Bank (var 6.24%) 20% 35% 35% small%
    Heartland Seniors Finance (var 6.29%) 15% 35% 45% 12%

    Westpac and Macquarie pulled out of the Australian reverse mortgage market in 2017. The total size of the reverse mortgage market in Australia (including legacy players with around 20% market share) was $2.5b (December 2017). There is further competition from the government operated 'Pension Loan Scheme'. From 1st July 2019, the scheme will be broadened to allow people to borrow to create an income stream 50 per cent higher than the full pension (including supplements). The advantages include the interest rate of 5.25 per cent (typically 1% lower than the private providers). Finally, income from the Pension Loans Scheme will not affect Centrelink benefits such as the age pension. Private reverse mortgages can affect the pension because of the income test from either an income stream or deeming rates applied to a lump sum.

    Meanwhile back in New Zealand, the reverse mortgage business ledger in this country totalled $453m , up 12% year on year. Heartland is the largest reverse mortgage player in the NZ market (as researched by Cameron Partners). The only other bank player who advertises reverse mortgages is 'SBS Bank', with their 'SBS Advance' product. Reverse mortgage interest rates are variable, with Heartland currently charging 7.82%. (SBS are currently lower at 7.55%). There is a maximum percentage of the value of the house you can borrow.

    Percentage of House Value Available, age 60 Percentage of House Value Available, age 80 Maximum Available
    SBS Bank (var 7.55%) 5% 30% 50%
    Heartland Bank (var 7.82%) 15% 35% 40%

    We can see that Heartland's key advantage in NZ is 'more money available earlier'.

    Small Business Lending

    'Heartland Bank' will continue to operate as the other fully owned subsidiary of 'Heartland Group'. Heartland Bank claim to have NZ’s largest platform for small business lending. The on-line part of this customer focus is named 'Open for Business' or 'O4B' for short. Loan approvals may be given fast 'on line'. Asset growth on the 'O4B' business unit, loan book now $100m, was reportedly up 98% over FY18. $1,066m worth of 'business receivables' are on the balance sheet as at 30-06-2018 (EOFY2018), including working capital and plant and equipment financing outside of the O4B interface. Heartlands 'best rate' for unsecured small business loans is 9.5% per annum, but may be as high as 16% p.a. 'depending on a range of factors'. For comparison

    Receivables Balance Best Interest Rate
    ANZ NZ Business Bank Business Services' Receivables 31-09-2017 0.1854 x $15,846m = $2,938m 9.5%
    Westpac NZ Business Bank Property & Business Services' Receivables 31-09-2017 $1,120m + $389m = $1,509m 13.95%
    ASB NZ Business Bank 'Other Personal Loans' Receivables 31-09-2017 $1,719m 10.17%
    Heartland Bank Balance Sheet 'Property & Business Services' Receivables 30-06-2018 $110.385m 9.5%

    It is clear that Heartland are not a big three player in 'business lending'. But they are specialising in 'small business'. It is difficult to get total market figures for 'small business' funding, because so many small businesses are financed by mortgages on homes. It is possible to take out an ordinary mortgage on your house without telling the bank you are funding a business venture with it. Heartland are not concentrating on retail house mortgage funding business loans. But they are committed to the SME market. They also seem 'interest cost competitive'.

    The other competitive advantage that Heartland tout is that loans can be rapidly approved (within minutes) over the net using their new banking software. Has anyone on this forum had a business loan approved in this way? I tried it myself, but they answer was 'we will get back to you'. And that sounds like the loan approval process of any other bank!

    Motor Vehicle Finance

    Motor vehicle financing is stronger, helped by Heartland's intermediated strategy and distribution relationships with Holden, Jaguar Land Rover and AA Finance. Motor vehicle financing sat at $955m as at FY2018 balance date. For comparison purposes:

    Receivables Balance Change Since FY2016
    Heartland Bank Balance Sheet Receivables 30-06-2018 $955m +180%
    MTF Balance Sheet Receivables 31-03-2018 $651.738m +22%
    Turners Automotive Group Balance Sheet Receivables 31-03-2018 $289.799m +100%

    As a specialist lender targeting the motor vehicle sector, the growth in Heartland loans to this sector has been astonishing. Their loan book is much larger than the long established MTF financing and they are growing much faster than 'fast growing leader' in the pre-owned vehicle market, Turners Automotive Group. Well done Heartland!

    Other Sector Comment

    In rural lending, Livestock financing is up 62% in FY2018. Larger rural relationship-managed lending, with the bigger banks increasingly moving into this end of the market
    market. So total rural funding is down, the receivables book total being $656m at EOFY2018.

    Conclusion:

    Pass Test

    SNOOPY
    Last edited by Snoopy; 02-10-2018 at 02:23 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  10. #11480
    Speedy Az winner69's Avatar
    Join Date
    Jun 2001
    Location
    , , .
    Posts
    37,738

    Default

    Skimmed through this book while at a friends house the other night. Very interesting

    Hope Heartland guys have read and got some insights from it

    Emotional Banking: Fixing Culture, Leveraging FinTech, and Transforming Retail Banks into Brands
    By Duena Blomstrom
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

Tags for this Thread

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •