HGH - Heartland Group Holdings

[freddagg]

ps.Today's article, Managing a reverse mortgage, at www.stuff.co.nz,business is worth reading.
Perhaps a kind poster would post the link.?

Here it is:
https://www.stuff.co.nz/business/opi...e-on-your-home

[Snoopy]

So I think these loans are very low risk at the moment but certainly something to watch out for and HBL should probably be providing us with more information in this regard in their reports.

I have always found Heartland's disclosure compares favourably with what is disclosed by other banks.

If you look in the Financial Report 2017, note 26 (Capital Adequacy), you will find the requirements of the Basel 3 standards that must be complied with, including what happens in times of 'economic stress'.

In note 26c, the relative risks of the entire loan book, as estimated by 'relative risk rating' is there. I will reproduce some of that information below in a comparison chart that I have done to compare the relative risk of a Heartland 'Property Investment Mortgage' with a Heartland 'Reverse Residential Mortgage'. These risks vary according to the loan to value ratio (LVR) of each type of loan.

Average Risk Weighting
Loan to Value Ratio	Property Investment Mortgage	Reverse Residential Mortgage
>100%	100%	Not Allowed
100%> and >90%	90%
90%> and >80%	70%
>80%		100%
80%>	40%
80%> and >60%		80%
60%>		50%

The total property investment mortgage book comes to $46.609m, much smaller than the residential reverse mortgage book of $922.748m. Heartland isn't known for conventional property loans. So this property investment could be the tail of when Heartland's ancestors did do residential conventional mortgages from the old building society days?

Looking at the same table we can see that the reverse mortgages with an LVR <60% total $885.278m.

So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.

That means that if every properties` underlying backing value dropped by 40%, then Heartland would still recover in full 96% of their reverse mortgage loans. Only the remaining 4% of loans would be wiped out (total $37.470m). With shareholder capital of $565.595m on the balance sheet, I don't think such a loss (a fairly extreme stressed scenario) would 'break the bank'.

SNOOPY

[Snoopy]

as reverse mtge book gets bigger part of there business , risk will reduce alot

Average Risk Weighting
Loan to Value Ratio	Property Investment Mortgage	Reverse Residential Mortgage
60%>		50%

Looking at the same table we can see that the reverse mortgages with an LVR <60% total $885.278m.

So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.

If we look table 26C, on p54 in the Financial Report 2017 we see that the lowest risk loans that Heartland does are to 'Welcome Home Loans' which has a government guarantee, and to low LVR conventional property loans, a market which Heartland is slowly exiting to leave to the big banks. As a broad brush comment, I believe that Bull's assessment of a larger reverse mortgage proportion of the loan book de-risking the total loan portfolio is correct.

So why are Heartland looking at taking the reverse mortgage portfolio out of the loan book, and spinning it off into a separate lending entity that is distinct from the New Zealand registered Heartland Bank? Won't the removal of these relatively low risk loans increase the loan book risk for the remaining Heartland Bank?

Furthermore how will this new stand alone 'Heartland Reverse Mortgage Business' , a strongly cashflow negative business unit remember, gain the cash to grow when it is cut off from Heartland bank?

SNOOPY (struggling to make sense of the restructuring proposal)

[percy]

[QUOTE=Snoopy;725234Looking at the same table we can see that the reverse mortgages with an LVR <60% total $885.278m.

So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.

That means that if every properties` underlying backing value dropped by 40%, then Heartland would still recover in full 96% of their reverse mortgage loans. Only the remaining 4% of loans would be wiped out (total $37.470m). With shareholder capital of $565.595m on the balance sheet, I don't think such a loss (a fairly extreme stressed scenario) would 'break the bank'.

SNOOPY[/QUOTE]

Certainly it would not "break Heartland Bank",but would most probably "break every other bank."

[Beagle]

No question the high margin very low risk reverse home equity part of HBL's loan book is the best part of the business on a risk / reward basis. The very high growth rate of this part of the business is what makes HBL a good hold. On a theoretical ex divvy SP of $1.665 and forward eps of 13.5 cps the forward PE of just 12.33 is a little lower than the 12.5 average of the peer group I follow and the growth rate of 8% in EPS for FY19 quite a bit higher than the average 4.4% of the big Aussie banks, although if you take the average of the growth rate in EPS for FY18 and FY19 and compare it with the Aussie banks we're talking about much the same average level of EPS growth. Conclusion - taking into account the full imputation credits available with HBL dividends HBL is sound hold cum a 5.5 cps divvy at $1.72.
All going well we should beat the previous high of $2.14 sometime in 2020 or 2021 with $2.50 by about 2023 or 2024.
Nearly 8% gross annual divvies in the meantime though so total shareholder return should be solid.

[percy]

So why are Heartland looking at taking the reverse mortgage portfolio out of the loan book, and spinning it off into a separate lending entity that is distinct from the New Zealand registered Heartland Bank? Won't the removal of these relatively low risk loans increase the loan book risk for the remaining Heartland Bank?

Furthermore how will this new stand alone 'Heartland Reverse Mortgage Business' , a strongly cashflow negative business unit remember, gain the cash to grow when it is cut off from Heartland bank?

SNOOPY (struggling to make sense of the restructuring proposal)

All of HBL's huge Australian growth is being constrained by The Reserve Bank of NZ capital requirements.
So HBL's capital will support higher growth in HBL's RELs, and other Australian growth area,such as "open for" products,which should mean a higher EPS and ROE..
You will notice in HBL's presentation, HBL have chosen to reduce high value loans, and increase the number of smaller loans.They have already taken an impairement charge of some of these larger loans.So fewer farm mortgages, and more livestock loans.Shorter terms and higher margins.Same with business loans etc.
Motor vehicle lending is moving from the lower end of the market, to the higher end,ie Holden,Jaguar/Landrover.Lower margin but better quality.
This strategy will mean overall Heartland will have a lot better loan book,however it also means a bit lower NIM.

[percy]

I also think it is not a satisfactory arrangement for The Reserve Bank of NZ to try and monitor a NZ Bank's business/exposure in Australia.
The Reserve Bank of NZ have worked with Heartland to find the right structure for Heartland.Heartland Bank to remain under The Reserve Bank of NZ's regulations,while Heartland's Australian operations are outside their mandate.

[percy]

No question the high margin very low risk reverse home equity part of HBL's loan book is the best part of the business on a risk / reward basis. The very high growth rate of this part of the business is what makes HBL a good hold. On a theoretical ex divvy SP of $1.665 and forward eps of 13.5 cps the forward PE of just 12.33 is a little lower than the 12.5 average of the peer group I follow and the growth rate of 8% in EPS for FY19 quite a bit higher than the average 4.4% of the big Aussie banks, although if you take the average of the growth rate in EPS for FY18 and FY19 and compare it with the Aussie banks we're talking about much the same average level of EPS growth. Conclusion - taking into account the full imputation credits available with HBL dividends HBL is sound hold cum a 5.5 cps divvy at $1.72.
All going well we should beat the previous high of $2.14 sometime in 2020 or 2021 with $2.50 by about 2023 or 2024.
Nearly 8% gross annual divvies in the meantime though so total shareholder return should be solid.

It was a year of two halves for HBL.A poor first half and a great second half.
Strategy of lowering risk is working,while the second half momentum will lead to a very strong coming year,so I expect they will finish the year exceeding their forecasts.
5x $2mil loans totals $10mil.Lowering risk means they are replaced by 50x $200t loans.

[Beagle]

It was a year of two halves for HBL.A poor first half and a great second half.
Strategy of lowering risk is working,while the second half momentum will lead to a very strong coming year,so I expect they will finish the year exceeding their forecasts.
5x $2mil loans totals $10mil.Lowering risk means they are replaced by 50x $200t loans.

I like lots of small loans. A lot less risk.

[Snoopy]

The reverse mortgages with an LVR <60% total $885.278m.

So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.

That means that if every properties` underlying backing value dropped by 40%, then Heartland would still recover in full 96% of their reverse mortgage loans. Only the remaining 4% of loans would be wiped out (total $37.470m). With shareholder capital of $565.595m on the balance sheet, I don't think such a loss (a fairly extreme stressed scenario) would 'break the bank'.

After further thought, my conclusion above may be oversimplifying things. What I have said above is true if all debts to Heartland remain static. But in general a reverse mortgage does not behave like that.

If you take out a 'fixed reverse mortgage amount', then the interest keeps accumulating, even if the amount lent to the homeowner is static. So it is possible that some of those reverse mortgages with an LVR less than 60% will become LVRs greater than 60% with the passage of time as the interest bill accrues. But such an event is more liable to happen if the LVR at the time of a 'property crisis' is above 50% (say). And we don't know how many reverse mortgage loans fall into this category.

Conversely if property values keep going up by enough, we could still have a situation where LVRs are reducing because the increase in property value more than cancels out the interest accruing on the loan.

Things are never quite as simple as they might seem in the finance world. I don't see anything in Heartland's published FY2017 figures that would change my view that Heartland could survive a 40% drop in property prices and still emerge viable of the other side of such an event. The problem I suppose would be a 40% drop in house prices would likely be coupled with downturn in Heartland's other areas of business. So surviving a 40% fall in house prices while farmers and small business people also cut back on their lending simultaneously might not be so easy! Sorry to finish on a gloomy note!

SNOOPY