The 19th March Heartland update didn't read well for business loans
https://www.nzx.com/announcements/350143
"Heartland expects that new lending levels in some portfolios, such as business intermediated and SME, will slow."
But things were a bit more cheerful with the 2nd April response to the government support measures for business,
https://www.nzx.com/announcements/351120
"Heartland Bank has been contacting its business lending customers that are most likely to be financially affected by COVID-19, to discuss their support options. To that end, Heartland Bank is pleased to support the New Zealand Government’s Business Finance Guarantee Scheme, the details of which were announced yesterday. The Scheme enables Heartland Bank, alongside other participating banks, to provide new and existing qualifying business customers with annual turnover of between $250k and $80m with business loans to meet their urgent liquidity and bridging finance requirements while they deal with the disruption to their businesses caused by COVID-19. Heartland Bank looks forward to being able to offer customers that support option and is accepting registrations of interest on its website at
www.heartland.co.nz/covid-19-update now."
Under the scheme, businesses with annual revenue between $250,000 and $80 million can apply to their banks for loans up to $500,000, for up to three years.
The real sting was in the next paragraph though:
"
Importantly, a range of other support options may be available to all Heartland Bank customers who have been financially affected by COVID-19. All affected customers are encouraged to contact Heartland to discuss support available to meet their loan repayments."
IOW, Heartland would really prefer that businesses sort themselves out without using this particular government scheme. Quite understandable when under it, Heartland would wear 20% of any 'generous' loan that went bad. Other banks seemed to agree. On 1st May, rules around the scheme were changed removing the $250,000 minimum revenue cap and allowing businesses in the agricultural space to join.
https://www.interest.co.nz/banking/1...including-agri
"Secondly, the Government is removing the requirement for a “general security agreement” under the scheme."
"This means that for a loan of more than $50,000, a bank will no longer have to "obtain security from the borrower under a general security agreement". "
"Borrowers will no longer have to draw down on all existing facilities provided to them by their bank before applying for a loan under the scheme."
That last sentence is important. I think it means that Heartland can effectively transfer existing loans, or at least the incremental headroom on existing loans into the scheme. Ultimately Heartland could transfer 80% of the risk of a marginal existing loan to the government. As far as I understand the banking laws, this does not reduce the amount of capital that Heartland needs to hold to support such a loan. But it does support the downside loss of capital if the loan were to go bad.
More recently we have the "COVID-19 Small Business Cash Flow Loan (SBCS)" administered by the IRD.
https://www.interest.co.nz/business/...e-viable-small
"Robertson said it was necessary for the Government to write businesses loans directly, in addition to underwriting bank loans, as the latter isn't meeting businesses' needs nor the Government's expectations."
The new IRD administered scheme provides an interest free loan for one year for up to $11,800 for a sole trader, to $100,000 for a firm with up to 50 full time employees. The scheme is only open for a one month window commencing 12th May. This must be serious competition for Heartlands 'O4B' on line small business loans. Who would take out a $100,000 loan from Heartland if they could get the same thing from the IRD at no cost? I guess if the IRD loan scheme is extended beyond 12th June , Heartland's O4B might be declared dead. But in the current business environment, I am not sure if this is a negative or a positive!
So what does this picture suggest for profitability in FY2021?
'O4B' was 3% of the Heartland bank loan book in December 2019, with $158m of loans on the books.
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