HGH - Heartland Group Holdings

[percy]

MMmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm?
I don't think I have the fortitude to start at 9am,however I will give it my very best effort.
How will I manage to get on my ear on Devonshire teas?
Brings back rather fond memories of a bookshop owner who offered me a cup of coffee, when I was selling him books.
Half a cup of coffee topped up with Kahlua.!.
Like another?
Yes please.!

[Snoopy]

Industry Group Risk

From AR2018 note 19c, the greatest 'business group' risk in dollar terms is agriculture, with $740.798m worth of assets. This represents a decrease of $16.206m over the previous year.

$740.798m/ $4,390.423m = 17% of all loans

This decrease is possibly due to Heartland declaring that they are moving away from 'larger relationship managed lending' (code for 'lending on farms') to strengthening the livestock lending proposition.

Regional Risk

From AR2018 note 19b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $1,121.983m worth of assets. This represents:

$1,121.983.m/ $4,390.423m = 25.6% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 8.1% in numerical terms over the year, behind the growth of the previous largest region Auckland which grew by 13.6% in gross loan amounts (Auckland still covers 24.4% of all loans). The increase in regional lending in the NI is an interesting and surprising contrast given the consummate decrease in rural lending.

The multi-year picture is shown below:

	2012	2013	2014	2015	2016	2017	2018
Largest Regional Market	Auckland (30%)	Auckland (30%)	Auckland (25%)	Auckland (26%)	Rest of NI (25%)	Rest of NI (26%)	Rest of NI (26%)
Largest Industry Group Market	Agriculture (24%)	Agriculture (21%)	Agriculture (16%)	Agriculture (17%)	Agriculture (18%)	Agriculture (19%)	Agriculture (17%)

Overall Heartland looks less risky than at any time in its history (bar 2014) from a 'Customer Concentration Test' perspective.

Industry Group Risk

From AR2019 note 22, the greatest 'business group' risk in dollar terms is agriculture, with $741.947m worth of assets. This represents an increase of just $0.281m over the previous year.

$741.947m/ $4,845.570m = 15.3% of all loans

While the size of the agricultural portfolio has barely changed, this significant percentage decrease of the total is due to many more reverse mortgage loans and finance and insurance loans being written.

Indeed reverse mortgage loans, for the first time, are being declared separately as an asset class. $1,318.819m of Reverse Mortgages are declared on the HGH balance sheet. Subsidiary 'Heartland Bank' declares $561.211m of NZ based Reverse Mortgages on the books. That means we can find the size of Heartland's Australian Reverse Mortgage book by simple subtraction:

$1,318.819m - $561.211m = $757.608m

This means that 'Australian Reverse Equity Mortgages' (Aussie REM), if you regard that as a credible loan category, can be thought of as the largest category of 'Account Receivables'

$757.608m/ $4,845.570m = 15.6% of all loans



Regional Risk

From AR2019 note 22, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $1,214.744m worth of assets. This represents:

$1,214.744.m/ $4,845.570m = 25.1% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 8.1% in numerical terms over the year for the second year in a row. (Auckland still covers 23.3% of all loans).

The multi-year picture is shown below:

	2012	2013	2014	2015	2016	2017	2018	2019
Largest Regional Market	Auckland (30%)	Auckland (30%)	Auckland (25%)	Auckland (26%)	Rest of NI (25%)	Rest of NI (26%)	Rest of NI (26%)	Rest of NI (25%)
Largest Industry Group Market	Agriculture (24%)	Agriculture (21%)	Agriculture (16%)	Agriculture (17%)	Agriculture (18%)	Agriculture (19%)	Agriculture (17%)	Aussie REM (16%)

Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.

SNOOPY

[Snoopy]

The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities'.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.

Loan Maturity	Expected Behaviour Multiple	FY2014 Financial Receivables Maturity: Contracted/ Expected	FY2015 Financial Receivables Maturity: Contracted/ Expected	FY2016 Financial Receivables Maturity: Contracted/ Expected	FY2017 Financial Receivables Maturity: Contracted/ Expected	FY2018 Financial Receivables Maturity: Contracted/ Expected
On Demand	100%	$50.254m / $50.254m	$37.012m / $37.012m	$84.154m / $84.154m	$57.040m / $57.040m	$49.588m / $49.588m
0-6 months	132%	$477.190m / $629.445m	$664.557m / $877.215m	$743.389m / $961.274m	$618.271m / $816.118m	$609.268m / $804.234m
6-12 months	132%	$367.564m / $483.727m	$450.638m / $594.842m	$484.420m / $639.962m	$521.215m / $688.004m	$469.632m / $619.914m

Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.

Deposit Maturity	Expected Behaviour Multiple	FY2014 Financial Liabilities Maturity: Contracted/ Expected	FY2015 Financial Liabilities Maturity: Contracted/ Expected	FY2016 Financial Liabilities Maturity: Contracted/ Expected	FY2017 Financial Liabilities Maturity: Contracted/ Expected	FY2018 Financial Liabilities Maturity: Contracted/ Expected
On Demand	3.01%	$629.125m / $18.922m	$748.332m / $22.450m	$718.587m / $21.630m	$836.829m / $25.189m	$924.072m / $27.815m
0-6 months	32.4%	$748.129m / $242.431m	$1,213.450m / $395.102m	$892.944m / $289.314m	$1,191.957m / $386.194m	$1,345.316m / $435.882m
6-12 months	36.4%	$538.050m / $195.682m	$686.159m / $249.762m	$837.844m / $304.975m	$729.145m / $265.409m	$572.731m / $208.474m

Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.

Loan-Deposit Maturity	FY2014: 'Expected' combined Loan and Deposit Cashflow	FY2015: 'Expected' combined Loan and Deposit Cashflow	FY2016: 'Expected' combined Loan and Deposit Cashflow	FY2017: 'Expected' combined Loan and Deposit Cashflow	FY2018: 'Expected' combined Loan and Deposit Cashflow
On Demand	$31.332m	$14.562m	$62.524m	$31.851m	$21.765m
0-6 months	$387.014m	$482.113m	$691.960m	$429.924m	$368.352m
6-12 months	$288.045m	$345.080m	$334.987m	$422.595m	$411.440m
Total	$706.391m	$841.755m	$1,089.471m	$884.370m	$801.557m

Once again lots of numbers here. Now there are five years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. The above table(s) are indicative of what might be expected to happen if Heartland management took a 'hands off the tiller' approach to cashflow management. Heartland management does not do this. Instead:

1/Heartland management is a frequent raiser of new capital. That boosts cashflow in.
2/ Heartland management can manipulate 'expected' behaviour of customers by offering higher interest rates for debenture depositors over time periods that cash is needed (for example).

So while the above tables will not be an accurate picture of what really happens to cashflow over the next twelve months, they are useful in hinting where deposit rates (a customer nudge factor) might be heading for 'current period' deposits.

A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

The 'On Demand' net position outlook is the weakest since FY2015. This bodes well Heartland's 'on call' account holders who might expect the generous (with respect to finance industry peers) 'on call' rates to continue as a result.

The following current 'on call' rates, from institutions with comparable credit ratings, I have lifted from the 'interest.co.nz' website:

Heartland 'Direct Call' (no restriction)	2.75%
Co-Operative bank ($100,000 minimum)	1.00%
SBS bank ($100,000 minimum)	1.00%
UDC Finance ($100,000 minimum)	1.00%

However with Heartland now committed to raising a lot more wholesale funding in Australia post restructure and with 'cash' balances an expected source of long term funding (sounds ironic but it is true!) I wouldn't be surprised if Heartland call interest rates in New Zealand are reduced significantly over the next twelve months, back to the level of their peers. I doubt you shareholders who voted for the restructure realised you were voting for the end of your generous call account terms in New Zealand going forwards, but I am calling it. Remember you read it here first!

Expected cashflow for the 0-6 months is the weakest on record. Granted it is still significant in absolute terms. So once again we can expect Heartland's rates offered for six month term deposits to be toward the top end of their comparative peer group.

Heartland ($1,000 minimum)	3.25%
Co-Operative bank ($2,000 minimum)	3.05%
SBS bank ($5,000 minimum)	3.25%
UDC Finance ($5,000 minimum)	3.35%

And so it proves to be....

The objective of this post is to consider cash flow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2019 is derived from note 23 in AR2019 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities'.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.

Loan Maturity	Expected Behaviour Multiple	FY2014 Financial Receivables Maturity: Contracted/ Expected	FY2015 Financial Receivables Maturity: Contracted/ Expected	FY2016 Financial Receivables Maturity: Contracted/ Expected	FY2017 Financial Receivables Maturity: Contracted/ Expected	FY2018 Financial Receivables Maturity: Contracted/ Expected	FY2019 Financial Receivables Maturity: Contracted/ Expected
On Demand	100%	$50.254m / $50.254m	$37.012m / $37.012m	$84.154m / $84.154m	$57.040m / $57.040m	$49.588m / $49.588m	$80.584m / $80.584m
0-6 months	132%	$477.190m / $629.445m	$664.557m / $877.215m	$743.389m / $961.274m	$618.271m / $816.118m	$609.268m / $804.234m	$1,020.160m / $1,346.611m
6-12 months	132%	$367.564m / $483.727m	$450.638m / $594.842m	$484.420m / $639.962m	$521.215m / $688.004m	$469.632m / $619.914m	$646.123m / $852.882m

Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.

Deposit Maturity	Expected Behaviour Multiple	FY2014 Financial Liabilities Maturity: Contracted/ Expected	FY2015 Financial Liabilities Maturity: Contracted/ Expected	FY2016 Financial Liabilities Maturity: Contracted/ Expected	FY2017 Financial Liabilities Maturity: Contracted/ Expected	FY2018 Financial Liabilities Maturity: Contracted/ Expected	FY2019 Financial Liabilities Maturity: Contracted/ Expected
On Demand	3.01%	$629.125m / $18.922m	$748.332m / $22.450m	$718.587m / $21.630m	$836.829m / $25.189m	$924.072m / $27.815m	$895.210m / $26.946m
0-6 months	32.4%	$748.129m / $242.431m	$1,213.450m / $395.102m	$892.944m / $289.314m	$1,191.957m / $386.194m	$1,345.316m / $435.882m	$1,531.594m / $496.236m
6-12 months	36.4%	$538.050m / $195.682m	$686.159m / $249.762m	$837.844m / $304.975m	$729.145m / $265.409m	$572.731m / $208.474m	$620.836m / $225.984m

Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.

Loan-Deposit Maturity	FY2014: 'Expected' combined Loan and Deposit Cashflow	FY2015: 'Expected' combined Loan and Deposit Cashflow	FY2016: 'Expected' combined Loan and Deposit Cashflow	FY2017: 'Expected' combined Loan and Deposit Cashflow	FY2018: 'Expected' combined Loan and Deposit Cashflow	FY2019: 'Expected' combined Loan and Deposit Cashflow
On Demand	$31.332m	$14.562m	$62.524m	$31.851m	$21.765m	$53.620m
0-6 months	$387.014m	$482.113m	$691.960m	$429.924m	$368.352m	$850.375m
6-12 months	$288.045m	$345.080m	$334.987m	$422.595m	$411.440m	$626.898m
Total	$706.391m	$841.755m	$1,089.471m	$884.370m	$801.557m	$1,530.893m

Once again lots of numbers here. Now there are six years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. The above table(s) are indicative of what might be expected to happen if Heartland management took a 'hands off the tiller' approach to cashflow management. Heartland management does not do this. Instead:
]
1/Heartland management is a frequent raiser of new capital. That boosts cashflow in.
2/ Heartland management can manipulate 'expected' behaviour of customers by offering higher interest rates for debenture depositors over time periods that cash is needed (for example).

So while the above tables will not be an accurate picture of what really happens to cashflow over the next twelve months, they are useful in hinting where deposit rates (a customer nudge factor) might be heading for 'current period' deposits.

A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

The 'On Demand' net position has strengthened considerably, only being bettered by FY2016. This signalled a likely reduction in Heartland's 'on call' account holder interest rates (a drop which has subsequently happened). Depositors looking to invest with Heartland for up to six months are likely to be similarly disappointed.

The following current 'on call' rates, from institutions with comparable credit ratings, I have lifted from the 'interest.co.nz' website:

Heartland 'Direct Call' ($1 minimum)	1.60%
Co-Operative bank ($100,000 minimum)	0.75%
SBS bank ($100,000 minimum)	0.75%
TSB Horizon Savings ($1 minimum)	0.90%

Heartland's call rate has dropped from 2.75% to 1.6% over the year. Other comparable deposit takers have dropped their rates too, albeit not as much in percentage terms. This is exactly what I predicted last year, when more outsourcing of debt via Australian bond issues was mooted. Cash fund depositors may think they have taken a 'hit' already. With more alternative Australian bond issues confirmed to fund the Australian expansion, I predict Heartland's on call rate to be significantly lower again in twelve month's time.

Expected cashflow for the 0-6 months has turned right around with Heartland now expecting an avalanche of cash to come due. This indicates we can expect Heartland's rates offered for six month term deposits to be toward the bottom end of their comparative peer group.

Heartland ($1,000 minimum)	2.80%
Co-Operative bank ($5,000 minimum)	2.80%
SBS bank ($5,000 minimum)	2.80%
ANZ bank ($10,000 minimum)	2.80%

There seems to be a 'consensus at the bottom'. Maybe the other BBB rated banks are also suffering from an excess of short term 'term deposit money'? If you have just $1,000 to invest then Heartland is competitive. But more than that and you would have to look very closely at investing in those lesser tier banks. I have thrown ANZ , a AA- rated bank, in there and can confirm that BNZ, ASB, Westpac and Kiwibank also offer a 2.8% return on a $10,000 investment over six months. If you have that $10,000 to invest, and there is no interest premium price to be paid by loaning your money to a lower credit rated BBB rated bank, why do it? And if Heartland doesn't really want to attract short term deposit money anymore, what does that say for their lending outlook going forwards?

SNOOPY

[percy]

[QUOTE=Snoopy;

Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.

Correct.
Adding to "less risk" has been HGH's strategy of replacing large Rural loans [mortgages] with a lot more smaller loans [livestock].Not only do they reduce HGH's risk, they have a better margin and a shorter loan term.
Loan book improvement has also been part of their strategy with motor vehicle lending,and their business lending, has like Rural lending, seen large loans replaced by a greater number of smaller loans.
RELs.HGH have looked to "spread" their sources of funding,and also sought longer terms.As the REL business is growing so rapidly, this is a very much ongoing work in progress.
The growth in RELs [together with generally tighter lending criteria]will see HGH's net interest margin reduce slighty,however it will still remain at twice other banks'.
Quality rather than quantity,means we remain "well positioned."

[ziggy415]

[QUOTE=percy;773073]

with a lot more smaller loans [livestock].Not only do they reduce HGH's risk, they have a better margin and a shorter loan term.
Loan book improvement has also been part of their strategy with motor vehicle lending,and their business lending, has like Rural lending, seen large loans replaced by a greater number of smaller loans.
RELs.HGH have looked to "spread" their sources of funding,and also sought longer terms.As the REL business is growing so rapidly, this is a very much ongoing work in progress.
The growth in RELs [together with generally tighter lending criteria]will see HGH's net interest margin reduce slighty,however it will still remain at twice other banks'.
Quality rather than quantity,means we remain "well positioned."

Did I read somewhere or did I imagine that heartland were going to securitise their rel,s.....I,m sure it was in one of their update but I can't find it....maybe too tired..night shift..off to bed..zzzzzzzz

[Snoopy]

Did I read somewhere or did I imagine that heartland were going to securitise their rel,s.....I,m sure it was in one of their update but I can't find it....maybe too tired..night shift..off to bed..zzzzzzzz

I think you read right Ziggy. The current information on 'Securitized Loans' can be found under Note 15 of AR2019, headed 'Borrowings'. In fact Heartland have been securitising their 'Australian Seniors Finance' 'Reverse Equity Loans' from day 1. The securitisation facility has a lid of $650m on it, and it was already drawn to $631m. The whole facility currently expires on 30th September 2022, which means the supporting bank has given their blessing to this arrangement for a further three years.

Heartland Group Holdings has issued $A50m in two year unsubordinated notes. That money can go towards supporting Australian REL loans. Then on 2nd July, Heartland announced the completion of an A$250 million committed reverse mortgage funding facility and said:

"Heartland now has access to committed Australian reverse mortgage loan funding of A$850 million in aggregate."

According to my maths $A650m + $A250m = $A900m

So it looks like, since balance date, the previous bank securitisation facility must have been reduced by $50m, back down to the $A600m figure from 2018. Heartland also state that the new facility provides:

"provides additional diversification of funding"

This would indicate the new facility must be with a different supporting bank in Australia. Did the original supporting bank reducing their level exposure force Heartland to go elsewhere for their new securitization facilities?

SNOOPY

[percy]

An additional bank.

[trader_jackson]

http://www.equity.co.nz/files/SKL_CMO_ABA_HGH.pdf

They say HGH really bad apparently...

[100101]

Lest we forget where the old ticker share price got to. Presumably as its the same company still it will return to the previous levels

http://chart.findata.co.nz/?e=NZX&s=...BB&w=940&h=480

[percy]

http://www.equity.co.nz/files/SKL_CMO_ABA_HGH.pdf

They say HGH really bad apparently...

If that is from Simply Wall Street,all I can say is their research remains really bad.