HGH - Heartland Group Holdings

[percy]

Let us assume the 2c dividend is sustainable from here-on in. Perhaps it is also possible to assume that the dividend will be matched by another 2c dividend in the second half of the year, which should be more profitable for a variety of reasons.

4c per share, fully imputed, means a yield of 7.8% on today's current price of 73c. That's not bad at all. If that's what Heartland can keep up with in 2H2013.

Sorry to go back to the AGM,however the chairman when speaking of dividends was very mindfull of how the market would react to HNZ at any time cutting the dividend.So I take it the 2cents is on going,[as for next year's interim].What we can start guessing is what the final in September will be.I guess it will be at least 2 cents,possibly more.Now that is fun,considering they want to leave plently of petrol in the tank.

[Snoopy]

Snoopy, thanks for your posts. I always learn a lot from them. After analysing HNZ's latest results, would you not say that they are definitely moving in the right direction?

Yes, although the underlying 'pace of movement' is not as fast as some think.

And if yes, what is holding you back? Capital adequacy? Surely that is something that they will managed very carefully now that they are a bank and will be monitored closely by the Reserve Bank as well.

Growing banks tend to need new capital to grow. Most of the profitability improvements for the HNZ half year look to have come from a near $2m fall in personnel expenses and a $1.6m reduction in legal fees verses the corresponding prior period. While welcome, these are not the foundations of a growth model for the future.

I think there is a difference between capital adequacy from a reserve bank perspective and capital adequacy from an HNZ company growth perspective. As it stands HNZ is fairly static (actully slightly shrinking) from a revenue perspective. And the shadow of more impairment in real estate has not gone away. The HY2013 report smacks more of 'kicking the can down the road' rather than finally addressing the impaired real estate issue.

Nevertheless it does look like there are plans to investigate selling off the difficult real estate package in one hit to clear the way going forwards. I am not sure if this is better or worse than just slowly working through the property portfolio.

SNOOPY

[forest]

Growing banks tend to need new capital to grow. Most of the profitability improvements for the HNZ half year look to have come from a near $2m fall in personnel expenses and a $1.6m reduction in legal fees verses the corresponding prior period. While welcome, these are not the foundations of a growth model for the future.

I think there is a difference between capital adequacy from a reserve bank perspective and capital adequacy from an HNZ company growth perspective. As it stands HNZ is fairly static (actully slightly shrinking) from a revenue perspective. And the shadow of more impairment in real estate has not gone away. The HY2013 report smacks more of 'kicking the can down the road' rather than finally addressing the impaired real estate issue.

.

SNOOPY[/QUOTE]

Snoopy thanks for sharing your detailed analyses on HNZ. Like Percy I was also at the AGM. And Percy please correct me if I am wrong but I think HNZ is focussed on being a small efficient bank. HNZ I think have researched the sector well and choosen to consentrate on
sectors were they feel they can have an advantage over the establised and bigger banks (and higher margens), think live stock and small to medium bussiness etc.
Therefore I expect slow growth and no need for capital in the forseeable future.

Forest

[Snoopy]

Let us assume the 2c dividend is sustainable from here-on in. Perhaps it is also possible to assume that the dividend will be matched by another 2c dividend in the second half of the year, which should be more profitable for a variety of reasons.

4c per share, fully imputed, means a yield of 7.8% on today's current price of 73c. That's not bad at all. If that's what Heartland can keep up with in 2H2013.

Yes this is all very true. From a potential yield basis alone I would be surprised to see HNZ retreat below 70c. But with revenue static and no clear growth path apparent [apart from rural finance which seems to be improving (I will let out a collective "Arrrgh!" here for those former PGW shareholders who had to watch and see their finance arm simply given away to HNZ)], I don't see a strong growth imperative for new shareholders to bid that price up above the 70 to 75 cent range.

I now expect HNZ to sit around the 70-75c levels for some time.

SNOOPY

[Balance]

Yes this is all very true. From a potential yield basis alone I would be surprised to see HNZ retreat below 70c. But with revenue static and no clear growth path apparent [apart from rural finance which seems to be improving (I will let out a collective "Arrrgh!" here for those former PGW shareholders who had to watch and see their finance arm simply given away to HNZ)], I don't see a strong growth imperative for new shareholders to bid that price up above the 70 to 75 cent range.

I now expect HNZ to sit around the 70-75c levels for some time.

SNOOPY

Eh, just like the 50 - 55c range before?

[percy]

Growing banks tend to need new capital to grow. Most of the profitability improvements for the HNZ half year look to have come from a near $2m fall in personnel expenses and a $1.6m reduction in legal fees verses the corresponding prior period. While welcome, these are not the foundations of a growth model for the future.

I think there is a difference between capital adequacy from a reserve bank perspective and capital adequacy from an HNZ company growth perspective. As it stands HNZ is fairly static (actully slightly shrinking) from a revenue perspective. And the shadow of more impairment in real estate has not gone away. The HY2013 report smacks more of 'kicking the can down the road' rather than finally addressing the impaired real estate issue.

.

SNOOPY

Snoopy thanks for sharing your detailed analyses on HNZ. Like Percy I was also at the AGM. And Percy please correct me if I am wrong but I think HNZ is focussed on being a small efficient bank. HNZ I think have researched the sector well and choosen to consentrate on
sectors were they feel they can have an advantage over the establised and bigger banks (and higher margens), think live stock and small to medium bussiness etc.
Therefore I expect slow growth and no need for capital in the forseeable future.

Forest[/QUOTE]

Forest 100% correct.They know where they want to be.That is why there is a reduction in mortgage lending.No win situation competing against the majors,including Kiwi Bank.Better to concentrate on profitable sectors. I agree will mean no need for extra capital,however more profitable lending will mean better use of capital and ratios such as ROE will improve. Overall loan book may not grow quickly,however profit will certainly grow very quickly.

[Balance]

Ah - you may not have read the presentation by CEO Jeff Greenslade today. There are some useful comments on growth there.

https://nzx.com/files/attachments/171425.pdf

Future profits and growth will come from a number of areas:

- Reduction in cost of funds (around 80 basis points so far now they are a registered bank)
- operating efficiencies (easier said than done, and IT systems always overpromise, but not unreasonable to expect some backoffice savings)
- building a float - offering more cash and cheque accounts which don't charge interest, offering HNZ "free money"
- Growth in certain market segments like invoice financing, livestock financing, credit cards, SME and school fees finance

Trust Bank had a similar experience after listing on NZSE. Its sp fell heavily after its first public company results because profit growth was via costs reduction, not revenue growth.

What the market missed at that time was the repositioning of the trustee banks to bring in new revenue streams but maintaining profitability meanwhile by containing and reducing costs.

A year later, investors who bought from the institutions who sold out made serious money.

Snoopy was expecting HNZ's sp to range trade for a long time at 50 - 55c last year?

[Snoopy]

Time to reevaluate liquidity for FY2012.

HNZ has total borrowings of $1,939,489,000, made up principally of term deposits lodged with Heartland.

Note 24 is meant to give a breakdown of these borrowings. Once again there is no breakdown given of current and longer-term borrowings

The information given on the secularized facilities is as follows

"The Group has securitisation facilities in relation to the Trusts totalling $450.0 million. On 27 February 2012, the Group entered into an agreement with its securitisation facility provider to extend the maturity date of Heartland ABCP Trust 1 $300 million securitisation facility to 6 February 2013. On 19 December 2011, the Group entered into an agreement to increase CBS Warehouse A Trust securitisation facility by $100 million to $175 million. $25 million of this increase matured on 1 April 2012. The maturity date of the remaining $150 million CBS Warehouse A Trust securitisation facility is 22 July 2013."

IOW all activity relates to a time-frame no more than one year out in the future.

The amount of securitized holdings has increased when I would have expected it to decrease now that HNZ has fully rolled out of the government deposit guarantee scheme.

"The Group has bank facilities totalling $650.0 million (2011: $475.0 million)."

That increase is good for future flexibility.

This money has been on loaned to customers who want loans. These customers owe HNZ 'Finance Receivables' of $2,078,276,000. Again there is no breakdown as to what loans are current and longer term (note 16).

Given:

1/ I understand 'liquidity' to be a balance between the maturity profile of current debenture holders VERSES
2/the loan periods associated with those on lent funds are unknown,

then my analysis comes to a full stop (again).

The only thing I do note is that the amount borrowed as debentures and deposits from customers has gone down (by $6.022m) and the amount lent to customers has gone up (by $3.065m). Given that bank facilities have gone up by $175m over the same period this isn't an issue.

Time to reevaluate liquidity for HY2013.

HNZ has total borrowings of $1,935,116,000, made up principally of term deposits lodged with Heartland (see note 12).

Note 12 is meant to give a breakdown of these borrowings. Once again there is no breakdown given of current and longer-term borrowings

The information given on the securitized facilities is as follows

1/ The Group has securitisation facilities in relation to the Trusts totalling $450.0 million.
2/ Securitisation facility provider to extend the maturity date of Heartland ABCP Trust 1 $400 million securitisation facility to 7 August 2013 (a six month extension, and a $100m higher ceiling than before).
3/ The Group has entered into an agreement to maintain CBS Warehouse A Trust securitisation facility at $175 million. It matures on 22nd January 2014, six months later than the last referenced maturation date."
4/ Heartland have their own bank facilities that have been wound back from $200m to $50m, maturing on 30th September 2013.

Putting all that together total bank facilities have decreased by $50m (to $600m total) compared to six months previously. I further note that all facilities expire to a time-frame no more than one year out in the future. I take this to mean those lending to HNZ want to retain the right to have HNZ management on a tight leash.

This money has been on loaned to customers who want loans. These customers owe HNZ 'Finance Receivables' of $2,044,793,000. Again there is no breakdown as to what loans are current and longer term (note 11).

Given:

1/ I understand 'liquidity' to be a balance between the maturity profile of current debenture holders VERSES
2/the loan periods associated with those on lent funds are unknown,

then my analysis comes to a full stop (again).

The only thing I do note is that the amount borrowed from NZ sourced deposits has gone up (by $38.433m) and overseas sourced deposits have also increased (by $7.203m). Meanwhile total finance receivables have decreased (by $33.483m). This is indicative of a more conservative policy of using more equity to cover less borrowings.

SNOOPY

[Snoopy]

Trust Bank had a similar experience after listing on NZSE. Its sp fell heavily after its first public company results because profit growth was via costs reduction, not revenue growth.

What the market missed at that time was the repositioning of the trustee banks to bring in new revenue streams but maintaining profitability meanwhile by containing and reducing costs.

A year later, investors who bought from the institutions who sold out made serious money.

Snoopy was expecting HNZ's sp to range trade for a long time at 50 - 55c last year?

No, I can't find a post where I mentioned a trading range of 50 -55c. However on 18th April 2012, I did post this:

"If current asset backing sits at 90c, and current market norms are to value finance companies at asset backing there is another way of looking at that 60c shareprice. One might say 60c reflects a 2/3 chance of success and a 1/3 chance of failure. A 1/3 chance of failure is not insignificant to those shareholders who want to retain capital. OTOH you could say a 60c to 90c move would be quite a good return if things go well."

"I see HNZ as a genuine investment with a decent risk return arbitrage. But a ticket to print money this is not."

SNOOPY

[janner]

Can I be Christopher Robin, the one to cheer everyone up then?

Anyone else buying more today around the 70-71 mark?

Don't forget the 2 cents divie up to and incl. 20/03/13.