HGH - Heartland Group Holdings

[percy]

Yup. And that has worked well for so many NZ companies entering Oz in the past.

Yes Ebos and Mainfreight come straight to mind.
HBL do have a very large footprint in Aussie already with their rapidly growing REL business.

[percy]

The way I see it, NZ is a good steady profitable business but the big growth opportunities are in Australia. The ASX listing will certainly get it noticed and easy access to Aussie capital. Think MQG ��

Agreed...…………………………………...

[Beagle]

Yes Ebos and Mainfreight come straight to mind.
HBL do have a very large footprint in Aussie already with their rapidly growing REL business.

MASSIVE opportunity for low risk high margin reverse equity mortgages there with all the major banks capital constrained and unwilling and unlikely to be willing to compete in the foreseeable future. I see the huge potential growth as a key attraction of Heartland compared to other banks. If its necessary to restructure to support this growth then that's what needs to be done and provided its all explained properly and logically I would support it.

[winner69]

Love that comparison with MQH

But some might see Heartland Group Holdings as more ‘risky’ than Heartland Bank and it be related down a bit by fundies.

[percy]

Love that comparison with MQH

But some might see Heartland Group Holdings as more ‘risky’ than Heartland Bank and it be related down a bit by fundies.

A very valid point,however higher EPS & ROE,with the onflowing increasing dividends will attract more "active" investors.

[Snoopy]

Snoops. PGGWrightson finance lending is all through Heartland.Check this out
https://www.pggwrightson.co.nz/Services/Finance

Heartland isn't the full story of financing within PGW Kiora. I was referring to a finance product of the Livestock division called "Go" that is completely independent of Heartland. PGW are very careful not to call it a finance product, so as not to offend Heartland I suppose. But "Go Beef" and "Go Lamb" are ways for financing sheep and cattle for fattening up, with PGW Livestock clipping the animal sale ticket at both ends of the fattening process - but only when the animals are bought and sold through PGW yards. I call "Go" the latest (third) incarnation of PGW Finance, after the previous two incarnations were sold to 'Rabobank' and 'Heartland' respectively. PGW won't admit to having their own finance division again just yet. But "Go" certainly passes the 'finance division' duck test.

PGW still clips the ticket on loans they send Heartland's way. But that arrangement is far less significant in scale, than what PGW themselves are doing with "Go" in house now,

SNOOPY

[Snoopy]

Winner is referring to one aspect of 'the art of profit manipulation', which is one way to interpret the table in my post 9372.

Put succinctly Column 'V' is the 'Impaired Asset Provision' going into the problem loan bucket. Column 'W' is the 'Impaired Asset Expense' leaking out of the problem loan bucket. In any particular six monthly period, there is no reason these two should be exactly the same. Over time though, one might expect the 'Impaired Asset Provision' to 'fully feed' the 'Impaired Asset Expense'. If it didn't, then the impaired assets on the books would eventually disappear. And it is unrealistic to think that a bank would have no impaired assets on the books at all.

"1st April 2014: Seniors 'Reverse Mortgage' Business Acquired." This is the date I recognise as the birth of the 'modern' Heartland we see today. It is probably unfair to compare the 'modern' Heartland with the Heartland that was born with all sorts of legacy property portfolio issues. So I have cut down my table to just show the half year time periods from 1st July 2014 onwards (HY2015 onwards).

Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (V)	Write Off (W)	Gross Financial Receivables (Z)	(V)/(Z)	(W)/(Z)
EOHY2015	$33.469m	$2,722.433m	1.23%	$5.102m	$1.456m	$2,749.232m	0.19%	0.05%
EO2HY2015	$32.824m	$2,862.070m	1.15%	$7.003m	$2.119m	$2,893.724m	0.24%	0.07%
EOHY2016	$29.147m	$2,928.601m	1.00%	$5.610m	$14.282m	$2,951.075m	0.19%	0.48%
EO2HY2016	$32.864m	$3,113.957m	1.06%	$7.891m	$4.381m	$3,140.105m	0.25%	0.14%
EOHY2017	$28.646m	$3,334.800m	0.86%	$6.892m	$6.552m	$3,361.934m	0.21%	0.19%
Total				$32.498m	$28.790m
Average							0.22%	0.19%

This shows a better picture with 'V' and 'W' more in balance. There is still a solid trend for X (the Stressed Loans of the Books) coming down. But this could be becasue we have a particularly favourable market for borrowers at the moment. Could it be that there are genuinely less stressed loans out there? Does that mean that my complaining about the divergence between the trends of 'Stressed Loans' and 'Impairment Provisions' over time is merely a product of benign market conditions? So there is nothing to worry about?

Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (V)	Write Off (W)	Gross Financial Receivables (Z)	(V)/(Z)	(W)/(Z)
EOHY2015	$33.469m	$2,722.433m	1.23%	$5.102m	$1.456m	$2,749.232m	0.19%	0.05%
EO2HY2015	$32.824m	$2,862.070m	1.15%	$7.003m	$2.119m	$2,893.724m	0.24%	0.07%
EOHY2016	$29.147m	$2,928.601m	1.00%	$5.610m	$14.282m	$2,951.075m	0.19%	0.48%
EO2HY2016	$32.864m	$3,113.957m	1.06%	$7.891m	$4.381m	$3,140.105m	0.25%	0.14%
EOHY2017	$28.646m	$3,334.800m	0.86%	$6.892m	$6.552m	$3,361.934m	0.21%	0.19%
EO2HY2017	$38.341m	$3,545.896m	1.08%	$8.123m	$5.119m	$3,575.613m	0.23%	0.14%
EOHY2018	$44.455m	$3,814.979m	1.18%	$10.416m	$8.092m	$3,814.979m	0.27%	0.21%
Total				$51.037m	$42.001m
Average							0.23%	0.18%

Once again I am only considering the time period following the acquisition of the reverse mortgage business, because this time period best reflects the 'modern' Heartland going forwards.

I have defined a 'stressed loan' ( > 90 days overdue (collective loans) OR individually impaired OR Restructured Assets) in the above table as a loan (or part of a loan) that has 'come to management's attention' (by being classified in the accounts as described) , but is not impaired. (I have finished the calculation of the 'Stressed loans' as I have defined them, by subtracting out the impaired portion.) The important thing is that there is no overlap between the loans or portions of loans in the 'stressed loan box' and the 'impaired loan box' in the table above, the way I have defined them.

So what does the above table mean?

The 'impaired asset expenses' and the 'write offs' over time should converge to a similar total. The fact that the summed impaired asset expenses are currently 20% higher than the summed actual write offs, one might interpret as Heartland being conservative in their provisioning. If it had been the other way around, with summed write offs exceeding summed impairment provisions, then one could argue that Heartland were massaging their profits by under-providing for bad debts. There is no evidence of this in the figures. In fact, the increasing divergence between the normalised V/Z and W/Z percentage averages since I last reported on these figures would suggest that Heartland has become slightly more conservative in their bad debt management over the last year.

Because loans are often written off in a lumpy way when compared across adjacent time periods, I don't believe it makes much sense to draw any conclusion from what happens in a single year.

If you believe, as I do, that a good finance company should be able to discern if a loan becomes 'stressed' before it has to be written off , then you should see a correlation between how X/Y moves and how W/Z moves. One would expect the X/Y percentage figure to be greater. If it were the same, then that would be equivalent to saying that every stressed loan ends up written off. Thankfully that doesn't happen!

Looking at the previously quoted post, my eye discerned a decreasing 'Stressed Loan' percentage even as the 'Impairment Provisions' remained steady. This is consistent with being 'too kind' when judging 'Stressed Loans', to the extent that such kindness might backfire leading to a blow out in 'Impairment Provisions at some future date. I am pleased to see that over the last year, that 'apparent trend' has reversed. The Stressed loans are going up with the Impaired Percentage going up. While having more impaired loans/write offs is never great, the fact that they are being tracked and acknowledged in a consistent way is an indicator of less nasty 'bad debt' surprises in the future. This is what we want. The accounts reflecting the true picture of what is happening 'behind the scenes'.

SNOOPY

[iceman]

MASSIVE opportunity for low risk high margin reverse equity mortgages there with all the major banks capital constrained and unwilling and unlikely to be willing to compete in the foreseeable future. I see the huge potential growth as a key attraction of Heartland compared to other banks. If its necessary to restructure to support this growth then that's what needs to be done and provided its all explained properly and logically I would support it.

It has been clear to me from their recent reports that the big growth in REL in Australia will be a strain on cashflow and require lots of funding. As you say Beagle, these loans are very low risk, have very limited competition and HBL is the biggest in Aussie. So I am not surprised they are looking at options in OZ, outside of their current funding from Commonwealth Bank, to support this massive growth opportunity.
But a concern would be if they intend to grow the business outside of Reserve Bank regulations in much more risking "finance company" type lending and is something to watch for in the near future.

Not sure what to think of the dual listing though !

[Snoopy]

Care needs to be taken when looking at HBL's rural loan book.
A great number of livestock and seasonal loans are short term.

Good point. Let's have a look six months down the road to see how the loan allocation into different categories might be evolving.

Industry Group Risk

From AR2017 note 18c, the greatest 'business group' risk in dollar terms is agriculture, with $757.004m worth of assets. This represents an increase of $129.334m over the previous year.

$757.004m/ $3,931,239m = 19% of all loans

Regional Risk

From AR2017 note 18b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $1,037.873m worth of assets. This represents:

$1,037.873m/ $3,939.231m = 26% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 18% in numerical terms over the year, outstripping the growth of the previous largest region Auckland which grew by 13% in gross loan amounts (Auckland still covers 24.0% of all loans) . Given 'Agriculture' loans have grown by 21% over the year in dollar terms, this 'growth' could reflect the compounding of agricultural interest charges into existing loans. According to Heartland, dairy represent 8% of Heartland's total loan book (but still under the 10% to one customer group earnings cap that I use as a volatility risk indicator).

0.08 x $3,931.239m = $314m

At an interest rate of 8%, assuming no interest was actually paid (i.e it was all capitalised), this would increase the value of the Heartland Agricultural loan book by:

$314m x 0.08 = $25.1m

Since the actual agricultural loan balance increased by $72.0m, we can assume that more net new agricultural loans were taken out, rather than just rolling over the dairy loan book. This is logical when by 30th June 2017, it was becoming clear the dairy crisis was past its worst.

This is very much a contrast to traditional market leader ANZ.NZ who kept their total rural loan book static over the similar period ($NZ19.205m @ 30th September 2017 vs $NZ19.226m @ 30th September 2016)

Looked at just in agricultural terms, you could say that Heartland are potentially compounding their own problems for the future. Or is it just a case a putting more emphasis on their rural roots? Yet because the loan book in total has grown, reducing Heartland's relative reliance on Auckland is probably a positive.

The multi-year picture is shown below:

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

An update on how the half year has shaped up to the previous full year result. The information below has been extracted from the half year report for HY2018.

Our test requirement is:

Highest single new customer group exposure (as a percentage of shareholder funds) <10%

Regional Risk

From reference Note 12b, the greatest regional area of credit risk in dollar terms is Auckland, with $1,074.776m worth of assets. This represents:

$1,074.776m/ $4,213.597m = 26% of all Regional Group Riskloans

So 'normal service has resumed' with the former concentration champion, 'Rest of the North Island' back down to :

$1,065.767m/ $4,213.597m = 25% of all loans.

Auckland at 26% of all loans is high, yet still below historical end of year concentration levels. But I don’t rate that concentration of loans in Auckland as being an issue. Particularly so when ‘Auckland’ is such a varied catch all group. I still don't know if 'Auckland' capture the Harmony investment stake too? The fact that 'Auckland' is likely to cover a whole set of businesses that are headquartered in Auckland but are not restricted to doing business there is why I would tolerate an 'overweight' regional exposure to Auckland.


Industry Group Risk

From reference Note 12c, the greatest 'business group' risk in dollar terms is Agriculture, with $754.754m worth of assets. This represents:

$754.754m/ $4,213.597m = 18% of all loans

This is slightly down on FY2017, when agriculture was

$757.004m/ $3,931,239m = 19% of all loans

Rural loans are quite a broad church. And of those 19 percentage points, only 8 are allocated to the heavily leveraged and volatile dairy market (@EOFY2017). 8 percentage points is still below my 10 percentage point maximum being allocated to one industry. Is the decrease in the rural loan percentage evidence of some of those stretched rural loans being paid down by those hard hit farming customers at last, as Percy hinted at? In dollar terms there is not much of a change in the loan balance, so perhaps I am just seeing what I want to see? That relentless Auckland loan balance, up nearly 14% in just six months, is in itself de-risking the group's rural loan book in percentage exposure terms.



SNOOPY

[blockhead]

Slightly off the present topic,

A while ago we were discussing how hard the internet banking was to use, shortly after that I am sure some of you will have had the chance to download the Heartland App, I downloaded it a week or so ago and it wouldn't operate on my iPhone 5, the app has been updated and it now works. Good stuff except it seems to only give me the ability to look at my savings type a/c's and not move money around a/c's or to another bank. I will copy and paste (below) how the IT dept explained it to me,

"Glad to hear you’re now able to login to the app.

We've released the app with a focus on making savings and deposit accounts easy to manage, so at the moment the app does not support our transactional accounts, like Everyday accounts. Providing this access is on the radar for future developments, as we realise this is something that will be useful for customers like yourself. At this stage we’re unable to give timings around when this feature might become available."

Interested to know how others have found the new app.

Blocky