HGH - Heartland Group Holdings

[moka]

http://nzx-prod-s7fsd7f98s.s3-websit...712/286553.pdf

Fitch affirms rating, worth a read.

I read it and this paragraph caught my eye and I did some research on Open Bank Resolution. I knew a bail-in existed but didn’t know it was called OBR.
“We believe the Open Bank Resolution (OBR) framework reduces the propensity of the sovereign to support its banks. The OBR framework allows for the imposition of losses on depositors and senior debt holders to make up capital shortfalls if a deposit-taking institution fails.”

So what I learned was

• as a depositor I’m expected to assess a bank’s liquidity and risk. Sorry Snoopy my eyes glaze over when I read the calculations in your posts.
• I may need to consult a registered financial adviser (not one employed by the bank) to help me decide whether to continue banking with ASB. Yeah right!
• I am an unsecured creditor with the bank, not a depositor. I have made an unsecured loan to the bank, and if it fails I am treated just like an unsecured creditor is with any other failed business.
• I am happy to accept risk in the sharemarket but I didn’t realise that I need to assess risk with my bank. I accept that finance companies are risky but my reading of the OBR policy is that a bank is now in the same category as finance companies = assess risk.
• It’s my responsibility to assess risk and make choices. If my bank fails I made a bad choice - tough.
• The Australian banking inquiry title says it all - Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Risky lending, liar loans, bribes, involved in multiple scandals- the same behaviour that led to the GFC is being repeated. No lessons learned or restraints put in place.
• Where can I put my money that is safe?

https://www.rbnz.govt.nz/faqs/open-b...on-policy-faqs
Why should depositors bail-out banks?
The OBR policy is designed to ensure that first losses are borne by the bank’s existing shareholders. In addition, a portion of depositors’ and other unsecured creditors’ funds will be frozen to bear any remaining losses. …….. The primary advantage of the OBR scheme, however, is that depositors would have access to a large proportion of their balances throughout the process. This contrasts with what would happen under a normal liquidation, where depositors might not have access to any of their funds for a significant period.

https://www.rbnz.govt.nz/regulation-...ank-resolution
This ‘OBR Made Simple’ fact-sheet (PDF 1.4MB) explains OBR and how it works.
Where is the safest place for my money?
Every financial decision carries risk. You may need to consult a registered fnancial adviser to match your investments to your willingness to take risk. To assist in assessing potential risks, the Reserve Bank publishes a Financial Stability Report twice a year, in May and November.

[minimoke]

From memory thsi came in after the GFC and after the Tax Payer bailed out South Canterbury Finance - and allowed deposits secured by the tax payer.

[moka]

From memory thsi came in after the GFC and after the Tax Payer bailed out South Canterbury Finance - and allowed deposits secured by the tax payer.

https://www.beehive.govt.nz/release/...nancial-system
11 March 2011
"The Government is considering options for maintaining confidence in the financial system when the Retail Deposit Guarantee Scheme expires at the end of this year, Finance Minister Bill English says.
The Government does not favour compulsory deposit insurance. This is difficult to price and blunts incentives for both financial institutionsand depositors to monitor and manage risks properly.
“One option for minimising disruption of the financial system and maintaining investor confidence is referred to as Open Bank Resolution. This aims to provide continuity of core banking services, allow the banking system to get back to normal and limit the costs to taxpayers."

[Beagle]

moka - Yes I'm afraid you are quite correct and many people are unaware of the risks. Australian banks are paying a scandalously low call rate on funds, many standard call accounts from the Australian owned banks only pay 0.1% (that is not a typo) and there are real risks in earning this "phenomenal" return. In Australia by comparison the Govt guarantees the first $250K of depositors personal deposits.

As close to risk free as it gets here is N.Z. Govt stock with various maturities that you can buy on market through your broker around 2-2.7% depending upon maturity date or invest in Kiwi Bonds https://www.nzdmo.govt.nz/individual...interest-rates Interest rates are VERY low but these are not subject to the OBR.

Senior ranked corporate bonds issued by major corporates are another option but are higher risk in as much as the company itself is a risk but again these are not subject to the OBR.

Some people (myself included) are using REIT's like ARG and power companies like GNE to achieve effective rates of return of about 8% gross which in my view is a far better risk adjusted return for one's funds than any of the above and again are not subject to the OBR.

P.S. At least Heartland give you some return for the risk with their on call interest rate of 2.75%. Using that account for one's funds that one wants to keep on call is a no brainer compared to the Australian owned banks in my opinion.

[Enjay]

So why not vote for the restructuring in a couple of years, when it may actually be needed? Why the big rush to put through the restructuring now?

Yes I imagine the Oz REL market could get a lot bigger than anyone is speculating here. But if that happens it will fundamentally change the nature of the Heartland Group.

Provided Heartland keeps growing REL Australia out of proportion, the cashflow issue remains... But once REL in Australia grows to 50% of all of the Heartland Group's business, that will no longer be an option.

All good points. Taking another look at those RBNZ restrictions on Oz wholesale borrowing, I think the answer about timing reveals itself.

Against total assets of 4,496M as at 30 June '18, HBL is able to borrow a max. of 20% or 899M. Current Oz borrowing (at that date) was at 615M.

A very rough and ready assessment shows that one year of 39% growth in existing borrowing takes HBL up to the limit (assuming no asset growth).

Those figures were as at June so, if we follow that timeline, HBL could be seen to be doing this 6ish months before hitting that upper cap.

Cash flow, certainly an issue, but the Scheme booklet suggests that CBA are happy to lend to support HBL's REL growth.

NJ

[iceman]

Thanks for you post 11315 Hamish. Very appreciative of you sharing your thoughs from the presentation.
P.S. it has gone XD so you´ve got your DRP. If you start selling at a good price, I´ll probably buy them off you :-)

[RTM]

Keen to get punters to vote .....just got a text as Heartland ‘needs me to vote’

I felt important

You are not so special, I got the txt as well. Just voted for the restructure.
The REL loans are probably the safest of them all. And profitable.

Hamish...thanks for your long report, appreciated.

[percy]

All good points. Taking another look at those RBNZ restrictions on Oz wholesale borrowing, I think the answer about timing reveals itself.

Against total assets of 4,496M as at 30 June '18, HBL is able to borrow a max. of 20% or 899M. Current Oz borrowing (at that date) was at 615M.

A very rough and ready assessment shows that one year of 39% growth in existing borrowing takes HBL up to the limit (assuming no asset growth).

Those figures were as at June so, if we follow that timeline, HBL could be seen to be doing this 6ish months before hitting that upper cap.

Cash flow, certainly an issue, but the Scheme booklet suggests that CBA are happy to lend to support HBL's REL growth.

NJ

This is posted in good faith as I am not sure I heard Jeff Greenslade correctly.

I think he said currently 80% of RELs being written in Australia, are being written by HBL's REL business..

[moka]

I am leaning towards voting against the new structure,

As I have mentioned before, risk manager resigned AND sold his complete shareholding,

Rather than just a mention I think that this needs to be emphasised. The expert in risk management has just left and sold down his complete holding. Probably because management has chosen to see the opportunities and has ignored the threats. I’d be gone too if I was the risk manager because of the overvalued Australian housing market.
Risk managers work with companies to assess and identify the potential risks that may hinder the reputation, safety, security and financial prosperity of their organisation.

[dabsman]

The risk manager might have also had a mortgage or needed to build a deck or decided to go to Europe or maybe buy his kids a house or build a bach....