HGH - Heartland Group Holdings

[percy]

Almost as bad as those dastardly Aussie banks in calculating some ratios.

Looks as though ANZ taught Jeff and Chris too well...lol.

[Snoopy]

Article behind PAYWALL in the NBR reads
'HEARTLAND QUIETLY ADMITS CAPITAL MISHAP'.

Come in Snoopy.

The analysis of what is an appropriate level of capital for 'Heartland' to hold has become more complicated. In 'Heartland Bank' terms, it has become easier. That is because the reverse mortgage Australian loans have been hived off into a separate entity. But we shareholders can no longer buy shares in 'Heartland Bank' directly. We can only buy into a parent entity 'Heartland Group Holdings' that still includes those Australian Reverse Equity loans. A comparison of the 'Heartland Bank' end of year position and the 'Heartland Group Holdings' end of year position sheds further light on this matter.

	Heartland Group Holdings		less Heartland Bank		equals Heartland Troublesome Holdings
Assets	$4,926.404m	(100.0%)	$4,138.735m	(100.0%)	$787.699m	(100.0%)
Liabilities	$4,250.736m	(86.3%)	$3,535.345m	(85.4%)	$715.391m	(90.8%)
Equity	$675.668m	(13.7%)	$603.390m	(14.6%)	$72.278m	(9.2%)

These figures show that while the financial risk position of 'Heartland Bank' has been shored up, the financial position of HGH shareholders is going the other way. The above figures were taken as at the 30th June balance date. That is before the 2nd July announcement of an incremental $A250m of incremental reverse mortgage funding. That means the ceiling on the Australian Reverse mortgage business is now $A850m. Yet no more shareholder equity to back up this aggressive expansion into Australia has been raised. It is clear then that the equity ratio of 'Heartland Troublesome Holdings' will be considerably weakened at the next reporting date. And the consummate risk taken on by parent HGH holders has increased significantly.

The question for HGH shareholders is therefore no longer:

"What is the appropriate capital ratio for Heartland Bank?"

It is now:

"What is the appropriate capital ratio for Heartland Group Holdings?"

There is regulatory oversight to help us choose an answer to the former question. But there is no longer any regulatory oversight to help us answer the latter question. In this context, any revisionist minor adjustment to the appropriate capital position in 2015 being miscalculated at Heartland Bank seems trivial. What the appropriate capital position going forwards for Heartland Group Holdings is the real question that should concern HGH shareholders.

SNOOPY

[BlackPeter]

The analysis of what is an appropriate level of capital for 'Heartland' to hold has become more complicated. In 'Heartland Bank' terms, it has become easier. That is because the reverse mortgage Australian loans have been hived off into a separate entity. But we shareholders can no longer buy shares in 'Heartland Bank' directly. We can only buy into a parent entity 'Heartland Group Holdings' that still includes those Australian Reverse Equity loans. A comparison of the 'Heartland Bank' end of year position and the 'Heartland Group Holdings' end of year position sheds further light on this matter.

	Heartland Group Holdings		less Heartland Bank	equals Heartland Troublesome Holdings
Assets	$4,926.404m	(100.0%)		$4,138.735m	$787.699m
Liabilities	$4,250.736m	(86.3%)	$3,535.345m	$715.391m
Equity	$675.668m	(13.7%)	$603.390m	$72.278m

And why exactly would you call the REL's "troublesome"? They should be as safe as any other mortgaged loan with a quite small loan ratio ... I would be more concerned about some of the business loans HGH is making to small business in NZ ...

[Snoopy]

And why exactly would you call the REL's "troublesome"? They should be as safe as any other mortgaged loan with a quite small loan ratio ... I would be more concerned about some of the business loans HGH is making to small business in NZ ...

I did not wish to imply that all reverse mortgage loans are troublesome. Rather the point I was trying to make was that it is the overgearing of that Australian Reverse Mortgage Portfolio that is potentially troublesome. No matter how secure the underlying loan in market terms, the security of that loan from an investor perspective can be reduced as the lending entity borrows more and more. This is not just my view. It is the view of the NZ Reserve Bank which had placed restrictions on how much Heartland Bank could weaken their capital position by boosting their offshore exposure to Australian Reverse mortgage loans before the associated capital risk to shareholders funds became too great. Heartland's solution was to offload the Australian reverse mortgage assets into a separate investment vehicle. That greatly decreased the risk profile of Heartland Bank going forwards. But it made no difference whatsoever to the risk profile that will be experienced by Heartland Group Holdings shareholders. Indeed with the subsequent increase in Australian mortgage funding announced on 2nd July 2019, I would argue that the capital risk going forwards for HGH shareholders has substantially increased.

SNOOPY

[Beagle]

Nice summary, thanks Snoopy.

[BlackPeter]

I did not wish to imply that all reverse mortgage loans are troublesome. Rather the point I was trying to make was that it is the overgearing of that Australian Reverse Mortgage Portfolio that is potentially troublesome. No matter how secure the underlying loan in market terms, the security of that loan from an investor perspective can be reduced as the lending entity borrows more and more. This is not just my view. It is the view of the NZ Reserve Bank which had placed restrictions on how much Heartland Bank could weaken their capital position by boosting their offshore exposure to Australian Reverse mortgage loans before the associated capital risk to shareholders funds became too great. Heartland's solution was to offload the Australian reverse mortgage assets into a separate investment vehicle. That greatly decreased the risk profile of Heartland Bank going forwards. But it made no difference whatsoever to the risk profile that will be experienced by Heartland Group Holdings shareholders. Indeed with the subsequent increase in Australian mortgage funding announced on 2nd July 2019, I would argue that the capital risk going forwards for HGH shareholders has substantially increased.

SNOOPY

Fair enough ... though as long as they make sure that they have enough headroom in their loan to equity ratio (and it is my understanding they do), they should be fine. They do provide loans which are typically paid back within a decade (average remaining lifetime of mortgagees) and are secured by mortgages with quite significant headroom.

Sure - property prices can drop, but how likely is it that they drop long term (even a a short blip like 2008 would be quite immaterial for them) by a significant amount (say 30% plus)?

On a second thought - there is one big risk I could see, and this is that at least parts of Australia become an undesirable (or uninhabitable) destination due to climate change really starting to bite ... so, yes, if too many of their securities become e.g. uninhabitable due coastal erosion and floods insurance companies don't want to pay for anymore or if these properties are in soon to be ghost towns due to drought destroying the agricultural base, than yes, there would be a real issue.

It might be interesting to do some analysis based on the environmental risk profile of their securities ...

[Beagle]

HGH call account rate slashed to just 1.6%...ouch.

[justakiwi]

Dammit

HGH call account rate slashed to just 1.6%...ouch.

[RTM]

HGH call account rate slashed to just 1.6%...ouch.

That's a buggar. Its pretty hard to know where to stash spare money.
I've got some with KiwiBank as well. Haven't checked that recently.
Thx for letting me know....I seldom check.
And they don't seem to let me know...even tho Ive asked them to.

[Beagle]

That's a buggar. Its pretty hard to know where to stash spare money.
I've got some with KiwiBank as well. Haven't checked that recently.
Thx for letting me know....I seldom check.
And they don't seem to let me know...even tho Ive asked them to.

You're welcome mate. I have a strong dislike for major reductions in call account interest rates with no notification by the bank but Heartland are by no means the only offender. I just shifted $100K over to them the other day which is the only reason I looked afterwards to make sure the money had arrived. Might shift it back and buy some more yield stocks now as its getting close to the point where their call account is practically worthless, other than as a relatively safe place to store money.