HGH - Heartland Group Holdings

[winner69]

All other in just over an hour ...quick chat to annoying shareholders and then off to thevreal business of the day

Geoff did mention ‘horses for courses’ so that’s a hint.

[Beagle]

Overdue for a peer group comparison. I think we all know the Australian banks are grappling with issues and don't need to regurgitate all of them.
FY20 forwards PE's
BEN 13.9 Comment a no growth bank with eps in FY17 and FY18 higher than either the forecast for FY20 or FY21 !
BOQ 12.7 - Comment - same as above
ANZ 12.2 Comment - Crikey do they have issues on both sides of the Tasman or what !...which probably explains their low PE
NAB 13.4
WBC 13.1
CBA 16.2
Australian sector average 13.6

How does HGH compare. Has been growing eps steadily but somewhat frustratingly more slowly in recent years. Mid point of FY20 forecast is 78.5m which gives forcast eps of 13.59 cos and a forward FY20 PE of just 12.2.

I think their generally better track record of eps growth, better capital ratio and better earnings prospects should accord them a PE at least the same as the sector average in Australia, 13.6 which could see a rerating to 13.6 x 13.59 = $1.85 in early 2020.

Gross yield assuming 10.5 cos in fully imputed annual dividends for FY20 is 10.5 / 0.72 = 14.583 / 166 = 8.8%.

I think eps growth in FY21 will be stronger than FY20. Disc 5.3% portfolio allocation.

[percy]

Another very positive agm .
Interesting to learn from HBL CEO, Chris Flood, after the meeting,how big, and how fast Kia NZ is growing.
REL's in Australia were 100% originated by brokers.Now down to 70% and expected to fall further as more people deal direct with HGH.
HGH/HBL are currently trading well.
Also positive is HGH's capacity to "adjust" HBL's equity ratio "at will" to suit The Reserve Bank of NZ's capital requirements.

[Beagle]

Thanks for your feedback Percy. yes Kia as a value brand is growing very strongly in N.Z. See above PE comparison.
Where do you see a fair forward PE for HGH ? (Range has been 11-17.5 in recent years)

[percy]

The Australian "Big Four" Banks remain pillars of the Australasian economy,and therefore have a greater acceptance from investors.
A friend of mine has had Westpac for years,and has decided to go out of his way to find funds for their capital raising.I am sure ANZ,and NAB will have the same support from their shareholders too.
This means the Australian Banks will trade at a higher PE ratio than small NZ Bank Group HGH.
So if you can buy HGH on the same sort of PE ratio as The Australian Banks,you can be assured you are finding excellent value.
I think a lot of retired investors are more interested in HGH's high fully imputed dividend.Earnings growth means HGH will be able to keep paying them,and will have the capacity to increase them.
Thinking years ahead,the huge growth HGH are achieving in Australia, may mean HGH will not be able to pay 100% fully imputed divies,however this will be off set by big increases in their SP.Australian investors will drive it looking for franking credits.

[Beagle]

Thanks Percy. My observations over the years are that at times HGH has traded on metrics materially above the Aussie banks. That marks it out as reduce / sell. When its materially below like it is now I think its accumulate / buy. Only HGH gives full imputation credits. Once RBNZ clarifies their capital requirements I think that unless there is something in there that's commercially untenable this is due for a 10-15% jump. If I'm wrong and it stays where it is for the next year and we just get an 8.8% gross dividend yield that's not too harsh to endure is it

[Snoopy]

A 10 am start not for Geoff ...or is he always this boring

Nothing wrong with a banker being boring. In fact if you wanted to unseat Geoff from the board, your best chance would be to put up a candidate against him who is even more boring, and that would probably be a good thing! At least *I* was excited, getting to attend my first Heartland AGM. And for those of you who want the real oil, I won't keep you hanging until the report end. The club sammies, freshly baked scones and fruit sticks tasted really good.

I won't go over the actual results, all those graphs and things. You shareholders all know what the forecasts are. I could probably save the Heartland presentation team quite a bit of money by drawing up next years presentation slides right now. A simple linear extrapolation from this years slides should do it.

Jeff put in a good effort answering shareholders written questions, which were intelligently formulated. Australia was a big theme from the shareholder quizzers. The tide of baby boomers retiring is too hard to resist as a business opportunity. Jeff announced that Heartland's securitization facility was now up to a potential total of $1.05billion, which is quite a lift from the $650m maximum headroom at balance date. We were told the board just yesterday on top of this approved the issue of another $A100m of Aussie wholesale bonds, bringing potential funding from that source up to a total of $A150m. Plenty of capital available in the meantime for Australia, but will it last?

One shareholder noted that the Commonwealth Bank of Australia, a big funder of reverse mortgages in Australia stopped writing any new business at the start of 2019. (Following the exit from the reverse mortgage market by MacQuarie Bank and Westpac in 2017, this means there are no big Aussie player left doing reverse mortgages.) So how could Heartland be supported doing reverse mortgages as a customer going forwards, when their supporting bank, that underwrote most of the securitization, had pulled the plug on their own reverse mortgage product? Jeff replied that the regulatory requirements for Reverse Mortgages had tightened in Australia and it was no longer realistic for the big banks to have Reverse Mortgages as an 'add on' product at the branches. Heartland's more focussed approach of having reverse mortgage specialists at a call centre who only dealt with reverse mortgages and knew all the legal boxes to tick was the way forwards. He also added when prompted that the new wholesale securitized banking arrangements in Australia at Seniors Finance were CBA (as before) , Westpac and ME Bank (a branch-less digital bank owned by 26 of Australia's superannuation funds).

There was a question from the floor on climate change and whether fires, floods and the ocean re-grabbing the coastline could 'claim back' any of the equity that was underwriting the Reverse Mortgage loans. Jeff replied that all properties that had reverse mortgages taken out against them were require to be insured. He added that when writing Reverse Mortgages, they had largely stuck to the bigger cities in New South Wales, Victoria and South Queensland which had higher capital growth and didn't have the rural fire risk or coastal erosion risk.

There were questions from shareholders on the sub par return on equity (11.1% over FY2019) when compared with a benchmark return for Aussie listed banks of 11% to 15%. Jeff noted that excluding one offs the ROE for FY2019 was 11.7% and underlying ROE was up to 12.2% for the second half. Jeff said that one way to raise this ROE figure was to have a 'just in time' capital raising, as opposed to the old system of raising capital in one lump, then having to wait months or even years before it was fully deployed. Jeff said the new group structure allowed 'just in time capital raising' to happen. I am not sure I fully understand this comment. As Heartland Group Holdings shareholders, we still have to hold onto the capital until the subsidiary we call 'Heartland Bank' needs it. So although the ROE at Heartland Bank goes up, the ROE at Heartland Group Holdings, the compnay we hold shares in, does not under that scenario. Perhaps another shareholder who was there at he AGM can better interpret what Jeff said that I did?

Next Jeff produced an an ROE bar graph showing ROE on the different classes of loans. This showed car loans had by far the greatest return on equity. A question from the floor revealed that the delinquency rate for these loans was just 70 basis points or 0,7%. That low figure is probably explained by the fact that most of these loans were to new car buyers (JLR, Holden and Kia in particular). However there were no plans to extend this business category of loan into Australia. Jeff made a perhaps telling remark that car loans in Australia are 'different'.

Big Geoff pronounced Heartland well placed to meet any further Reserve Bank capital adequacy moves. Heartland already have a capital to loan ratio of 13.5% on the books. And the rumoured 15% requirement that may or may not be confirmed by the Reserve Bank in December would not be too difficult a stretch task to meet. A shareholder asked what the prospects were for 'credit upgrade'. Jeff said he was happy with the BBB rating they had and that there was no firm path to follow, as laid out by the rating agencies, to go to BBB+. He thought the best way to do this, comparing Heartland with financial institutions with higher ratings would probably be to just get bigger!

A shareholder complained that they had to go to Westpac to get out and deposit cash. Jeff explained that Heartland did not have the scale to process cash transactions at their own branches. He said that cash handling had been outsourced and that Heartland current account holders were actually now customers of Westpac. These Heartland cash accounts even had Westpac account codes!

Jeff's big push for the future will be in the digital space. In Heartland terms 'digital' is not about devices, even though millenials aged 17 to 36 now largely regard mobile devices as their sole tool with which to transact. Even Internet banking is old school' for this group. Digital in Heartland terms means being flexible.and it means being fast. This is where Heartland has an advantage. Their leaner meaner structure makes it easier for them to adapt. Today's big thing is tomorrow's old thing. Heartland must keep moving forwards. In this regard don't be surprised if Jeff is not at the lectern at AGM2020. What you will be seeing is a real world manifestation of the quantum theory based Heisenberg Uncertainty Principle. Just when you have located Jeff blink and he will suddenly vanish, having moved on to the next project.


SNOOPY

[Beagle]

Good write up Snoopy, thanks mate.

[peat]

In this regard don't be surprised if Jeff is not at the lectern at AGM2020. What you will be seeing is a real world manifestation of the quantum theory based Heisenberg Uncertainty Principle. Just when you have located Jeff blink and he will suddenly vanish, having moved on to the next project.


SNOOPY

Yes thanks Snoops
That sure is a trippy ending to the story.

[BlackPeter]

Oustanding notes from Snoopy! Cheers ... saves me the job to try and decipher my handwritten notes ;

...

There were questions from shareholders on the sub par return on equity (11.1% over FY2019) when compared with a benchmark return for Aussie listed banks of 11% to 15%. Jeff noted that excluding one offs the ROE for FY2019 was 11.7% and underlying ROE was up to 12.2% for the second half. Jeff said that one way to raise this ROE figure was to have a 'just in time' capital raising, as opposed to the old system of raising capital in one lump, then having to wait months or even years before it was fully deployed. Jeff said the new group structure allowed 'just in time capital raising' to happen. I am not sure I fully understand this comment. As Heartland Group Holdings shareholders, we still have to hold onto the capital until the subsidiary we call 'Heartland Bank' needs it. So although the ROE at Heartland Bank goes up, the ROE at Heartland Group Holdings, the compnay we hold shares in, does not under that scenario. Perhaps another shareholder who was there at he AGM can better interpret what Jeff said that I did?

...
SNOOPY

Related to the funding of the Australian REL -

I thought Geoff was referring to the quite different funding model in Australia where they basically get their money by issuing capital notes to institutions and bundeling
securitisation of mortgages instead of increasing their capital by issuing shares or bonds through the stock market ...

This is something they can do quite flexible (on a monthly or even weekly schedule) and without the need to park any equity in the Heartland Group Holding.