HGH - Heartland Group Holdings

[Snoopy]

Don't know about most financials' being rubbish but banks and finance companies trying to model up future estimates of bad and doubtful debts on all existing loans when nobody has any idea how long Covid 19 will wreck havoc on the economy...and the effect on borrowers. Lets just say the other Beagle should stop wasting his time. We'll only know what bad debts really are once Covid is all over.

I was thinking that if Harmoney could come up with a result in quick time, the Maori/Pakeha Girls/Boys, tasked with the equivalent job at Heartland are doing a piece of cake exercise. But after checking out the BDO paper on what to do:

https://www.bdo.global/getattachment...spx?lang=en-GB

it seems I am wrong. Wrong, because most of those Harmoney loans are relatively short term. So there isn't much 'forecasting' involved. Harmoney already know whether their loans have gone bad.

I did find this gem in the BDO report that have direct relevance to Heartland's motor vehicle loan portfolio. From p11

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BDO comment
"For loans with ‘front loaded’ loss patterns such as car loans, where a majority of the losses tend to occur in the first couple of months after a loan is advanced, applying the 3 stage model would be likely to result in a substantial loss on initial recognition for 12-month expected credit losses. This would be followed by recognition of actual credit losses, and a release of the provision."

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So it does appear that 'write backs' on previously impaired motor vehicle loans are almost expected,

Now this from p13:

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DETERMINING SIGNIFICANT INCREASES IN CREDIT RISK

"The transition from recognising 12-month expected credit losses (i.e. Stage 1) to lifetime expected credit losses (i.e. Stage 2) in IFRS 9 (2014) Financial Instruments is based on the notion of a significant increase in credit risk over the remaining life of the instrument. The focus is on the changes in the risk of a default, and not the changes in the amount of expected credit losses. For example, for highly collateralised financial assets such as real estate backed loans when a borrower is expected to be affected by the downturn in its local economy with a consequent increase in credit risk, that loan would move to Stage 2, even though the actual loss suffered may be small because the lender can recover most of the amount due by selling the collateral."

I read that as saying that just because a loan moves up the risk scale , that says nothing necessarily about the likelihood of recovering the debt. For example those legacy sharemillker loans that Heartland has may be listed as impaired even though there is a ready market for cow meat if the cows could not be sold as milk producers. Shoot the cows and consequently the loan can be fully repaid.

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Now we move to p19

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"Various sources of data can be used to estimate expected credit losses. Entities should consider both borrower specific factors, macroeconomic conditions, and internal and external information such as internal historical credit loss experience, internal ratings, and external reports and statistics. Entities should also take into account both the current and future forecast direction of conditions at the reporting date.An entity is not required to incorporate forecasts of future conditions over the entire remaining life of a financial instrument. For long dated instruments, the standard does not require a detailed estimate for periods that are far in the future – for such periods, an entity may extrapolate projections from available, detailed information"

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That last sentence is interesting. How I read it is that if you can make a reasonable estimation of medium term losses, say one to two years out, you can then extrapolate those losses forwards. You don't have to worry about guessing what will happen much further out than twelve months, as there will be no comeback if your longer term write off guesses are wrong.

So where does this leave Heartland? We can predict big write-downs because the shorter term loans, like Harmoney, have already shown how bad the near term downturn is, for some types of loan at least. Beyond that the writedowns will be worse than many expect (including me) because bankers are inherently conservative once the bad debt baby comes back to hit them. And given they have documented problems with short term loans, it would be a brave banker who would say that bad debt rates in the ensuing twelve months are going to get substantially better. We also know they can extrapolate beyond the medium term to the longer term. This means a picture of maximum gloom and doom should get bank directors 'off the hook'. A cash issue would get the directors a bonus point for risk mitigation too. So I am going to change my mind on this issue and say a cash issue is imminent, even though it probably isn't needed, except for 'butt covering'.

On a brighter note, the outlook two to three years down the track should be much better than expected as the write backs start to come through. So no need to throw your investment hands in the air. Wasn't it Warren who said: "Be fearful when others are greedy and greedy when others are fearful."?

SNOOPY

discl: continuing to hold and bracing myself for more headline bad news than I previously expected and a sharper rebound that I previously thought.

[winner69]

March 18th when the **** started hitting the fan
Heartland continues to forecast a result in line with the original NPAT forecast in the range of $77 million to $80 million, and expects that a result in the middle of that range is likely.

Nothing since - solid result coming up in a couple of weeks .......





.......or if he’s read Snoopy prognosis Jeff better come clean on Monday and say he’s been living in hope and npat is nowhere near $77m ...




....and then we can have a debate about disclosure obligations

[nztx]

March 18th when the **** started hitting the fan
Heartland continues to forecast a result in line with the original NPAT forecast in the range of $77 million to $80 million, and expects that a result in the middle of that range is likely.

Nothing since - solid result coming up in a couple of weeks .......





.......or if he’s read Snoopy prognosis Jeff better come clean on Monday and say he’s been living in hope and npat is nowhere near $77m ...




....and then we can have a debate about disclosure obligations

well they've been continuously consistent in not varying the earlier release..

Maybe they've got some hidden reserves to trot out to negate a few bad pennies or already have provided
for a few harmonious things hitting the fan along the way..

[Snoopy]

March 18th when the **** started hitting the fan
Heartland continues to forecast a result in line with the original NPAT forecast in the range of $77 million to $80 million, and expects that a result in the middle of that range is likely.

Nothing since - solid result coming up in a couple of weeks .......

.......or if he’s read Snoopy prognosis Jeff better come clean on Monday and say he’s been living in hope and npat is nowhere near $77m ...

....and then we can have a debate about disclosure obligations

Just to be clear. I have made no overall numerical prognosis for FY2020. It is all historical anyway and share markets are always forward looking. I am interested in the FY2020 result in that it feeds into what happens in FY2021 and beyond. So if the downturn in Harmoney comes earlier and is no larger than I predicted, that won't invalidate my prediction for FY2022 (as an example). But if the downturn in Harmoney in FY2020 is already greater than I am predicting in FY2022, then I may have a modelling problem. Yet since I am already modelling a complete shut down of Harmoney by 2022, I don't think this is likely!

If there is any discrepancy between the $77-$80m forecast for FY2020, and what is declared, I am sure Jeff will run out the old line that the $77-80m referred to 'operational profits' and any extra write downs are 'non-cash items'. I reckon the Holden lion might come roaring to Jeff's rescue this year. Holden may be a zombie company. But Holden is a solid product. Kiwis love a bargain and they have been second only to Toyota in at least one sales month. Some areas of business do better than expected and others do worse. It is usually the way.

SNOOPY

[Marilyn Munroe]

A single point of data.

I have an acquaintance in a heavily impacted tourist related business.

He has a vehicle on hire purchase with Heartland and has stopped making payments.

From his comments it appears Heartlands approach is nurturing rather than "Tony Soprano".

Boop boop de do
Marilyn

[RTM]

I see Xero have bought a lending company to provide short term finance for companies against receivables.
Wonder how much this might impact Heartland? Seems like a pretty neat add on for Xero,

[Beagle]

Some will resort to receivables factoring...sometimes though of as lending of last resort. Xero would be in an excellent position to run analytics on customers to determine safe lending level's and advance money on receivables based on very current data.

Meanwhile the wall of insolvencies looms. https://www.interest.co.nz/business/...September+2020

The other Beagle better tune up his doubtful debt model because what this dog is sniffing at the coal face is very worrisome. Lots of business's just hanging on by their fingernails...

[winner69]

Some will resort to receivables factoring...sometimes though of as lending of last resort. Xero would be in an excellent position to run analytics on customers to determine safe lending level's and advance money on receivables based on very current data.

Meanwhile the wall of insolvencies looms. https://www.interest.co.nz/business/...September+2020

The other Beagle better tune up his doubtful debt model because what this dog is sniffing at the coal face is very worrisome. Lots of business's just hanging on by their fingernails...

Good comment posted after that article

"We looked at the books, and yep, you're insolvent."

Hope they don't have a Heartland quickie

Sad thing though there are a few who are too scared to look at their books

[KJMLimited]

Big volume yesterday of 3.5m shares, well above the daily average. Didn't UDC recently note an increase in lending volumes? Maybe the buyers sense a 'better than expected' report next week.

[sb9]

Big volume yesterday of 3.5m shares, well above the daily average. Didn't UDC recently note an increase in lending volumes? Maybe the buyers sense a 'better than expected' report next week.

Did notice the big volume crossing y'day afternoon, added a few more on Friday.