HGH - Heartland Group Holdings

[KJMLimited]

I assume they talk to customers, use the feedback as one input, discount some more based on other inputs, make further assumptions, discount some more just to acknowledge the uncertainty and get to a number. Any decent lender will be doing this on a daily basis. As to whether the new number (or further write down of loans) is material enough to tell the market, 10% is a rule of thumb. They've had ample time to tell the market if that was the case so if they turn up tomorrow with a new level of write-offs then they will be in trouble won't they?

[Snoopy]

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

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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'.

Anyway back to HGH. Got to admit I am confused despite the other Beagle's attempts to explain it. In line with the new international financial reporting standard concerning doubtful debt provisioning and a much more forward looking stance regarding same we have seen every other bank report results materially affected by this new standard in the context of this Covid environment and its impact on customers and the economy.

HGH have clear obligations regarding continuous disclosure and have a forecast in the market in the late $70m range.

I struggle to see how they can report a result within such a range that's consistent with this new IFRS standard and their continuous disclosure requirements. They must be in breech of one or the other.

In any event I cannot fathom how they can possibly make any sort of reasonable judgement about what bad and doubtful debts will be going forward seeing as Covid and its effects on customers and the economy is unprecedented and any attempt to use previous modelling such as during the GFC might be wildly inaccurate.

Well as you said Beagle I answered this before and, for those who haven't taken things in, I repeat my answer again (above). There is a difference between being able to pay the interest on a loan and the ability to repay the principal of that loan. If interest payments stop then the underlying loan asset can still be sold to recover any debt and deferred interest payments. It wouldn't surprise me in the least if Jeff after delivering his AGM address, pulled a butchers knife out of his trousers and when straight down to the farm to slaughter a few dairy cows. The meat would pay the loan capital off, and there would probably even be enough money left to get any errant blood stains off Jeff's business suit at the dry cleaners. Despite many loans being in possible default, and the new 'predictive standards' requiring them to be reported as such , that doesn't mean the debt will have to be written off.

My memory of how the Australian banks are playing this Covid-19 situation is rather different to yours. Yes there were big write offs. But it was also clear these write offs were backward looking and it was made very clear that as Covid-19 ravaged its way through the loan books more write offs would likely be required. No provision was made for these 'next stage' write offs. The most glaring example I remember was those homeowners who had taken a mortgage payment holiday yet were not being recorded as any bad debt risk. There is no such equivalent risk with the Heartland reverse mortgage loan book, which is one reason that I think Heartland is in a better position than the big four Aussie banks to withstand Covid-19.

I agree that forecasts for FY2021 may end up being 'wildly inaccurate'. But directors must only be able to demonstrate that they have put their best efforts into forecasting the future position and have acted prudently in line with those reasonable beliefs. The law appears to allow them to forecast future bad debts as a linear extrapolation of current bad debts. They can forecast something that turns out to be wrong and still fulfill their legal obligations is my reading of those BDO report comments. Of course as time goes by and their forecasts look wrong, the directors do have an obligation to update their forecasts and keep shareholders informed. But I don't think you can criticise directors for not being able to forecast three years in advance in this business climate.

SNOOPY

[peat]

In any event I cannot fathom how they can possibly make any sort of reasonable judgement about what bad and doubtful debts will be going forward seeing as Covid and its effects on customers and the economy is unprecedented

And why is this different for any of the banks. I tend to think they are all just wildly guessing and I have my sneaking suspicions that many of the covid impairments being made by other banks are likely to come back into the normal books at some time. Who knows of course and we all have a-holes I mean opinions

[Beagle]

I assume they talk to customers, use the feedback as one input, discount some more based on other inputs, make further assumptions, discount some more just to acknowledge the uncertainty and get to a number. Any decent lender will be doing this on a daily basis. As to whether the new number (or further write down of loans) is material enough to tell the market, 10% is a rule of thumb. They've had ample time to tell the market if that was the case so if they turn up tomorrow with a new level of write-offs then they will be in trouble won't they?

I don't know. I've put it into the "too hard" basket.

[Snoopy]

Under the continuous disclosure rules, material matters have to be announced immediately to the market. It doesn't matter whether the annual result is due in 2 days or 2 months.

While I can't disagree with your comment KJM, I am not satisfied with that explanation. To start with you make the assumption that the announcement is material, but is it? It is not marked as 'price sensitive'. All that has happened is that a bundle of existing REL loans have been packaged up and sold off as one securitized loan. No doubt Heartland still have some unspecified risk exposure to this securitized loan in extremis. But Heartland have not seen fit to tell us what risk remains once the securitized loan deal is done. If this announcement was really material, I would have expected more detail than what was given. There is a promise that more securitized loans in the future are possible. But on a day to day basis, nothing much has changed with this announcement. Now, if there was a change in a substantial shareholder holding (as a completely different event example), that would have to be notified to the market too - but not immediately. I think there is something like a month's grace before a notice has to be posted. So I have real doubts that this announcement was 'material'.

Nevertheless, for the sake of argument, let's assume the new lending arrangement announcement was material. I would assume that the board has met, probably today, to sign off the annual result presentation for tomorrow. It would seem quite logical for the board to sign off this new loan deal as well at the same board meeting. The securitized loan deal could have been done 'subject to board sign off'. That would have been a legitimate way to delay, by a few days, the announcement of the new lending facility. But perhaps the board met on the 14th to sign off the loan deal for announcement on the 15th. If that happened, wouldn't the board have also signed off Thursday's profit release at the same time? So if the new loan arrangement was material, why has the profit announcement, which was surely even more material, been kept under wraps for three days?

I guess the proof of all this could come out in the wash with tomorrow's profit announcement. A cash issue would come as no surprise for shareholders who have seen other banks do the same to shore up their balance sheets. A cash issue would certainly be material, but it would only have been signed off at the last minute to avoid running foul of continuous disclosure rules. That means the board meeting was this afternoon. And that means the new loan arrangements, if material, were not signed off at the same board meeting. And that means the new loan arrangements were constructed in such a way that they:

1/ Were not material after all OR
2/ Did not need final board approval - by design, IOW one way or the other, the board deliberately chose to release details of the new loan arrangements two days ahead of the annual result.

SNOOPY

[Waltzing]

if interest rates stay under 1% for the next (n) years, what price will you pay for 3%.

THATS THE QUESTION.

[winner69]

if interest rates stay under 1% for the next (n) years, what price will you pay for 3%.

THATS THE QUESTION.

HEAPS and HEAPs

I suppose you saying a company paying a 10 cent share is worth $3.33 ...or if you i count imputation credits $4.50

Better to own the bank instead of investing in the bank they say ...probably same result if it goes bust.

[Waltzing]

"HEAPS and HEAPs"

YOUR THE WINNER!!!

Im not an economist but even with my accounting background not financial maths. We have discussed bold methods of direct government debt funding. Mr O has not been had his offer taken up and therefore he will have to try to keep interest rate low if he wants to support the high NZ debt.

Which assets classes are going to be in demand, buy those. In fact thats why anything on the any market paying 4.5% is still undervalued.

https://www.cnbc.com/2020/09/16/singapore-summit-cppib-ceo-on-zero-bound-interest-rates.html

https://www.cnbc.com/2020/09/16/blac...t-returns.html

[winner69]

Waltz ....cnbc is bad for your health

[Waltzing]

well its not behind a pay wall for most here for most people to read.

Bloomberg is also in use but the site we download the most is the US economic research site. Yahoo's free API was closed off a few years ago.

we use another site but thats on a VPN only.

you have to down load special OS software.

and remember we arnt always in residence in these lovely isles.

we have our own languages to use far better at interlinking software than python and javascript and accessing raw data.

and we have no idea what the local news here is.