HGH - Heartland Group Holdings

[Muse]

liquidity nearly equal to on call deposits- that's a very good bank.
But how robust is their loan book I wonder?

CaM - I normally wouldn't share things I've prepared for my own benefit but given interest in the topic I've attached a few workings from my files.

Below is a snapshot that includes Heartland's actual incurred net credit losses as a % of average interest earning assets. Within a banks P&L there is total impairments, which consists mainly of the sum of the ACTUAL receivables written off during a period (net of recoveries), and then the movement in provision which can be a bit chunky as things are provided for and released. Bad debt expense as a % of ave assets dropped 29bps, and in relative terms improved 57% (-.22%/-.51% less 1) on FY20 results. Actual credit loss expense in 1H FY23 improved on FY21 and FY22 (when conditions were extremely benign), and in a macro environment where interest rates and inflation are high and the economy contracted in the fourth quarter. I think this is a remarkable achievement all things considered.


Attachment 14523


In my view much of this is due to the improved credit mix of receivables. For instance, HGH wrote P2p personal loans via Harmoney (who have now discontinued facilitating P2P loans) with those receivables peaking at 5.3% of total gross credit exposure in 2020. When P2P loans were peaking, while they only represented ~5% of total receivables they contributed 30-40% of total heartland impairments during those periods. Personal lending is now down to 0.9% of total exposure. Reverse mortgages and mortgages which are relatively low risk have also increased in % of the book, from 27% at the start of 2018 and are now 35.3% now.

I saw a great bit of analysis years ago from a broker looking into the mix of HGH receivables but they've never updated it so I went back and recreated it, updated it and made it my own. It basically looks at each type of credit exposure, assigns a relative risk grade (IE how they compare to each other, but not in an absolute sense), and then comes up with a weighted average index. It shows it has improved and continues to improve. Some of the weightings are subjective but none the less its a useful framework. IE personal lending clearly if on a 1-5 scale is a 5, RM's a 1, mortgages a 2...rural more difficult to consider but conservatively assigned it a high/4 risk weighting. P2P lending I've shown as a 5 (as wanted to keep it 1-5) but in reality its probably more like a 7. It's all highly subjective but I thought it was a (semi) interesting framework, though I think the real story is simply just the % mix of personal lending vs RM and mortgage lending.

Attachment 14524


NZ reverse mortgages have a weighted average LVR of 19.7% (0 loans over 75% LVR) and an average borrower age of 78. Australia's are much the same: weighted ave LVR of 20% (only 3 loans over 75% LVR) with an average borrower age of 77.

Looking at the relatively small mortgage book (4.3% of total exposure), as best I can tell by looking at the HBL disclosure statement, even after last years decline in property prices, 99% of the mortgage book was below 80%. Only 1% was above 80%, and 0% above 90%. They don't provide information below the 80% so dont know what the weighted average LVR is.

So I personally believe HGH have made strides in improving the credit quality of their book, evidenced in the proportion mix of high risk and low risk lending, and credit losses / bad debt expense as a % of assets.

On 30 June 2022 HGH provided $8m towards a specific macro conditions provision. Last year HGH had total impairment expenses of 13.8 - consensus forecast is for that to rise to 18.7 in the current year. I'm not brave enough to wager a guess on what it'll ultimately be.

[Snoopy]

CaM - I normally wouldn't share things I've prepared for my own benefit but given interest in the topic I've attached a few workings from my files.

<snip>

Hope that is useful.

FM that is a great piece of work, and hopefully should help remove some jitters from 'nervous nellie' Heartland shareholders. I guess the only caveat is that all of this information is historical (obviously) and that default risk in today's market is not necessarily the same as default risk in tomorrow's market.

I note with interest how you have classified loan category risk on respective category ratings of 1 to 5. I wonder if it is possible to adjust this model to reflect what I am talking about? I am bringing in the idea here of 'relative risk change'. As an economy enters recession loan risk will go up. But some categories of loan risk will go up more than others. In order to answer that question myself, I would need to know a bit more how your relative risk rating system works.

For example, I notice you have categorised reverse mortgages as the lowest risk category of all (1), while personal retail mortgages come in under the second least risky category (2). One way of interpreting that would be to say that based on those absolute numbers (1&2), a retail personal mortgage is twice as risky as a reverse mortgage. Yet both of these are loans against the same asset class! That doesn't seem right to me. I may be way off beam about this and be reading your table in the wrong way. But I am wondering if you could clarify? TIA

SNOOPY

[Muse]

@clearasmud - w/ respect to liquidity - banks in New Zealand are all governed by the RBNZ and so far as I'm aware are all subject to the same regulatory minimum liquidity ratios.
In that respect its interesting to note that of the 3 key liquidity ratios subject to regulatory requirements that Heartland is bang-in-line with the big 4.

Heartland's December quarterly average core funding ratio was 90.4% vs big4 of 90.2% (and was 91.2% as at 31 December 2022), 1 month mismatch ratio of 7.6% vs big4 of 7.8% (and heartland's rose to 10.2% on 31 December 22), and 1 week mismatch ratio of 8.0% vs 8.1% for the big banks (and was 9.8% at 31Dec22).

Attachment 14525

Heartland's core funding ratio was above Westpac and ASB, its 1 month mismatch ratio was above ASB and the same as westpac, and its 1 week mismatch was above both ASB and BNZ.

Banks receive credit ratings from various agencies. The only provider to cover all the big4 and heartland (on a like for like basis) is Fitch. Big4 rated A+, heartland BBB (same as co-op bank and SBS bank).

All useful bits sourced directly from the RBNZ (w/ the exception of the 31dec22 hbl liquidity ratios - those are from heartland's latest preso, whereas the HBL quarterly average's are from RBNZ)

DISC: shareholder in HGH.

[clearasmud]

Thanks so much F.M.
Great analysis.
Is core funding the same as equity. What is mismatch?

[Muse]

I guess the only caveat is that all of this information is historical (obviously) and that default risk in today's market is not necessarily the same as default risk in tomorrow's market.

I note with interest how you have classified loan category risk on respective category ratings of 1 to 5. I wonder if it is possible to adjust this model to reflect what I am talking about? I am bringing in the idea here of 'relative risk change'. As an economy enters recession loan risk will go up. But some categories of loan risk will go up more than others. In order to answer that question myself, I would need to know a bit more how your relative risk rating system works.

For example, I notice you have categorised reverse mortgages as the lowest risk category of all (1), while personal retail mortgages come in under the second least risky category (2). One way of interpreting that would be to say that based on those absolute numbers (1&2), a retail personal mortgage is twice as risky as a reverse mortgage. Yet both of these are loans against the same asset class! That doesn't seem right to me. I may be way off beam about this and be reading your table in the wrong way. But I am wondering if you could clarify? TIA

SNOOPY

yep agree w/ that and take your point on reverse mortgages and mortgages. I guess I'm a little bit influenced by the fact I can see the LVRs and age profile of RM receivables, on mortgages I can't. It's totally subjective and relative risk can change through time as you rightly say. I'm probably less interested in that weighted ave number popping out at the bottom than just the changing % of personal loans relative to the % of RMs + mortgages, which is basically the underlying story in my view.

[percy]

yep agree w/ that and take your point on reverse mortgages and mortgages. I guess I'm a little bit influenced by the fact I can see the LVRs and age profile of RM receivables, on mortgages I can't. It's totally subjective and relative risk can change through time as you rightly say. I'm probably less interested in that weighted ave number popping out at the bottom than just the changing % of personal loans relative to the % of RMs + mortgages, which is basically the underlying story in my view.

Thank you Fiordland Moose for sharing your excellent research.

[Rawz]

Yes thanks FM for sharing, wish i could give more reps. The HGH book is quite well spread between RM, Motor, Rural and Business lending. I suppose next step is business and motor lending in Aus, after stockco is bedded in.

[Snoopy]

Yep agree w/ that and take your point on reverse mortgages and mortgages. I guess I'm a little bit influenced by the fact I can see the LVRs and age profile of RM receivables, on mortgages I can't. It's totally subjective and relative risk can change through time as you rightly say. I'm probably less interested in that weighted ave number popping out at the bottom than just the changing % of personal loans relative to the % of RMs + mortgages, which is basically the underlying story in my view.

I think you are right to concentrate on the underlying story rather than being too caught up on the minutiae of detail. But going back to the 'mortgage', 'reverse mortgage' relative rating, suppose you thought of that in a slightly different way.

If, for instance, you gave all loans a base rating of '5' -and then-, keeping the 1-5 rating scale you have now, added these relative risks to that 'base risk rating'. You would then end up with an overall risk ratings of:

For reverse mortgages: 5+1=6
For regular mortgages: 5+2=7

That would give a relative risk rating of: (7/6-1) = 16.6% verses (2/1 -1)=100% under the other alternative method. Just saying that the same risk ratings you use now could give very different relative risk results, depending on how you choose to use them.

SNOOPY

[Muse]

Thanks so much F.M.
Great analysis.
Is core funding the same as equity. What is mismatch?

No worries - mainly just taking things directly from the RBNZ and lining them up side by side in a table really.

Here is a link to the liquidity definitions from the RBNZ - no point me making a hash out of trying to explain them (I have an interest in the sector having dabbled with hgh shares, but am no expert and have never worked in commercial banking so my understanding of many things likely incomplete)

https://bankdashboard.rbnz.govt.nz/liquidity

RBNZ bank dashboard a free great resource w/ a lot of timely data in it. It's worth people having a look around, doing their own work and coming to their own view w/ respect to their own banking considerations.

[ralph]

The weakest link in our banking sector HGH getting trashed again today ,I suppose if any this will be the One