HGH - Heartland Group Holdings

[BlackPeter]

Poor Leanne. Jeff never told her when she became Heartland 'Bank' Chief Executive that Heartland isn't really a bank. It is just a jumped up finance company that does *all* its banking through Westpac, and the 'bank' bit on the Heartland name was all a marketing exercise. No wonder Heartland isn't on a level playing field with the real banks.

SNOOPY

You mean this might be a case of better do your research before you sign your contract? ;

[ronaldson]

DRIP shares allotted today at $1.6865 compared with the current on-market price of $1.73, so a marginal benefit for those choosing that option.

[Joshuatree]

ElNino arrived here two days ago,I like👍Holding Heartland thru whatever and out the other side,income and easy to sleep at nite stock for me.

[Norwest]

Basel III capital requirements.

Common Equity Tier 1 (CET1) is core capital that a bank holds in its capital structure i.e. retained earnings. The ratio compares a bank’s capital against its risk-weighted assets to determine its ability to withstand financial distress.

The following disclosures were all reported on 30th June 2023

Bank	CET1 %	Tier1 %	Total %
CBA	12.20	14.50	20.00
ANZ	13.50	15.40	21.10
WBC	11.86	14.02	19.71
NAB	11.90	13.80	20.20
HGH	12.68	12.68	14.71

It should be noted that HGH CET1 has been decreasing compared to both 2022 (13.49%) and 2021 (13.99%).
Infact, since 2020 HGH's CET1 ratio has only increased by 0.01 compared to the big four Australian Listed Banks increasing by 0.60 - 2.40. This is, in my opinion, because they have been paying out too high dividends instead of retaining capital.

The $100 million of bonds issued earlier this year on NZDX "HBL1T2", is classified as Tier2 capital.

The only other NZDX listed bonds "HBL020" is classified as Tier1 capital, however when they mature on 12th April 2024 I believe this will further decrease HGH's Tier1 ratio by $125 million. Any subsequent bond issues will be classified as Tier2, this is because of changes of capital definitions changes defined by the RBNZ document "BPR110" in 2021.

The big four Australian banks already meet the 2028 capital requirements, where as HGH is going to have to retain more capital in the next several years to meet these requirements.

[maclir]

Dividends possibly further threatened...Jenny Ruth works through ssome of the regulatory impacts upcoming:

https://justthebusinessjennyruth.sub...m_medium=email

[Muse]

It is good to see the new RBNZ capital requirements and the pending deposit takers act being discussed - have raised it a few times but never much interest amongst punters.

https://www.spglobal.com/marketintel...redit-65720981

https://www.rbnz.govt.nz/regulation-...io%20of%207%25

@Norwest - for the Aussie banks is it possible you are looking at their Australian parent capital adequacy ratios (IE the Aussie bank operating companies capital adequacy) rather than their NZ domiciled subsidiary capital adequacy for their operations in New Zealand? Your ratios do not appear to line up to the RBNZ dashboard. I only double checked that thought by looking at CBA (operating as ASB here) and CBA's Australian Cet1 ratio was 12.2% - for their Australian operations - which are irrelevant to NZ operations, as they are judged solely on their NZ subsidiary operations.

https://bankdashboard.rbnz.govt.nz/capital-adequacy

The RBNZ dashboard indicates all the banks in your table are well above the minimum levels, and all have some ways to go to meet the new higher requirements by 2028. The big4 banks are D-SIB's and require higher buffers than the other ~20banks. Heartland Bank Ltd (the NZ bank) will require a core capital ratio of 11.5% and a total capital ratio of 16% by 1 July 2028. The later is at ~14.7% so will need to increase by 1.3% over the next 5 years.

What is the various levers to achieving that?
* Retained earnings: maintaining and/or growing NPAT without distributing all in the form of dividends increases retained earnings & equity
* Flexing dividend payout ratio: paying out less increases retained earnings/equity
* Keeping the DRP or improving its economics - there has been a ~15% takeup in the DRP when offered
* Further capital raises: many options including various types of notes or common equity
* falling interest rate cycle: as a great deal of assets are held on a mark to mark basis, as we hit peak interest rates, and hopefully in a year or two see rates fall, those assets on a M2M basis should increase in value providing a tailwind to achieving those ratios

End result likely to be a combination of some of the above - particularly growing NPAT while (hopefully) keeping payout more or less the same, so note issues, and perhaps a tailwind from the interest rate cycle. But you can never rule out anything.

I note the brokers show HBL meeting its capital requirements by the end of the transionary period on a status quo basis. But brokers are brokers.

One thing that always strikes me is how the media and politicians are unable to see how raising capital requirements - making our banks much safer - also likely makes borrowing more expensive. Banks have to hold much more capital, and they attendant charge more for it to help recoup that reinvestment - and their profits go up. Their profits ought to go up, as they now hold billions and billions more assets than they needed to before.

Will leave the deposit takers point for a later post.

[Norwest]

@Norwest - for the Aussie banks is it possible you are looking at their Australian parent capital adequacy ratios (IE the Aussie bank operating companies capital adequacy) rather than their NZ domiciled subsidiary capital adequacy for their operations in New Zealand? Your ratios do not appear to line up to the RBNZ dashboard. I only double checked that thought by looking at CBA (operating as ASB here) and CBA's Australian Cet1 ratio was 12.2% - for their Australian operations - which are irrelevant to NZ operations, as they are judged solely on their NZ subsidiary operations.

You are correct and it's a good call out.

The figures I posted are the Australian parent company's Basel III disclosures. The reason I chose this is I can't invest directly into their NZ subsidaries.

[Muse]

You are correct and it's a good call out.

The figures I posted are the Australian parent company's Basel III disclosures. The reason I chose this is I can't invest directly into their NZ subsidaries.

Fair enough and thanks for raising.

The RBNZ's new capital adequacy rules are something I have pondered off and on about re my HGH shareholding. I think it's a good the RBNZ have done this, especially in the post GFC era, although we forget why its important and we got a little reminder after watching the mini US banking crisis back in March. But there are side effects.

Increasing the capital a bank is required to hold - and holding all else equal - ought to diminish a banks return on equity and theoretically ought to reduce it's P/BV and PE (and increase the divy yield demanded by investors, thus driving prices down). Banks won't just sit there and raise & retain more capital while not passing on any costs to customers, so it's inevitable that they raise their lending rates to compensate. Whether they can (or should) raise lending rates enough to maintain ROE's remains to be seen, but I would have thought as industry the new framework will hurt ROEs. ROE in my mind is one of the most important indicators for a bank so I've always been a bit cautious how it will impact my investment in HGH. I'm pleased HGH has a lot of long-term initiatives underway to improve ROEs as there needs to be to offset these new RBNZ requirements impact. Reducing HGH's cost to income, optimising Australia's borrowing programme (either thru repo's of StockCo's pre acquisition funding debt, and eventually expanding it to include deposits), and focusing on higher margin income streams all key to this. But they also all remain works in progress.

[Snow Leopard]

Basel III capital requirements.

Common Equity Tier 1 (CET1) is core capital that a bank holds in its capital structure i.e. retained earnings. The ratio compares a bank’s capital against its risk-weighted assets to determine its ability to withstand financial distress.

The following disclosures were all reported on 30th June 2023

Bank	CET1 %	Tier1 %	Total %
CBA	12.20	14.50	20.00
ANZ	13.50	15.40	21.10
WBC	11.86	14.02	19.71
NAB	11.90	13.80	20.20
HGH	12.68	12.68	14.71

It should be noted that HGH CET1 has been decreasing compared to both 2022 (13.49%) and 2021 (13.99%).
Infact, since 2020 HGH's CET1 ratio has only increased by 0.01 compared to the big four Australian Listed Banks increasing by 0.60 - 2.40. This is, in my opinion, because they have been paying out too high dividends instead of retaining capital.

The $100 million of bonds issued earlier this year on NZDX "HBL1T2", is classified as Tier2 capital.

The only other NZDX listed bonds "HBL020" is classified as Tier1 capital, however when they mature on 12th April 2024 I believe this will further decrease HGH's Tier1 ratio by $125 million. Any subsequent bond issues will be classified as Tier2, this is because of changes of capital definitions changes defined by the RBNZ document "BPR110" in 2021.

The big four Australian banks already meet the 2028 capital requirements, where as HGH is going to have to retain more capital in the next several years to meet these requirements.

Just a quick reminder that there is:
HGH: Heartland Group Holdings and
HBL: Heartland Bank.

Although the former owns the latter and it is the latter that is the Bank, they are two distinct entities.

[Muse]

Dividends possibly further threatened...Jenny Ruth works through ssome of the regulatory impacts upcoming:

https://justthebusinessjennyruth.sub...m_medium=email

That's a great article, thanks for sharing. Ruth is an awesome journalist - not many business reporters in her league.

I don't know much about the deposit takers insurance and I think its still a WIP but it's clear somebody's gotta pay for it - banks, bank customers in the form of higher borrowings, or probably both. A good initiative I reckon for the resilience of the banking sector, but at a cost to borrowers & banks.