HGH - Heartland Group Holdings

[CJ]

Just to reprise Tim Hunter's quote:

"As a new bank, Heartland has been given more onerous capital requirements by the Reserve Bank than the established players. Its tier-one capital ratio - basically the equity as a percentage of risk-weighted assets - must exceed 12 per cent, while the requirement for ANZ and Westpac is 6 per cent."

What this means is that if Heartland singles out $12,000 of capital, then they can sign up a loan of $100,000 tied to that capital.
If ANZ or Westpac singles out $12,000 of capital, then they can sign up a loan of $200,000 tied to exactly the same dollar amount of company capital.

If that isn't a restriction on Heartland's core activities vis a vis other banks, I don't know what is. No matter how you spin it, the Heartland banking licence does not give Heartand the same privileges as banking licences awarded to ANZ and Westpac!

My understanding is that, while the banks are currently only required to hold 6%, they will be required to have a minimum 12% once fully implemented - this could potentially lead to a lending crunch. However, that is not expected to constraint lending as they already have over 12% capital.

Can you confirm/dispute this. I will try and find an article on it tonight.

Edit: found this (haven't read it yet): http://www.interest.co.nz/news/56611...banks-basel-ii

[percy]

Tim Hunter may not have expressed himself in an optimal way. But there is nothing wrong in his article. You should not be so quick to disparage it.

SNOOPY

Well you certainly got it all wrong going on about a learners licence.
I think Tim Hunter writes very good articles as a rule.
However as I most probably understand HNZ better than he does,I thought it was a lazy article,poorly put together, with the muck up with net/gross yields adding to the confussion.

[winner69]

See F&P Finance reported a 20% increase in profit to $20m

And that $20m profit was made on $112m of equity .... that seems like an ROE of 18%

Something for HNZ to emulate eh

If HNZ interested in them the price just went up

[mouse]

My understanding is that, while the banks are currently only required to hold 6%, they will be required to have a minimum 12% once fully implemented - this could potentially lead to a lending crunch. However, that is not expected to constraint lending as they already have over 12% capital.

Can you confirm/dispute this. I will try and find an article on it tonight.

Edit: found this (haven't read it yet): http://www.interest.co.nz/news/56611...banks-basel-ii

I am interested in the new 12% cover for bank lending. What really interests me is, where is the 12% minimum equity to be held? Australia or NZ? All of us need to find out, since if the cash is held 'overseas' then it can vaporise in the heat of Oz. So, where is the cash??? And should not Heartland, SBS, Kiwi Bank etc., NZ owned Banks, considered to be more secure as a result of being NZ Banks? Comments please.

[forest]

Back to a point Snoopy made the other day about Reserve Bank Governor Graham Wheeler raising interest rates to cool the property market.

Stuff have an article about how Wheeler is really trying to target "first home buyers", and will essentially force banks into lower loan value ratios for property owners. He will do this through the 12% lower equity limit for banks. ASB would be a prime target here.

http://www.stuff.co.nz/business/mone...ming-for-loans

This of course has a much smaller to zero impact on Heartland into the future, as they don't really loan out money for first home buyers - its not a market they are targeting. There are no central bank requirements or limits I'm aware of for funding combine harvesters, trucks or livestock.

Wheeler will like the idea of LVRs more than rates rises because he won't necessarily want to target the rest of the economy with higher interest payments when the overall economy is still fragile and growth could be choked by a rates rise.

What do other punters on Sharetrader think?

I think Wheeler has the right approach, 12% obviously will make the banks more stable and therefor the whole country economy, it helps home owners not to get carried away and mortgage their properties to the hill. And if finance for property is a little limited then property prices should not rise as fast as it would other wise and therefor home owners should still find it just as easy/hard to finance a place.
All good I think.

[percy]

See F&P Finance reported a 20% increase in profit to $20m

And that $20m profit was made on $112m of equity .... that seems like an ROE of 18%

Something for HNZ to emulate eh

If HNZ interested in them the price just went up

ROE of 18% is excellent.
We have talked about ROE a long time ago on this thread.I think I compared Aussie banks ROE,and worked out 15% plus was the norm.
HNZ have first of all got to get over 10%,[which is one of their stated objectives as per Jeff Greenslade at last AGM].
They will achieve this,then I expect them to aim for 15% plus.
Longer term I expect they will be aiming for 18% .[plus?]
Then you could say we are "cooking with gas !".
Plenty for you to think about while planting your native trees.!!! lol.

[Snoopy]

My understanding is that, while the banks are currently only required to hold 6%, they will be required to have a minimum 12% once fully implemented - this could potentially lead to a lending crunch. However, that is not expected to constraint lending as they already have over 12% capital.

Can you confirm/dispute this. I will try and find an article on it tonight.

Edit: found this (haven't read it yet): http://www.interest.co.nz/news/56611...banks-basel-ii

I have read your referenced article CJ, talking about the implementation of Basel III capital requirements. At the moment it is an international target that the NZ reserve bank intends to adopt on January 1st, while other countries may take up to nine years to implement the same thing.

I am not clear how this relates to the capital ratios that the reserve bank has apparently dictated for Heartland. Are they saying that Heartland is such a new bank that they are bringing in this requirement for them in advance of 1st January 2014? Or are they saying that because Heartland is a new bank, that in itself is a reason to stick them with higher capital adequacy requirements? As I see it, it would make sense to couple the amount of back up capital that must be held with they credit rating of the bank being evaluated, not the newness of the bank. Of course compared to other banks, the Heartland credit rating is barely investment grade BBB-.

The worst case scenario is that Heartland is subject to a 'new bank' premium of 6%. That mean that come 1st January when the 12% tier one capital requirement is brought in, Heartland will require 12% + 6% = 18% tier one capital on the balance sheet.

Could it really get that bad for Heartland?

SNOOPY

PS The sting in the comparative tail is that ANZ and WBC are Australian banks. The Australian parents are not subject to NZ Reserve Bank rules!

[CJ]

I have read your referenced article CJ, talking about the implementation of Basel III capital requirements.

I have now read the article and it didn't really say what I thought it would.

The issue is that currently HNZ has to have 6% more capital than other banks. I am not sure why (googling at the moment) but I assume that over the next few years, either the other banks will be required to hold more capital like HNZ or HNZ will be allowed to hold less - either way, the difference will close over time. Will post when I find more.

EDIT1: reading this http://www.imf.org/external/pubs/ft/wp/2013/wp1307.pdf the big 4 have over 10% Teir 1 capital (pg6).

[Snoopy]

PS The sting in the comparative tail is that ANZ and WBC are Australian banks. The Australian parents are not subject to NZ Reserve Bank rules!

Further to the above comment, this is from the reserve bank glossary on what it means to be a 'locally incorporated" bank:

-----
Locally incorporated
Registered banks of a certain size (e.g.,if they have retail deposits of a value of $200 million or more) are required by the Reserve Bank to be incorporated as New Zealand companies.
This is referred to as local incorporation and it means that the full suite of New Zealand company law applies to them. In contrast, companies incorporated overseas and doing
business in New Zealand are known as “overseas companies”. Overseas companies are primarily governed by overseas law and exempt from various aspects of New Zealand company law.
-----

Now, what I believe this means is that the likes of ANZ and Westpac have been forced to set up NZ based business units that are subject to NZ Reserve bank laws. However, when you buy shares in Westpac or ANZ you are buying shares in the Australian parent, even if those shares are listed on the NZX. So as far as depositors and lenders of ANZ and WBC are concerned in New Zealand, their banks are subject to NZ laws, and RBNZ oversight. But as far as NZ shareholders of ANZ or Westpac are concerned, they are subject to Australian law and Australian reserve bank oversight.

Clear as mud?

SNOOPY

[CJ]

Clear as mud?

As investors, we invest in the Parent company which for the likes of ANZ and Westpac, is incorporated in Australia. That company will have a 100% owned subsidiary in NZ which is fully subject to the RBNZ rules including capital requirements.

From memory, there was one major bank operating through a branch structure (ie. Australian incorporated company operation in NZ) which it wasn't very happy with so I think it change the rules.