HGH - Heartland Group Holdings

[iceman]

It is very rare that such a large positive consensus is struck on this site.

You spoke too early snapiti. Should have waited for Snoopy's welcome comments first !

[CJ]

Mind you the IRD will be happy because they gained a tax rake off along the way at the expense of the company!

The dividends were/are fully imputed so no extra tax.

Note: there would be a little as imputation is only 28% compared to the top rate of 33%.

[blakecb]

It is very rare that such a large positive consensus is struck on this site.
Bought in yesterday @ 87cps.

I agree, nice to see FA and TA in harmony. I too have bought in @87cps.

[Snow Leopard]

Oh I "get it" very well Paper Tiger. There has been a $24.3m charge taken in FY2013 against the bad property loans to allegedly put these to bed. Yet despite this, the value of loans in the 'monitor category and worse' is now:

$198.370m + $18.034m + $21.518m + $27.761m = $265.683m

Last year the number of loans in the 'monitor' and above category was

$185.315m + $53.360m + $14.096m + $13.471m = $266.242m

In other words those 'monitor+' debts have barely moved, despite all the restructuring. It is true that less of those debts are now in the higher risk 'substandard', 'doubtful' and 'at risk of loss categories'. But if that is really true, can you please explain why the provision for bad debts has jumped from $8.032m last year to $15.961m this year? Of course I don't expect you to be able to answer that question. But if I was a shareholder I would certainly ask that question of management at the AGM. However my vision of the upcoming AGM is largely unchanged. The lap dog shareholders will still be there wagging their little tails in the front row, while in the second row as somewhat larger animal swings their orange and black tail in sympathetic harmony.

SNOOPY

Let us try.
One of the ways that HNZ divides it's financial assets is into two broad portfolios:

The Judgement Portfolio: where loans are assessed into one of 9 different risk ratings: 1 having the least risk of the loan going bad and 9 the most. Provision for risk impairment for each of 1-8 is based on a % of loan value (based on years of experience), each loan in 9 is individually assessed (Impaired loans from this portfolio are called Collective Impaired Assets);

The Behavioural Portfolio: where each loan is risk assessed individually (Impaired loans from this portfolio are called Individually Impaired Assets).


Reading Note 37(e) of the accounts shows that the Total Provision for Impaired Assets as jumped from $27M4 in 2012 to $50M5 in 2013, net +$23M1, and that this is almost entirely from Property divided between an increase of $9M3 in the Judgement Portfolio (Collective Impaired Assets) and $14M3 (Individually Impaired Assets).

Now remember how in the Judgement Portfolio as the category number gets higher the perceived risk % rises and the greater the impairment provision, so although the gross amount of loans across 6-9 is essentially unchanged the increase in the 2 highest risks categories results in an higher overall impairment provision.

Best Wishes
Paper Tiger

Disc: Will not be at the AGM.

[Snoopy]

Time to reevaluate liquidity.

HNZ has total borrowings of $1,939,489,000, made up principally of term deposits lodged with Heartland.

Note 24 is meant to give a breakdown of these borrowings. Once again there is no breakdown given of current and longer-term borrowings

The information given on the securitized facilities is as follows

"The Group has securitisation facilities in relation to the Trusts totalling $450.0 million. On 27 February 2012, the Group entered into an agreement with its securitisation facility provider to extend the maturity date of Heartland ABCP Trust 1 $300 million securitisation facility to 6 February 2013. On 19 December 2011, the Group entered into an agreement to increase CBS Warehouse A Trust securitisation facility by $100 million to $175 million. $25 million of this increase matured on 1 April 2012. The maturity date of the remaining $150 million CBS Warehouse A Trust securitisation facility is 22 July 2013."

IOW all activity relates to a time-frame no more than one year out in the future.

The amount of securitized holdings has increased when I would have expected it to decrease now that HNZ has fully rolled out of the government deposit guarantee scheme.

"The Group has bank facilities totalling $650.0 million (2011: $475.0 million)."

That increase is good for future flexibility.

This money has been on loaned to customers who want loans. These customers owe HNZ 'Finance Receivables' of $2,078,276,000. Again there is no breakdown as to what loans are current and longer term (note 16).

Given:

1/ I understand 'liquidity' to be a balance between the maturity profile of current debenture holders VERSES
2/the loan periods associated with those on lent funds are unknown,

then my analysis comes to a full stop (again).

The only thing I do note is that the amount borrowed as debentures and deposits from customers has gone down (by $6.022m) and the amount lent to customers has gone up (by $3.065m). Given that bank facilities have gone up by $175m over the same period this isn't an issue.

Time to look at the Liquidity Buffer ratio for 2013

HNZ has total borrowings of $2,134,285,000, made up principally of term deposits lodged with Heartland (see Statement of Financial Position).

Note 26 is meant to give a breakdown of these borrowings. Once again there is no breakdown given of current and longer-term borrowings

The information given on the securitized facilities is as follows:

-------

Bank borrowings and deposits (which include NZDX bonds) rank equally and are unsecured. The group has securitised bank facilities totalling $500m, all in relation to the trusts. Heartland ABCP Trust 1 (ABCP Trust) has a maturing facility of $400m maturing 5th February 2014, and CBS Warehouse A Trust (CBS Trust) has a securitisation facility of $100m maturing on 22nd January 2014 These facilities are drawn by $259m (2012: $264m).

Investors in ABCP Trust rank equally with each other and are secured over securitized assets of that trust. Investors in CBS Trust rank equally with each other and are secured over securitized assets of that trust

--------

Once again all Securtised asset activity relates to a time-frame no more than one year out in the future, in this case just 6 months. Not much time then until everything is up for renegotiation.
The amount of securitized holdings has decreased a little (by $5m), but in context presents a fairly steady as she goes picture..

The Group's bank facilities are down from $650.0 million to $500.0 million, yet these now seem to be completely undrawn with last years $50m loan paid back. That all adds up to a net borrowing capacity down by $100m year on year.

This money has been on loaned to customers who want loans. These customers owe HNZ 'Finance Receivables' of $2,010,376,000. Again there is no breakdown as to what loans are current and longer term (note 18).

Given:

1/ I understand 'liquidity' to be a balance between the maturity profile of current debenture holders VERSES
2/the loan periods associated with those on lent funds are unknown,

then my analysis comes to a full stop (again).

The only thing I do note is that the amount borrowed as debentures and deposits from customers has gone up (by $194.796m) and the amount lent to customers has gone down (by $0.679m). That means Heartland is a shrinking company, not a growing company as some here believe. Of course shrinking is not such a bad thing if it is the bad loans that are being shrunk! Bank facilities have gone down by $100m over the same annual comparative period. So Heartland having shifted tactics and are using more funds borrowed from customers to make up the alternative bank funding shortfall.

Some of the build up in funds may be due to the reserve bank conditions imposed when Heartland became a bank of course. Anyone know for sure?

SNOOPY

[K1W1G0LD]

Well, you could ask them. They're pretty good in answering questions.

Thats a savage response Mr Clown, we all know that beagles can't talk !

[Snoopy]

Once again there is no mention of Tier 1 or Tier 2 in the Heartland FY2012 report.

The 'best case' scenario is that all loans are Tier 1. $1,939.29m of loans are outstanding. 20% of that figure is:

0.2 x $1,939.29m = $387.9m

Heartland has total equity of $374.8m which is insufficient no matter what the tier classification of the loans.

Result: FAIL TEST

However the numbers are moving in the right direction. Heartland are certainly doing the right thing by retaining their earnings and not paying out a dividend.
Ironically the small reduction in the size of their loan book is helping too.

However the fact that the overall business is downsizing does mean less customer activity. Those shareholders looking for a step change in earnings are likely to be disappointed IMO.

Once again there is no mention of Tier 1 or Tier 2 in the Heartland FY2012 report.

The 'best case' scenario is that all loans are Tier 1. $2,097.553m of loans are outstanding. 20% of that figure is:

0.2 x $2,097.553m = $419.5m

Heartland has total equity of $370.5m which is well below the 20% of loan target no matter what the tier classification of the loans.

Result: FAIL TEST

Heartland have increased their lending and reduced their capital by paying out dividends, hence the poor result on this test. Last year I started a barrage of derision by suggesting a capital raising was looking likely when Heartland failed this same test. Over that FY2013 year Heartland obtained their banking licence (good, although they don't have the same freedom as other banks as regards capital ratios), decided to lend more against tier 2 assets (bad from this statistic's point of view, which is not to say tier 2 loans aren't profitable). Furthermore during the year the so called Basel 3 requirements, designed to shore up the stability of banks and requiring banks to carry more capital have been implemented (bad for this statistic).

I don't wish to speculate again on the overall likelihood of a cash issue to shore up HNZ in FY2014. All I will say is that given what has happened over FY2013, and looking at the trend in this statistic, such a cash issue to shareholders or a third party placement of HNZ shares is looking much more likely now.

SNOOPY

[Snoopy]

Well, you could ask them. They're pretty good in answering questions.

Yes I could, but it isn't my capital on the line. And I have other financial statistics to calculate before my analysis of FY2013 for HNZ is complete.

SNOOPY

[Snoopy]

Updating this number for the full year

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland FY2012

= $374.8m/$2348.1m = 16.0%

This is a slight improvement on the half year position, achieved by both shrinking the loan book and not paying out any dividend from profits.

Updating this number for the full year

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland FY2013

= $370.542m/$2504.627m = 14.6%

This is a significant deterioration on the FY2012 position. Not surprising as borrowings from debenture customers have increased, which results in a larger total asset position and dividend payments have weakened the balance sheet by shrinking equity. Unfortunately I believe that if HNZ is going to grow as they proclaim, they simply can't do it by shrinking their share capital base.

SNOOPY

[CJ]

This is a significant deterioration on the FY2012 position.

YOu could also say this is an improvement as they are working their money harder. I understand Banks would prefer the lowest % possible that the RBNZ will allow.