HGH - Heartland Group Holdings

[blakecb]

How do you think it will affect both HNZ and PGW share prices?

For HNZ I imagine it will come down to who the buyer is.

[RTM]

On a slightly related issue (how I came to Heartland) PGC has released some results.
Compared with 2012....it certainly all seems positive. However, I am not a financial person !
Still have the pain of those in my portfolio. Just to remind me.

[Snow Leopard]

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...

...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)....

SNOOPY

Perhaps you should read Note 38 of the 2013 Full Year Accounts?

Best Wishes
Paper Tiger

[swillisam]

On the money there Paper Tiger.

38 Liquidity risk

Contractual liquidity profile of financial assets and liabilities
The following tables show the cash flows on the Group's financial liabilities and unrecognised loan commitments on the basis of their earliest
possible contractual maturity

In short the net position shows a large amount of liabilities falling due in the next 12 months and then a positive forecast thereafter.

[Snow Leopard]

On the money there Paper Tiger.

In short the net position shows a large amount of liabilities falling due in the next 12 months and then a positive forecast thereafter.

That is the contractual profile.

We have to hope that the expected maturity profile is closer to reality otherwise Snoopy will be right and HNZ will be asking us to buy new shares soon.

Best Wishes
Paper Tiger

[Snoopy]

At 30 Jun 2013 Heartland Bank has:
A risk weighted exposure (to loans and things) of $2,359,613,000 which requires $283,154,000 of Tier 1 Capital (12%) under the Conditions of Registration;
An actual Tier 1 Capital of $324,642,000 which provides a capital ratio of 13.76% (2012 was 14.54% so a step back here).

Just for fun I am not going to tell you from which of the full year results documents I extracted this figure from.

After reading my own post I can see why you might find it confusing, yes. I think I need to back track a bit to explain where I am coming from with all this stuff. I still class myself as a learner when it comes to analyzing banks. The base line for my analysis is the quite comprehensive report which came out when PGW sold, er I mean gave away, their finance division to Heartland. There was a very comprehensive document put out by First NZ Capital and UBS on the subject. The ratios I am calculating are theirs, not things that I have dreamed up.

Now you might argue that Heartland as a whole is so different to PGW Finance, that whatever ratios I am using are too conservative. I would have some sympathy with that view. However, given that all this was worked out in the shadow of the financial crisis, the banking consortium behind PGW was very focused on not losing their capital. And guess what, so am I. So I intend to continue looking at my ratios as I am doing, but with these caveats in mind.

PT, you say that Heartlands conditions of bank registration require a risk weighted exposure (to loans and things) of $2,359,613,000 which requires $283,154,000 of Tier 1 Capital (12%).

However, in practice any bank would not allow itself to get near these 'minimum capital requirements' under conditions of normal operation. The question is then, what margin of safety should the bank allow itself when working around these minimum capital. requirements? My margin of safety is to say that there must be 20% of tier 1 capital to back up their risk weighted loan exposure. And that margin of safety is not made up by me. It is made up by parent banks wanting to be darn sure they will get their capital back!

As CJ has noted doing more lending on less capital boosts ROE, another important performance indicator. My point is that boosting lending on fixed capital is actually a two sided coin, the high side being a greater return for shareholders the under side being more risk to shareholders should some loans go bad.

However there is never any talk on the forum about this underside risk. The talk here is all about growing the loan book boosting dividends and working the capital hard. I am amazed at the short memories of investors as regards this. Because it is exactly this kind of thinking that caused the virtual collapse of the finance sector in New Zealand five short years ago.

SNOOPY

[Snoopy]

I see 'Tier 1' and 'Tier 2' and 'Basel 3' but am otherwise confused by what you are trying to prove here. You seem a 'little confused' on this sort of stuff.

Some more clarification here. 'Tier 1' and 'Tier 2' capital are terms used to measure the quality of capital contained within a bank. Shareholders equity is Tier 1. I was using the terms Tier 1 and Tier 2 with respect to loans, which is probably a bit naughty in this context. However, the general point I would make is that the quality and quantity of capital contained within a bank must be matched to the quality and quantity of the loans that the bank makes out.

In the First NZ Capital / UBS Report the exact terminology is:

Minimum Equity Contribution:

Tier 1 Risk Share Lending: > 20%

Tier 2 Risk Share Lending: > 30%

As for Basel 3, the reason I mentioned that is because since the First NZ Capital UBS report I am using came out, there has been a trend to tighten international banking standards. Thus all things being equal you might expect the Risk Share lending requirements I have outlined to have tightened further. Or perhaps you could argue that Basel 3 is really just the international boys catching up with what the banking syndicates in New Zealand were already doing? I don't know what the effect of Basel 3 is in New Zealand and more specifically within Heartland. I only mentioned it as a point of discussion.

SNOOPY

[Snoopy]

That is the contractual profile.

We have to hope that the expected maturity profile is closer to reality otherwise Snoopy will be right and HNZ will be asking us to buy new shares soon.

Best Wishes
Paper Tiger

More to the point if it really is PGW that has sold down their holding this will be why. There is no way that PGW can afford to subscribe more capital to Heartland should that become necessary. So best to sell out now at a small profit before the other shareholders recognize Heartland's coming capital crunch!

SNOOPY

PS As a PGW shareholder I would be happy with the 3.5% discount taken on the market price to get away such a significant HNZ share parcel.

[Snoopy]

Perhaps you should read Note 38 of the 2013 Full Year Accounts?

Best Wishes
Paper Tiger

Fair call PT. I hadn't got as far as note 38.

The one year maturity profile looks challenging for FY2013.

But it also looked challenging in FY2012. A wall of $520.467m of contracted net withdrawals, with $460.492m of undrawn bank and loan commitments to cover them in the event of the worst happening. They came through that one OK.

Returning to the twelve month maturity profile for FY2013, I get $781.094m of contacted net withdrawals, with only $346.702m of undrawn bank and loan commitments to cover them.

Crikey, you wouldn't want anything to go wrong, like some sort of global instability, while HNZ are renegotiating their maturing securitized debt over the next 6 months or so would you! That is a cashflow hole of $400m! You HNZ shareholders are certainly a brave lot. Hang onto your (hard) hats!

SNOOPY

[Snow Leopard]

Snoopy and All

You should relax a bit.

Almost? all banks have net withdrawals on the contractual profile for periods upto one year.

What UBS meant by "Tier 1 Risk Share Lending: > 20%" I do not know and can not find a copy of the report to find out.

However in an ideal world HNZ would have a Tier 1 Capital Ratio of greater 14.5% but 20% would be excessive.

At 30 Jun 13 HNZ was:
Tier 1 CR: 13.8% (min 12%)
Total CR: 13.8% (min 12%)

by comparison at 30 Jun 13 ANZ (NZ) was:
Tier 1 CR: 10.7% (min 6%)
Total CR: 12.4% (min 8%)

So although HNZ would breach it conditions earlier in a crunch it is as 'robust' as the next bank (ANZ).

Best Wishes
Paper Tiger