HGH - Heartland Group Holdings

[Snow Leopard]

...well let's just say that the next six months will be the most difficult time from a cashflow perspective....

OK.
So on what 'facts' do you base this assertion?
How is Heartland different in this respect from other NZ banks such as ANZ and Westpac?

Best Wishes
Paper Tiger

[RTM]

I am looking at them as a long term hold. Hopefully a cornerstone of my retirement portfolio as I see them soon paying a regular dividend which will be a nice yield on my average purchase price of around 77c. . Hence my concern with Snoopy's comments.

[Snoopy]

In your assessments of cash flows, and imaginings of the needs for extra capital, what allowance have you made for HNZ shareholders subscribing to the dividend reinvestment programme and its discount?

For those who came in late, we are talking here about Note 38 (liquidity Risk) of the FY2013 results. We are presented with a 'contractual liquidity profile' and an 'expected liquidity profile' for the twelve months going forwards from balance date. For comparative purposes the contracted and expected figures for the previous FY2012 year are given too.

PT has pointed out, after my initial alarmist shock at the bare 'contracted' figures that most banks operate assuming a good percentage of their debentures are rolled over and some new debentures are taken out to replace those permanently withdrawn. However, the change in debenture patterns is not definitively forecastable. A wise investor would stress test these assumptions to work out what would happen if reinvestment rates did not go entirely to plan.

Back to Note 38, and I have looked at the difference between the contracted liabilities and the forecast position of those same liabilities over the 'on call', 0 to 6 months and 6 to 12 months future periods respectively.

$181.879m - -$265.8m = $447.679m
$197.352m - -$253.758m = $451.110m
$307.180m - -$261.536m = $568.716m

That adds to a net gain of $1,467.505m of net new debenture stock expected to roll across the Heartland bank desks for the twelve months beginning 1st July 2013.

Such large numbers are hard to grasp. But if we look at the equivalent forecast figures for FY2012 $1,186.472m of extra one year or less debenture money was expected to roll in. Since FY2013 is done and dusted we know that Heartland made it. And there is no reason to suppose they won't be able to raise a very similar new amount for the coming year. However they are expecting to raise:

$1,467.505m - $1,186.472m = $281.033m

extra over and above what they did last year. If they can do it, then great. If they can't then the difference will have to be made up by shareholders equity. With $370.572m of shareholders equity on the books, that would leave only

$370.572m - $281.033m = $89.539m

of net equity in shareholders pockets

That means NTA drops to one quarter of what it was, and there lies one assessment of the 'downside risk' for shareholders. In reality such a downside position would be intolerable and there would need to be a cash issue to restore the company's capital base.

The payout total for the current dividend is $9.7M. Should holders of one third of HNZ shares subscribe to the DRP, HNZ's share capital will increase by almost 10%.

According to the HNZ balance sheet as at 30th June 2013, total equity was $370.542m. If the total final dividend is $9.7m, and one third of the dividend is paid out, then the amount retained in the company will be 2/3 x $9.7m = $6.5m. That would be a 1.8% increase in capital for HNZ by my calculations. Useful and a step in the right direction, but not a game changing amount.

SNOOPY

[Under Surveillance]

I accept your arithmetic, up to a point. I was talking share capital, not total equity. $6.5M/$192M represents a 3.3% increase in share capital.

[Snoopy]

OK.
So on what 'facts' do you base this assertion?

The information in note 38 of the annual results for FY2013, see my reply to Under Surveillence.

How is Heartland different in this respect from other NZ banks such as ANZ and Westpac?

Differences between Heartland and ANZ/WBC in NZ

1/ Heartland has no Aussie parent that can bail them out.
2/ Heartland is not too big to fail.

SNOOPY

[Snoopy]

I am looking at them as a long term hold. Hopefully a cornerstone of my retirement portfolio as I see them soon paying a regular dividend which will be a nice yield on my average purchase price of around 77c. . Hence my concern with Snoopy's comments.

I wouldn't have too many concerns about having Heartland as part of retirement portfolio. Indeed I may yet buy some HNZ for myself for purely that reason. My concern would be for those who drastically overweight their portfolio in HNZ shares under the assumption it is an absolutely sure thing. It isn't.

SNOOPY

[CJ]

Snoopy - do you have any reason to believe that rollovers and new deposit's would not be forthcoming.

I would argue, without access to any imperical evidence, that they are more likely to increase. As Heartland becomes more well known, which was in part the reason for getting the work "bank" at the end of "Heartland", they should increase. They pay a higher rate than the big 4 banks, in part due to its lower credit rating and in part due to the fact it onlends those funds at a higher rate (ie. less home loans).

No Australian parent - so what - If things got really bad, and bad in Australia two, I beleive they would cut NZ off.
Not to big to fail - I really dont think this is likely to happen, except in extreme circumstances. They are more secure than the finance companies that failed during the GFC so we are taking about an event more extreme than that.

So while there is a risk, I think there is more than enough growth left in the shareprice to compensate for that risk. I think that is, in part, what you are missing. This is not a top 10, blue chip, yeild stock so comparing it against the big 4 is not fair. There is more risk than that, and I accept that. In return I expect higher return which I expect to get.

[percy]

One quick read says your are missed guided, and will look even more foolish when again proven wrong.HNZ have never had funding problems.They came through the Govt Quarantee with excess funds,have paid back MARAC debentures, and their treasury dept have made sure they retain their faithfull depositors.
On sniff of a problem and the Reserve Bank would stop them accepting deposits.Has not happened,and will not happen.

[percy]

I wouldn't have too many concerns about having Heartland as part of retirement portfolio. Indeed I may yet buy some HNZ for myself for purely that reason. My concern would be for those who drastically overweight their portfolio in HNZ shares under the assumption it is an absolutely sure thing. It isn't.

SNOOPY

Only two sure things in life,taxes and death.
Maybe three.HNZ will be a great NZ Bank.
You are doing a great job Snoopy;share price back up to 86cents.
Overweight ;means to me out perform.!

[janner]

Can I just ask those long on HNZ, do you guys see this as a really long term hold for your portfolio or are you looking toward some kind of exit point? For a while the mentality seemed to be that HNZ was significantly undervalued, and clearly a lot of that has been erased with the SP nearly doubling over the last 18 months or so. Thoughts?

In my mid 70's.. HNZ is giving me a good return. As I am still working it is DRP. Can see no reason to sell..