HGH - Heartland Group Holdings

[percy]

I have had a conceptual problem with this question for a while, so this might be the time to lay the cards I have on the table, using Heartland as an example.

Criterion 3 shows that Heartland's core assets: offices staff and the tools they need to do their job, are quite conservatively financed with plenty of capital.

Criterion 5 shows that in relation to the business and home loans outstanding on the books, Heartland is if anything quite short of capital.

So, does Heartland have adequate capital or not?

SNOOPY

In the announcement dated 14/3/12 they state HNZ's equity ratio is 13.5% compared with regulatory requirement 9.58% so they have room to grow their book.

[percy]

Anyone else picked up on rumor that an overseas bank is looking to JV with HNZ?

At one meeting I spoke to G.Kerr and he spoke of looking for a 25% return on equity,so am not surprised an overseas bank would like a piece of the action.

[Snoopy]

In the announcement dated 14/3/12 they state HNZ's equity ratio is 13.5% compared with regulatory requirement 9.58% so they have room to grow their book.

Define 'Equity Ratio' in this case Percy. How is that 13.5% figure calculated?

SNOOPY

[Snoopy]

In the announcement dated 14/3/12 they state HNZ's equity ratio is 13.5% compared with regulatory requirement 9.58% so they have room to grow their book.

What happens if Heartland increase their lending right up to the limit of their 9.58% regulatory requirement? Then a single loan defaults and they have to write off some equity. Does the reserve bank then tip Heartland into receivership?

SNOOPY

[Snoopy]

So, does Heartland have adequate capital or not?

Here is my thought experiment answer.

Suppose Heartland were to sack all of their staff and move out of all their premises. To replace everyone a single 'super executive' would be hired. ''Superexec" would possess the knowledge to perform every company task, no matter how complex or menial. "Superexec" could also snap her fingers and stop time. That would prove a handy asset because it would then be possible for a single person to complete every task, because from the perspective of everyone else she would have infinite time available to run the company. Concommitant expenses would be minimal because she would be able to run the entire company from a computer on her kitchen table.

This example would be the lowest cost of capital way to run Heartland: a single salaried employee and a laptop. I cannot see why the Reserve Bank would force Heartland in this situation to raise the money to buy an office building and some furniture, simply because it deemed a single laptop to be inadequate capital for a bank to run on.

What difference does the amount of operational capital a company has on its books make to the mechanics of running a banking business? I would say no difference.

If every customer paid their debenture back on time, no debentures were redeemed early and the lending periods perfectly matched the borrowing periods a perfect finance company would need no lending capital of its own capital at all.

Surely what the reserve bank is after is enough capital to cover the odd loan going bad? And this has nothing whatever to do with the number of Office blocks that Heartland operates from!

SNOOPY

[percy]

Define 'Equity Ratio' in this case Percy. How is that 13.5% figure calculated?

SNOOPY

Ring the company.

[percy]

What happens if Heartland increase their lending right up to the limit of their 9.58% regulatory requirement? Then a single loan defaults and they have to write off some equity. Does the reserve bank then tip Heartland into receivership?

SNOOPY

No as with any other bank they would have to raise extra capital.
Are you coming down to the sharetaders' meeting? I am on my way and will buy you a beer when you arrive.

[percy]

Here is my though experiment answer.

Suppose Heartland were to sack all of their staff and move out of all their premises. To replace everyone a single 'super executive' would be hired. ''Superexec" would possess the knowledge to perform every company task, no matter how complex or menial. "Superexec" could also snap her fingers and stop time. That would prove a handy asset because it would then be possible for a single person to complete every task, because from the perspective of everyone else she would have infinite time available to run the company. Concommitant expenses would be minimal because she would be able to run the entire company from a computer on her kitchen table.

This example would be the lowest cost of capital way to run Heartland: a single salaried employee and a laptop. I cannot see why the Reserve Bank would force Heartland in this situation to raise the money to buy an office building and some furniture, simply because it deemed a single laptop to be inadequate capital for a bank to run on.

What difference does the amount of operational capital a company has on its books make to the mechanics of running a banking business? I would say no difference.

If every customer paid their debenture back on time, no debentures were redeemed early and the lending periods perfectly matched the borrowing periods a perfect finance company would need no lending capital of its own capital at all.

Surely what the reserve bank is after is enough capital to cover the odd loan going bad? And this has nothing whatever to do with the number of Office blocks that Heartland operates from!

SNOOPY

That is why the ratio is 9.58%.

[Snoopy]

That is why the ratio is 9.58%.

9.58% may satisfy the Reserve Bank Percy, but it may not satisfy the banking syndicate that is behind funding the business!

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Criterion 5/ Minimum Equity Contribution:
Tier 1 Risk Share Lending (basic equity capital and disclosed reserves) > 20%,
Tier 2 Risk share lending (this applies to undisclosed debts, and provisions against bad debts) > 30%.

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SNOOPY

[Snoopy]

Snoopy wrote:
"Define 'Equity Ratio' in this case Percy. How is that 13.5% figure calculated?"

Ring the company.

The objective of this exercise is to try and get you to think for yourself Percy. Ringing the company will only get you the answer that they want you to hear. In its simplest terms 'Equity Ratio' is only one number divided by another. Your challenge (or anyone else who takes it up) is to go to the last released interim report and calculate it.

Because the date of that report is 31st December 2011 not 14th March 2012 it is unlikely to be 13.5% though, even if that figure is likely tpo be 'ballpark correct'.

SNOOPY