HGH - Heartland Group Holdings

[percy]

Out of interest I looked at Westpac on yahoo finance.Their return on equity is 16.82%.Should HNZ achieve this HNZ's profit would be over $60mil.
WBC equity was a low 6.176% 381,890,000/618,277,000.
ANZ bank.ROE 14.88% equity 6.247% 33,220,000/531,739,000
CBA bank.ROE 18.81% equity 5.5% 35,570,000/646,330,000

[Lizard]

1/ EBIT to interest expense > 1.2

EBIT is not listed as that, so I have had to improvise. On p10 (Interim
Statements of Comprehensive Income) we find the 'Interest Income'
figure and I have subtracted from that the selling and administration
costs also on p10.

EBIT = $101.770m-$35.691m= $66.079m

Interest expense is listed as $62.64m.

So (EBIT)/(Interest Expense)= ($66.079)/($62.64)= 1.05 < 1.2

Result: FAIL TEST

SNOOPY

Hi Snoopy,

Only just getting the chance to read through your analysis - possibly someone else has commented, as yet to finish reading. My calc for the EBIT ratio would be 1.08. However, we knew they would not be running at top return in first half as they still had a considerable quantity of debentures that they were having to allow for possible repayment on close to end of period - that meant holding lots of cash while also paying interest to the debenture holders. Once the last of the guarantee debentures had expired, they would either not have the interest payments to make on them OR they would have been renewed and HNZ could then reduce the amount of cash on hand through lending once they no longer needed to allow for a bulge of maturing deposits.

As expected, the third quarter is said to have lower funding costs and it could be expected that this would be maintainable. Therefore, we could probably comfortably multiply the 3rd quarter NPAT of $5.3m by 4x, divide by 0.7 to allow for tax and add to funding costs (doubling first half funding costs of $62m). That would give an EBIT ratio of 1.24 by my calc - and given the funding costs have likely reduced somewhat, conceivably higher.

[Lizard]

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

I don't think you should get too hung up on these figures right now Snoopy - at the time that those covenants were put in place, we know there was a material level of impairment going on in regards to loans and I am guessing these equity covenants were set to cover.

For instance, by comparison, Kiwibank has $11,500m of loans and $608m of equity, so ratio there was only 5.2% (Kiwibank could probably do with more equity capital though in my not-so-expert opinion).

I think Percy is correct - in the current environment with the bulge of impairments dealt with and now at more stable levels, the Reserve Bank regulatory requirement is a satisfactory test. And while they are making a profit, the equity ratio should only improve, at least until they start to pay dividends.

[Lizard]

According to 'investorwords' (www.investorwords.com) the equity ratio is defined as:

=(Total Equity)/(Total Assets)

Using numbers from the Heartland HY2012 report dated 31-12-2012, page 11

= $360.2m/$2380.5m = 15.1%

The declaration by Heartland on 14/03/2012 of an equity ratio of 13.5% represents a significant deterioration in this statistic. This has to be a worry as if the deterioration keeps up like this hopes of becoming bank will be extinguished in about 18 months. Shareholders would need to budget for a substantial capital raising before then. No warning bells ringing yet Percy?

SNOOPY

Actually Snoopy, Percy may have just read the wrong column on the table and given you the Jan 2011 equity ratio, as the table on page 29 of the Mar 14 presentation says 15.1% equity in Dec 11 up from 13.5% in Jan 11.

They would have to have significant impairments or abnormals of some description for the equity ratio to have fallen, not the operating profits they are indicating.

[Lizard]

2/ Liquidity buffer ratio (including bank lines) >10%

The hurdle setters don't specify, but I believe that this test is to provide an insight into how current liabilities are matched to current assets. It could be thought of as a 'stress test' on liquidity with a twelve-month time horizon.

From p12 (Interim Statements of Financial Position) we see HNZ has total borrowings of $1,985,551,000, made up principally of term deposits lodged with Heartland. Note 11 is meant to give a breakdown of these borrowings. Strangely there is no breakdown given of current and longer-term borrowings. Nevertheless Note 11 contains this tantalizing hint.

"On 2 August 2011, the Group entered an agreement with its securitisation facility provider to increase the MARAC ABCP Trust 1 securitisation facility by $100m to $300m, and to extend its maturity date to 8 August 2012."

This gives the impression of Heartland almost operating 'hand to mouth' with even this new banking syndicate agreement expiring just a
year of being signed. To proceed further I can only assume that all funds deposited with Heartland, directly or indirectly (via securitisation) are 'current liabilities'.

This money has been on loaned to customers who want loans. These customers owe HNZ 'Finance Receivables' of $2,075,211,000. Again there is no breakdown as to what loans are current and longer term. 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. Any ideas as to how to proceed from here, or even opinions on if I am on the right track, would be greatly appreciated.

Result: UNCERTAIN (due to lack of published loan data). But if almost all depositors have put their money with Heartland on a one year or less basis, then I am not encouraged.

SNOOPY

You are probably best to go back to the Jun 11 Annual Report and look at the liquidity risk tables on page 49 and 50. There are two sets of tables - the first is based on "contractual maturity" and the second on "expected maturity" (i.e. taking into account expected rates of roll-over of deposits. Not surprisingly, there was a very high rate of maturity in the 0-6 month category as investors tended to take advantage of the guarantee for as long as possible.

Gaze at these tables for long enough and it becomes clear that the securitisation measures were mostly just to allow space in case an unexpectedly large proportion (i.e. nearly all of the investors with maturities prior to the end of the guarantee) turned out to be only hanging in until expiry (after all, at that stage they could be perceived as safer than the bank, but with better rates!). I think from memory that later announcements have indicated that the reinvestment rate actually held up solidly and new investments rose, so the extra liquidity buffer provided by the securitised facility was probably not necessary. Having said that, in financial services, safety begets investor confidence and investor confidence begets safety. So there was no point risking any false rumours tipping things over at the last minute.

[Lizard]

I have been covering these hurdles out of my original order to better match the flow of this thread. But there is one more bankers test that HNZ must face.

4/ Single new customer group exposure (as a percentage of shareholder funds) <10%

This criterion may have lead to the downfall of PGGW Finance (PGF) as an independent entity. As at 31/12/2010 PGG had $126.7m of loans in the dairy sector from a total loan portfolio of $491.8m. Total Crafer loans from all institutions are reputedly $200m. PGF claim they are a 'junior partner' in the banking syndicate. But if the PGF exposure was say $40m, then as other loans were wound back those
Crafer loan interest is capitalized, Crafer farms might approach 10% of all PGF loans.

I can't find any information in the Heartland HY2012 interim report on customer concentration. Since one of the objectives of merging all the entities that formed Heartland together was to reduce the concentration of risk, I don't think it likely that a single customer has 10% or more of the balance of the loans outstanding.

The HNZ interim report does say that post merger, 40% of loans are now in the Canterbury region (note 11). That might mean regional volatility need be considered in future.

Result: PROBABLE PASS (interim report has insufficient information)

Possibly there is some indication in the 14 March presenation - the trust deed limit is 15% of consolidated group capital to one customer. From the last annual report, the only concentrations of credit risk look to be the concentrations of cash held at other banks if I'm reading the note at bottom of page 46 correctly.

[percy]

Possibly there is some indication in the 14 March presenation - the trust deed limit is 15% of consolidated group capital to one customer. From the last annual report, the only concentrations of credit risk look to be the concentrations of cash held at other banks if I'm reading the note at bottom of page 46 correctly.

Given that the equity ratio of banks being so much lower than HNZ it may in fact have been a real credit risk.!!!!!!! lol.

[forest]

Good thread. Good to see a few sharetraders looking into the finer details. I asked and just received hard copies of HNZ financials. With this, came a bussiness card of HNZ investment relation manager (IRM), Ben Searle.
Maybe the job of IRM is more to relate to term deposit investers than to share holders. Even so I would like to think that Ben Searle has a commitment to answer share holders questions.
Below are Bens contact details, please share anything of interest,
ph (09) 9279210, F (09) 9279321 and E ben.searle@heartland.co.nz

[janner]

I have total agreement with you forest..

Also with Belgarions ..

" Craig needs to get with the times ... ST is an active forum and not a blog. "..

With quality members like Lizard.. and many, many, many, others.. We have influence !!!....

Front up and face the questions... Or on your own head be it !!..

[janner]

Influence example !!..

How many PGC shares passed hands this week ??..