HGH - Heartland Group Holdings

[percy]

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.

It would be very unlikely for HNZ to pay out all profits in dividends,so equity ratio will improve.$20mil profit would mean over $200mil of extra lending is possible, if no dividend were paid. Easy to see how banks can grow earnings/profits very quickly.The next few months should see further gains,and we all may be surprised with an early dividend.Certainly the equity ratio of HNZ would be the envy of many a bank.For us shareholder it is a comfort to know we have invested in a company that has built a solid platform for future growth.Looks as though HNZ could increase lending by 65% without putting too much pressure on equity ratio.Don't think any other bank could do that without requiring more capital from shareholders.

[Snoopy]

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

Your thinking has got me thinking again Percy. I have to admit the equity ratio of Heartland looks good compared to all of those bank statistics you have rolled out. The question in my mind is, what is the difference in Reserve Bank thinking on banks vs NBDTS (Non bank deposit takers) ?

SNOOPY

[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.

Apologies if I am paraphrasing your retort to my Heartland hurdle test too briefly Lizard. But:

1/ HNZ EBIT at 31-12-2011 is in a transitional state. Underlying EBIT/ Interest Expense is already around 1.24 > 1.2, so EBIT/ Interest Expense hurdle is cleared. I accept that.
2/ The securitisation of loans in August 2011 was a way to bring more cash onto the balance sheet in case of a wall of debenture redemption after the government guarantee expired. A good point which leads me to a QUESTION:

What happens come August 2012? Do Heartland buy their own loans back, effectively swapping equity for debt but boosting their loan book? Or do they try to renegotiate with the banks on those securitized loans?

3/ The 20% minimum equity contribution hurdle was based on PGF being a distressed company and is too conservative. Not sure I can agree with that

In the PGW FY2010 share issue prospectus, PGF was snapshotted like this:

"In the first four months of FY2010, PGF's net interest margin increased (+20.6%) while EBITDA declined (-10.5%) relative to the previously comparable period. This was due to the cost of the Crown Retail Deposit Scheme and higher bad and additional doubtful debt provisioning. From 30-06-2009 to 31-10-2009 the loan book remained largely static and as at 31-10-2009 was $565m and assets under management grew 0.5% to $639m driven by natural growth from existing credit commitments. (Equity at 30-06-2009 was $66.82m). Over the same period the deposit book reduced 7.5% to $281m, driven by reduced levels of new deposits, while average reinvestment rate of existing deposits were maintained at 76% over the same period which is comparable with historical averages."

I would argue that PGF itself was not distressed at the point the prospectus was compiled. And it was even less distressed when following the PGW cash issue, PGF had a new total of $100.38m of shareholder equity (as at 30-06-2010). I would argue that it was the cash bolstered post capital raising PGF that the banking syndicate had in mind when drawing up their financial hurdles.

SNOOPY

[Snoopy]

I now move to the PGW documentation relating to the sale of PGF which was discussed at the PGW special general meeting of FY2011

Northington Partners suggested that investors should look for a few more signs of improvement. One of these is a reduction in bad debts. In the HY2012 commentary we learn:

"New impaired and past due loans over 90 days were $88m which was 4.2% of net finance receivables as at 31st December 2011. This is down from $101m and 5.0% of debts as at 30th June 2011."

Bad debts were at least going in the right direction.

SNOOPY

[Snoopy]

Northington asks us to look out for the reinvestment rates of existing deposits. There is no direct information in HNZ HY2012 about that. However, if we look in Note 11 we can see that total deposits from NZ total $1,664.9m as at 31st December 2011, up from $1,556.6m as at 30th June 2011. Overall Heartland has more money on deposit at the end of the half-year than six month previously, and that has to be good.

But didn't the merger with PGG Finance occur after the 30th June 2011 balance date? I am not sure what the value of PGGW Finance term deposits were transferred over. But if it was less than $108.3m, then pre merger Heartland went backwards over the last reported half year. On this evidence, I think it is too early to say that Heartland has the confidence of the retail deposit market.

A quote from p2 of the Heartland HY2012 commentary backs this up:

"Cash and cash equivalents reduced to $120m from $267m at 30th June 2011 as excess liquidity held in the lead up to the expiry of the crown guarantee was utilized as planned."

Translation: Term deposit holders have pulled a net $147m out of the company in the last six months.

SNOOPY

[percy]

Your thinking has got me thinking again Percy. I have to admit the equity ratio of Heartland looks good compared to all of those bank statistics you have rolled out. The question in my mind is, what is the difference in Reserve Bank thinking on banks vs NBDTS (Non bank deposit takers) ?

SNOOPY

I wondered that myself.HNZ equity ratio is so much greater than the banks.Around about 2.5 x the banks ?!
I can understand the ROE figures,but having banks with 5.5% equity is a real worry.I am thinking of all the banks exposure to property in both Australia and NZ.I believe Australian property prices are under pressure,so it would not take too much for the banks to take some pretty big hits.Their 5'5% equity could disappear very quickly.We have been there before,I think it was 1992 when Westpac was under threat from Kerry Packer.Westpac came back to shareholders for more capital.This course of action is open to all listed finnacial instituations.In fact HNZ is the result of PGC having to recap after losing their shareholders funds in property.From memory Marac had an equity ratio of over 16% but ofcourse had 25 to 30% of total lending in property.
Back to the Reserve Bank's thinking.I suspect dark thoughts.!!!!!!

[percy]

LOL - which is why my ASX Share competition selections are all for banking institutions ... I'm aiming to finish last of course which is just as hard as trying to finish first (although I'm probably the only person trying to do this?) I'm pleased to say that I'm currently only a few places off the bottom at present.

LOL,I think you are "well positioned" for the down turn.!!!!!

[janner]

Your not to far of of the top on the NZX Belg.. !!..

[winner69]

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 !!..

Guarantee that Craig et al keep a watching brief on ST and what punters are saying

He probabaly having a good laugh and thinks we are no hopers anyway .... thats what happens to good guys when they get sucked into the corporate way of doing things .... the more passionate they get about the company the less they listen to others who have an alternative view

I shall send my sincerest apologies to HNZ for some of the things I have said .... and implore Xerof and some others to do the same ..... Prob this Craig and a few others got a pissed off hearing some of the things we say .... heck we are only ignorant nobodys and wouldn't have a clue about what we are talking about

[percy]

Guarantee that Craig et al keep a watching brief on ST and what punters are saying

He probabaly having a good laugh and thinks we are no hopers anyway .... thats what happens to good guys when they get sucked into the corporate way of doing things .... the more passionate they get about the company the less they listen to others who have an alternative view

I shall send my sincerest apologies to HNZ for some of the things I have said .... and implore Xerof and some others to do the same ..... Prob this Craig and a few others got a pissed off hearing some of the things we say .... heck we are only ignorant nobodys and wouldn't have a clue about what we are talking about

Agree with you 100% Winner69.All the more reason for Craig to supply guidance from "above".