HGH - Heartland Group Holdings

[Beagle]

Wow, an amazing lot of enthusiasm yesterday and today almost has me wondering if I've got this wrong, emphasis on almost.
Reality check. Consensus broker forecast for 2016, (which hasn't changed for quite a while and thus hasn't factored in the recent months of dramatic declines in dairy or emerging talk by leading economists of a recession), is for EPS of 10.4 cps.
The risks for those that have studied economics and understand the overall effect on the economy and bad and doubtful debtors on banks and finance companies are definitely too the downside. Potentially headwinds could be quite strong and building. Most of the PE's of the Aussie banks have come back and are sitting at circa 12-13. HNZ has historically been about 12 so that's 12 x 10.4 cents = $1.25 by say early 2016 if the **** doesn't hit the fan in terms of economic effects.

Within Percy's range though and as he's quite correctly noted there a final divvy due in the next few months so as long as the economy doesn't go into recession and as long as Fitch keeps their finger off the downgrade trigger, (the effect of which could be pretty serious), its not the worst investment on the NZX by any means collecting three fully imputed dividends in fifteen months will have the brave / hungry divvy hounds sniffing around) but certainly not without meaningful risk.
Disc - Don't hold.

[percy]

Roger.
I would not be surprised to see Fitch's upgrade Heartland's credit rating.
Sound diversified lending,secure lower cost funding,growing profitability,and high capital ratios,should be recognised.

[Beagle]

I think its helpful to have another look at what they actually said on 4 June 2015.
http://www.reuters.com/article/2015/...92494520150605
Clearly we've had a couple of really big drops in the GDT auction prices since then although the dollar has dropped a fair bit too cushioning that to some extent.

[percy]

I think its helpful to have another look at what they actually said on 4 June 2015.
http://www.reuters.com/article/2015/...92494520150605
Clearly we've had a couple of really big drops in the GDT auction prices since then although the dollar has dropped a fair bit too cushioning that to some extent.

With HNZ low exposure to dairy farm conversions,secure lending on livestock, I am sure I will not be surprised with a Credit rating upgrade from Fitch's.
Possibly October?

[winner69]

With HNZ low exposure to dairy farm conversions,secure lending on livestock, I am sure I will not be surprised with a Credit rating upgrade from Fitch's.
Possibly October?

Currently BBB

Next step up would be A - that will impress punters eh

Would be only one notch down from the AA thatNZ Sovereign debt has

Heartland that strong?

[Beagle]

With HNZ low exposure to dairy farm conversions,secure lending on livestock, I am sure I will not be surprised with a Credit rating upgrade from Fitch's.
Possibly October?

Sharemilkers:- A significant percentage of HNZ's customers would be farmers going backwards at present and they wouldn't get $1k a head at the works so its not well secured if they loaned 60% at close to $3K a head when dairy was at its peak is it mate !!

Fitch work at a macro economic level and work downwards from there to identify specific risks to its rated clients. NZ Inc isn't in the fantastic shape it was last year by any means.
Let's be clear they are talking about a risk to asset quality and go on to say if there isn't any recovery before mid 2015 then concerns increase.
This is not the sort of macro economic environment where any N.Z. bank gets a credit rating upgrade. Okay, let me help spell it out. Look at this, emphasis added.

What is Heartland Bank's credit rating and what does it mean?

Heartland Bank has a long-term issuer rating of BBB (Outlook Stable) issued by Fitch Ratings.

Fitch Ratings BBB (Outlook Stable) A rating of BBB from Fitch Ratings indicates that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

I'd say we now have those adverse economic conditions despite what Stephen Joyce tried to argue today.

[winner69]

Sharemilkers:- A significant percentage of HNZ's customers would be farmers going backwards at present and they wouldn't get $1k a head at the works so its not well secured if they loaned 60% at close to $3K a head when dairy was at its peak is it mate !!
Fitch work at a macro economic level and work downwards from there to identify specific risks to its rated clients. NZ Inc isn't in the fantastic shape it was last year by any means.
Let's be clear they are talking about a risk to asset quality and go on to say if there isn't any recovery before mid 2015 then concerns increase.
This is not the sort of macro economic environment where any N.Z. bank gets a credit rating upgrade. I there's a change to HNZ's rating it won't be in the direction you want.
BBB- is on the cars I reckon.

You forgot about the personal guarantees Roger

[percy]

Well lets look at the time line.
25th August 2014; HNZ announces full year npat of $36mil..
29th October 2014; Fitch raises HNZ Credit rating.
14th January 2015; RBNZ Reduces Regulatory Capital Requirements for HNZ.
26th June 2015,HNZ confirms profit of approx. $48mil.This is up 33% from the profit Fitch used for their last upgrade.
So sound diversified lending,secure lower cost of funding,growing profitability,and extremely high capital ratio.
So no I would not be surprised at a credit rating upgrade.

[Beagle]

The full detail of what Fitch said when they upgraded in October 2014 - emphasis added.

Heartland Bank Limited KEY RATING DRIVERS - IDRs AND VR The upgrade of HBL's Long- and Short-Term IDRs and VR reflect the bank's consistent reduction in non-core assets resulting in improved asset quality and stronger earnings. At the financial year end 30 June 2014 (FY14) HBL's noncore asset portfolio stood at NZD41m. HBL expects to reduce the portfolio to NZD26m by end-2014, while maintaining current provisioning levels. At this point the portfolio would be unlikely to present a material risk to the bank's capitalisation and profitability.
HBL's funding and liquidity profile is adequate for its rating level. It makes greater use of wholesale funding relative to most of its domestic peers, with a loan/ deposit ratio of 116% at FYE14, leaving it somewhat susceptible to investor confidence. In addition, HBL's on-balance sheet liquidity is lower than domestic peers. This risk is partly offset by HBL's shorter duration loan portfolio. Around 53% of HBL's liabilities maturing within 12 months are covered by maturing assets at FYE14.
HBL's business model focuses on lending niche markets in which it has a leading market share. As a result, HBL generates a stronger net interest margin than peers despite the riskier lending profile. Fitch expects HBL's core asset quality to remain sound, benefiting from strengthened underwriting standards and good economic conditions. In addition, HBL's capital ratios are adequate relative to its risks.
RATING SENSITIVITIES - IDRs AND VR HBL's IDRs and VR are sensitive to changes in its company profile and risk appetite. A weaker company profile - mainly reflected in its business model and franchise, could impact the bank's earnings performance and could lead to a change in risk appetite, placing negative pressure on HBL's asset quality and/or capital, funding and liquidity positions. Positive rating action is unlikely in the short- to medium-term.

There's been a lot of economic water under the bridge since October 2014 and unfortunately its all been going in the wrong direction.
I also note in the context of what Fitch were talking about in terms of changes to their business model that HNZ are aggressively targeting more unsecured consumer lending and poorly / moderately secured vehicle lending, some of it on deferred payment terms plus as the as yet unproved and mostly unsecured lending through Harmoney. All lending that changes their business model to a somewhat higher risk one in my opinion. I wonder how Fitch will see this ?

[percy]

The full detail of what Fitch said when they upgraded in October 2014 - emphasis added.

[/B]
There's been a lot of economic water under the bridge since October 2014 and unfortunately its all been going in the wrong direction.
I also note in the context of what Fitch were talking about in terms of changes to their business model that HNZ are aggressively targeting more unsecured consumer lending and poorly / moderately secured vehicle lending, some of it on deferred payment terms plus as the as yet unproved and mostly unsecured lending through Harmoney. All lending that changes their business model to a somewhat higher risk one in my opinion. I wonder how Fitch will see this ?

I am sure that is how Fitch's saw the outlook in October LAST year.
Excellent water under the bridge for Heartland since then.In fact very fast flowing fresh water!
14 th January THIS year RBNZ reduces regulatory capital requirements for HNZ.
26th June THIS year, ie under two weeks ago, HNZ confirms their npat will be close to $48mil,up from last year's $36mil.Up approx 33%.Now that is a lot of fast flowing water under the bridge.!! Fresh water too.!!
And Heartland are "assessing possible capital management options to improve ROE."
Now that sounds very much like a bank which deserves to have their credit rating upgraded,[again].