HGH - Heartland Group Holdings

[Beagle]

However, all the banks made large increases to provisions for bad debts, some of which related to dairy farmer loans.
Tripe said it would take a while for the full extent of the downturn to filter through, and it was unsurprising that most banks had not yet foreclosed on farmers.

I found this bit quite interesting NBT. Curiously HNZ made no extra provision for bad debts in the dairy sector despite having an average LVR based on farm values as at 30 June of 65%, (remember farm values have fallen 17% since then so current LVR is probably into the mid late 70% range now). How is it that HNZ think they're immune to this dairy issue but all the other banks think otherwise ?
All HNZ have done is kick this can down the road and this must inevitably come back to bite them in subsequent year's financial results. GDT auction results overnight are expected to show a 5% fall according to the futures, (article in Herald this morning). This dairy sector is not out of the woods by any stretch of the imagination. Bankers massive bonus's for the FY15 year couldn't possibly have had something to do with this apparent dairy under-provisioning, surely not...

[Snow Leopard]

I found this bit quite interesting NBT. Curiously HNZ made no extra provision for bad debts in the dairy sector despite having an average LVR based on farm values as at 30 June of 65%, (remember farm values have fallen 17% since then so current LVR is probably into the mid late 70% range now). How is it that HNZ think they're immune to this dairy issue but all the other banks think otherwise ?
All HNZ have done is kick this can down the road and this must inevitably come back to bite them in subsequent year's financial results. GDT auction results overnight are expected to show a 5% fall according to the futures, (article in Herald this morning). This dairy sector is not out of the woods by any stretch of the imagination. Bankers massive bonus's for the FY15 year couldn't possibly have had something to do with this apparent dairy under-provisioning, surely not...

I find your whole rant 'quite interesting' Roger.

HNZ made a large increase to provisions for bad debts, some of which related to dairy farmer loans (from FY accounts)
They increased their provisioning in the rural sector, even though the quality of the rural loan book improved over the year (from FY accounts).
The 65% was actually 61% (from NZX announcement).
They do not think they are immune to anything (from FY accounts & NZX announcement etc).

I am sure that Heartland will have segments of their business that under-perform and others may well over-perform.
There will come a time when their year on year profit will fall and there is the [currently remote] possibility of worse things.

Best Wishes
Paper Tiger

[Beagle]

61% as at 30 June 2015. 65% after some additional data showing farm prices had started to fall. Winner69 posted official stat's for the September quarter some time back showing average farm prices had fallen 17% in the Sept quarter and also showing sales were down dramatically, (classic sign of an illiquid market with few buyers) so their exposure as at 30 September was 61 / 0.83 = LVR of 73.5% PLUS the further additional support HNZ have had to give negative cash flow dairy farmers over the lean winter, call it 75% and that would probably be conservative. I posted a link recently showing a website with over 2,000 farms for sale so I guess its no surprise the banks don't want to forcibly liquidate anyone in an illiquid market as what would that do to their remaining security values

October stat's on farm prices will be interesting as will the overnight GDT auction result.

If I get time I'll have a look at the provisioning tomorrow. Yes agreed there was a lot more but the vast majority was consumer loans IIRC.

[axe]

http://www.interest.co.nz/personal-f...ending-service

Harmoney has a few advantages in this space.

First mover. Up and running over a year now?
HNZ on board with seed capital and finance expertise
TME on board. I think every TME member got an email from TME advertising Harmoney when TME got their stake. TME is NZ's largest online marketplace. Harmoney probably NZ's largest P2P platform.

It will be a large hill to climb for any newcomers into this space.

[Beagle]

So yesterday Paper Tiger alleged they'd made significant extra provisioning in their financials for the exposure to Dairy losses in their FY15 accounts.
Can you please direct me to where exactly in the accounts this is done ?

The financials all look lovely, beautiful pictures and images and even the Maori translation. They're sure to include a good gender, age and ethnicity balance in their photo's too...all very lovely and tremendously politically correct...must be trying to win the annual report of the year award surely ?

But scratch beneath the glossy surface and one wonders if they simply haven't put lipstick on an otherwise somewhat unattractive situation.

From my read all the provisioning has gone into other areas.

From note 19(e) in the accounts where they lump all agricultural loans together, (they don't appear to separate out dairy loans from my read) we get total provision for impaired loans both individually impaired and collectively impaired in 2014 of $2.114m on total loans in this sector of $490.7m = 0.43% total provisioning.
In 2015 we have total provisioning of $2.173m on total agricultural sector loans of $571m = 0.38%.
This material reduction in the percentage rate of provisioning is against known information at the time that dairy was at a ten year low and many of their clients required ongoing support..go figure but this seems to defy logic seeing as the outlook in June 2014 was better than in mid winter 2015 ?

How much of the extra $81m loaned to that sector was ongoing support to dairy farmers that required it, we don't know as they won't and don't disclose that.

Here's a small extract of their blurb on how their judgement's are made

Credit impairments are recognised as the difference between the carrying value of the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held (discounted at the loan’s original effective interest rate). All relevant considerations that have a bearing on the expected future cash flows are taken into account, including the business prospects for the customer, the likely realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. Subjective judgements are made in this process. Furthermore, judgement can change with time as new information becomes available or as work-out strategies evolve, resulting in revisions to the impairment provision as individual decisions are taken. Changes in judgement could have a material impact on the financial statements.

Emphasis added.

As mentioned yesterday with the Sept 30 quarter farm sale data now known and a 17% fall in that quarter alone, their 61% LVR ratio becomes 61 / (100-17) = 73.5% as at 30 September 2015.
Further, from previous serious downturns we know that once farm prices start trending downwards its never over in a single quarter so in my view its highly likely that many banks will presently be talking to cash flow negative clients in this sector inviting them to "consider their options". (This is "bank speak" for we can't continue to support you so get out or refinance before we have to enforce our security rights). Its my view that its likely that for every forced sale currently being contemplated by the banks, i.e. officially a mortgagee sale, there are many more where the clients are effectively taking instructions from their bankers even though the property is not being marketed as a mortgagee sale so the weight of supply going forward is highly likely to depress farm prices further, perhaps quite significantly in my opinion.

If farm prices fall another 17% in total in the balance of FY16 spread over the next three quarters, which seems like a reasonably conservative assumption to me, HNZ's average Loan to valuation ratio becomes 61 / (100-34) = 92.4% ! (A client of mine told me his farm worth approx. $8m at the peak, he'd be lucky to get $5m for and that was back in August). I'd suggest he might get $4m now, about half. Nobody can sell in that district is the other comment he made. I think another 17% fall spread over the current quarter and the next two, i.e. nine months could be quite conservative and it could fall materially further than that and then we really have a serious problem. Do HNZ carry and provide further support to dairy farmers for a third year when their LVR is over 100% ?

I will leave people to judge for themselves whether they think total collective loan provisioning of $2.17m on an agricultural sector loan book as at 30 June 2015 of $571m is adequate or not, but please keep in mind that they talk a lot about providing ongoing support so the LVR can only go one way when that's happening and that's on top of the issue being exacerbated by rapidly falling farm values.

We have had any number of expert economists in the media in recent months saying highly indebted dairy farmers are losing serious money with a pay-out at last year's level and this year isn't much of a recovery so far...extremely challenging times for the dairy industry meaning the loan provisioning for that sector can only head one way...perhaps quite dramatically and impact FY16 and FY17 profits ?...you be the judge.

I think shareholders would be wise to keep an eagle eye on the future farm sale data as any further material deterioration in values could seriously undermine HNZ's asset quality and future profits.
My 3 cents but please DYOR and don't accept glossy pictures and images at face value.

[winner69]

PT reckons HNZ execs at Melbourne Cup (pput the asm off eh)

Prob being looked after by the Bendigo people before getting down to the nitty gritty discussions later in the week.

[Beagle]

http://www.interest.co.nz/business/7...-rise-expenses

Further to this mornings comment, here's the BNZ's approach, nearly doubling collective provisioning because of the outlook for dairy. Quite a stark contrast to HNZ's approach of reducing provisioning as a percentage of the agri loan book...hmmmm. Even mentioned a new accounting standard IFRS9 that other banks aren't adopting yet. http://www.ifrs.org/Alerts/PressRele...July-2014.aspx I see mandatory adoption isn't until 1 January 2018 but voluntary early adoption like the BNZ have done is allowed.

Interesting that using the more rigorous and up to date methodology regarding accounting for financial instruments, (i.e. measuring bad debts and provisioning for doubtful debts), the BNZ are taking quite a different approach to HNZ. One bank appears to be kicking the can down the road and simply hoping for the best and the other taking a more realistic approach to impending and current problems.

[Snow Leopard]

PT reckons HNZ execs at Melbourne Cup (pput the asm off eh)

Prob being looked after by the Bendigo people before getting down to the nitty gritty discussions later in the week.

You are attributing all of that to the wrong feline.

Never mentioned the Melbourne Cup or started the Bendigo rumour.

Best Wishes
Paper Tiger

[Snow Leopard]

So yesterday Paper Tiger alleged they'd made significant extra provisioning in their financials for the exposure to Dairy losses in their FY15 accounts.
Can you please direct me to where exactly in the accounts this is done ?
...

19(d) Provisions for Rural collectively impaired assets went from:
$583K on $491M (or 0.119%)
to
$1M356 on $572M (or 0.237%)

Best Wishes
Paper Tiger

[winner69]

Keeping well clear of Melbourne Cup and Show Weeks....

Sorry PT ...it was Xerof

Always get you two mixed up