HGH - Heartland Group Holdings

[Beagle]

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

Individually and collectively impaired loans went down as a percentage of total loans advanced as per yesterday's post...and that with dairy outlook at a ten year low.

Even if you take your viewpoint that's hardly the substantial new provisioning you called it in your previous post...really quite minuscule in the context of the loan book with so many customers unable to meet their current loan obligations.

There's been several recent articles in the press about substantial new draw-down's of loans in the sector in the last quarter to 30 September...I guess if people can't pay their existing loans and can't sell their farms its better to loan them even more money, (dress it up as showing support, that's really politically correct), and cross your fingers and hope it all comes out in the wash...opps it isn't...GDT dairy prices down 8% overnight.

[nextbigthing]

Roger,

Let's say things aren't looking good for a farmer and HNZ 'invites' them to sell their farm/herd. The original loan was $1M. Worst case scenario for HNZ, it was a reasonably new loan so they've paid almost nothing off it, it's sitting just under $1M. The farm was worth $1.2M but has dropped 20% and is now worth - just under $1M. HNZ get all their money back bar a few fees and can apply it to loans elsewhere.

Sure land/herd prices may drop further, however of all the loans they carry, how many were written at the peak? Then of those, how many are actually the peak LVR. Then of those, how many aren't backed up by other security eg they're second farms with the original as collateral. The number of high risk loans is surely small. They're a bank, they manage this risk.

Then out of all of this, how many are HNZ actually going to let go under and not do a thing? Any that show some promise and have appropriate collateral may be given extra loans (more revenue for HNZ) and any that are 'iffy' are going to be carefully managed. You can't tell me the competent managers at HNZ are simply going to stand aside and do nothing.

The extra revenue from extra loans is great because it's simply stealing the future spending on new Landcruisers and giving it to HNZ. Perfect.

We miss you on the cheerleading squad Roger. There's still a spot available

[nextbigthing]

PS Older dairy farmers who have made their $$$ already are simply 'retiring' by converting to beef which is a lot easier while the prices are so good. This decrease in supply will help the dairy cause.

[iceman]

Even if you take your viewpoint that's hardly the substantial new provisioning you called it in your previous post...really quite minuscule in the context of the loan book with so many customers unable to meet their current loan obligations.

Roger what do you base that statement on ? Do you have some information on a large increase in HNZ "customers unable to meet their current obligation" as you claim ? Please show us where you get this info from.

Below is copied text from NBR's Margin Call from end of September. You will note the analysts like HNZ because of their low exposure (7.6% of total loan book) to dairy with only 9 customers with loans in excess of $5m. While I agree with you that us SH need to carefully monitor what, if any, effect downturn in dairy will have on HNZ, I feel your comments on HNZ are increasingly alarmist.

From NBR 19/09/2015:
Forsyth Barr has marked up only one stock, Heartland New Zealand, from
underperform to outperform after the latest reporting season.
It says the rural, motor vehicle and South Island-focused lender has the combination of a more attractive risk profile and still some price upside.
Heartland is also rated “outperform” by First NZ Capital analysts, who note the low exposure to the dairy industry
(Heartland says it is just 7.6% of its total lending book).
While Heartland has received a generally favourable press since its listing in February 2011, the share price
hasn’t always reflected that. It surged in the latter part of last year and early this year but has since dropped back.
On a 12-month basis it is up 23%, peaking in February at $1.41. But at this week’s price of $1.17 it is back to near
where it was at the start of the year.
It has indicated a share buyback since announcing its result in mid-August. No timing has been set for this, though
the bank says it will depend on market conditions in the current financial year (to June 30, 2016).
Forsyth Barr notes the solvency ratio is well ahead of the minimum 10.5% at 12.9% (June 30) and the bank could
raise $50-75 million in Tier 2 debt to optimise its capital structure.
First NZ Capital says $50 million is feasible and this would mean 10% of its capitalisation being returned to
shareholders.
Heartland has indicated net profit after tax guidance of $51-55 million, with improvements in asset growth,
margins and stable impairments providing an earnings rise of 6-14%.
In the 2015 result, an impairment of $1 million from a Court of Appeal decision was cancelled out by a similar revaluation of its interest in peer-to-peer lender Harmoney.

[Beagle]

http://www.interest.co.nz/rural-news...ns-prices-will

Hi Iceman,

Have you seen all the economists opinions over winter saying dairy farmers need mid-late $5 per kg as a minimum to break even if they have meaningful debt ?

Why do you think there's been such a huge draw-down of new debt in the agri sector in the last quarter ? Why do you think farm prices are falling at a rapid rate ?

For what its worth I am not a fan at all of Forsyth Barr's research, (used to be a client), just look how they're performing in this year's sharetrader comp. Feltex, Credit Sails, SCF e.t.c.

if you'dike me to post more links substantiating what I'm saying I'm happy to do so tomorrow when I have more time.

The problem NBT is that dairy farm sales have increasing dried up and its become an illiquid market. Best for me to simply post some more links when I have more time.

[iceman]

http://www.interest.co.nz/rural-news...ns-prices-will

Hi Iceman,

Have you seen all the economists opinions over winter saying dairy farmers need mid-late $5 per kg as a minimum to break even if they have meaningful debt ?

Why do you think there's been such a huge draw-down of new debt in the agri sector in the last quarter ? Why do you think farm prices are falling at a rapid rate ?

For what its worth I am not a fan at all of Forsyth Barr's research, (used to be a client), just look how they're performing in this year's sharetrader comp. Feltex, Credit Sails, SCF e.t.c.

if you'dike me to post more links substantiating what I'm saying I'm happy to do so tomorrow when I have more time.

The problem NBT is that dairy farm sales have increasing dried up and its become an illiquid market. Best for me to simply post some more links when I have more time.

Hi Roger. Yes of course I have seen the various economic commentary. However I have not seen any reports on HNZ having "many customers unable to meet their current loan obligations". I look forward to receiving your links to substantiate it

[Snow Leopard]

Sorry PT ...it was Xerof

Always get you two mixed up

That's understandable.

Best Wishes
Paper Tiger

[Snow Leopard]

Individually and collectively impaired loans went down as a percentage of total loans advanced as per yesterday's post...and that with dairy outlook at a ten year low.

Even if you take your viewpoint that's hardly the substantial new provisioning you called it in your previous post...really quite minuscule in the context of the loan book with so many customers unable to meet their current loan obligations.

There's been several recent articles in the press about substantial new draw-down's of loans in the sector in the last quarter to 30 September...I guess if people can't pay their existing loans and can't sell their farms its better to loan them even more money, (dress it up as showing support, that's really politically correct), and cross your fingers and hope it all comes out in the wash...opps it isn't...GDT dairy prices down 8% overnight.

You are digging a pretty deep hole for yourself, Roger.

I should not be in a position where I feel the need to explain Company Account's 101 to an accountant.

There exists the real possibility that HNZ will have to make further provision for loans to dairy, that is not in dispute and there also exists the possibility that they have already made more than enough.

But they have to make reasonable, rational decisions.

Best Wishes
Paper Tiger

[Beagle]

Hi Roger. Yes of course I have seen the various economic commentary. However I have not seen any reports on HNZ having "many customers unable to meet their current loan obligations". I look forward to receiving your links to substantiate it

That's good then mate as I don't need to waste the time repeating what most economic commentators have been saying many times and that's generally been that the dairy price needs to be in the late $5 range + for farmers with debt to just break even.
Of course I can't provide links saying HNZ's customers can't pay their bills but what do you think a loan to farm value ratio of approx. 73% on current farm values implies, (amongst the most indebted in the sector surely ?) and that combined with HNZ's own statements that they're giving ongoing support to their customers. Support means lending more money to them because their cash flow is insufficient to survive, see this.
http://www.interest.co.nz/news/78394...s-respectively I dunno mate but I'm pretty sure those dairy farmers weren't borrowing money hand over fist to travel to the Rugby World Cup.

Not at all PT, I think its pretty clear than the BNZ and HNZ have taken quite distinct approaches to their provisioning and I think that's clear for people to see, even those that don't want to understand the latest IFRS, (International Financial Reporting Standards). HNZ might squeak through though, the new standard doesn't come into force till 1 January 2018..suppose they're hoping the dairy storm has blown over by then. Time will tell, nuff said.

[iceman]

Roger I don't think anyone on this forum is disagreeing with you mate about the risks the dairy downturn has for banks. Not just HNZ but even more so the big banks, some of which have much higher proportion of their books in dairy than HNZ.
Most of them also have a huge risk in the Auckland property market which is stalling, no less risky than dairy in my view. HNZ has wisely stayed out of that potential bubble territory.

nextbighting has outlined clearly in post 6622 how he/she thinks the situation is with regard to dairy. I think that is a fair summary and agree with it. Particularly the bit about HNZ not relying solely on securities over land. We know they also hold securities over machinery as well as personal guarantees. Many struggling farmers will be receiving support from family and I think it is entirely appropriate for HNZ and other banks to help those farmers (by lending them more) they deem to have appropriate collateral as well as the skill to manage through the downturn. That is the business banks are in. I have no doubt that HNZ's management is well aware of the state of the dairy industry and I have full faith in them managing it appropriately.

Other posters obviously have much greater concerns by the sounds of it and I assume are not HNZ holders anymore.

Careful monitoring of their loan book and bad debts over the coming 2-3 years will be very important. It is possible that us SH will at some stage look back and say "Roger was right and HNZ was indeed reckless". I think that is unlikely. Only time will tell my friend.