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  1. #6931
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    Quote Originally Posted by Raz View Post
    They may... however their profession and consensus research does not back that up.

    If you actually have a chat with their chief economist he will suggest our GDP growth has basically converged towards population growth. Thats why we currently have migration at current levels....although again is that the whole story:-)

    Just noted your other query and yes risk seems elevated to win clients in the last 12 months.
    Yes raz, with population growth ~2% latest GDP figure just under 3% not that flash.

    You acquaintance of Dominic? He changed a lot over the last year from a pretty gung ho type to him and his team seeing negatives in nearly every economic update and crying out for OCR cuts. His masters must have an ulterior motive.

    Anyway back on topic. With way above average population growth one would think that Heartland would have heaps more new customers. Good for growth.
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  2. #6932
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    Default Tier 1 and Tier 2 Lending Ratios FY2015

    Quote Originally Posted by Snoopy View Post
    Once again there is no mention of Tier 1 or Tier 2 in the Heartland FY2014 report.

    The 'best case' scenario is that all loans are Tier 1. $2,564.266m of loans are outstanding. 20% of that figure is:

    0.2 x $2,564.266m = $512.9m

    Heartland has total equity of $452.6m which is still below the 20% of loan target no matter what the tier classification of the loans.

    Result: FAIL TEST

    PS Other posters have protested at my 20% of equity to back up the loan measuring stick in the past. 20% is not too far away from the 17% which by implication is judged acceptable by management under the watchful eye of Reserve Bank chairman Graeme Wheeler. The Reserve Bank further qualifies their views that a company of Heartlands credit rating still has a 1 in 30 chance of going broke in any year. I prefer to think in business cycles and 30 years will contain around five of those. So you could restate the Reserve Bank's view as saying that HNZ has a one in five chance of going broke at the bottom of the business cycle.

    For me that investment risk is too high. So I am sticking to my 20% equity requirement, even if the Reserve Bank will settle for less.
    I am a little overdue with this 'annual update, but better late than never.

    Heartland has announced its intention for Heartland Bank to complete an issue of Tier 2 capital issue in FY2016, provided that market conditions remain favourable. An issue of Tier 2 capital would (in the absence of any other use) allow Heartland to return capital by way of a share buy back which would have a positive impact on ROE and EPS. This statement implies that at EOFY2015 30th June 2015) , all capital within Heartland was Tier 1 capital. It is nice to get confirmation of this, because this has been my assumption for several years. The awkward thing about this new Tier 2 capital is that it will make next years equivalent calculation more difficult!

    $2,879.134m of loans are outstanding. 20% of that figure is:

    0.2 x $2,879.134m = $575.8m

    Heartland has total equity of $480.1m which is still below the 20% of loan target.

    Result: FAIL TEST

    Putting a number on it, the actual capital to loan ratio is:

    $480.125m / $2,879.134m = 16.6%

    This is down from the 17.6% of last year and now nearer the 17% equity that Heartland had when Governor Wheeler originally approved Heartland as a bank. Wheeler has of course slackened Heartland's requirement for capital since then. But the raw figure is not very encoraging, if progress is what you were seeking.

    SNOOPY
    Last edited by Snoopy; 18-01-2017 at 01:26 PM.
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  3. #6933
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    Default Underlying Gearing Ratio FY2015

    Quote Originally Posted by Snoopy View Post
    The underlying debt of the company (borrowings removed) according to the full year (FY2014) statement of financial position is:

    $39.375m + $0.431m = $39.806m

    To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the problem 'Investment Properties' and the unspecified 'Investments' from that total:

    $3,016.888m - ($2,607.393m +$24.888m + $238.859m) = $145.748m

    We are then asked to remove the intangible assets from the equation as well:

    $145.798m - $47.421m = $98.327m

    Now we have the information needed to calculate the underlying company debt net of all their lending activities:

    $39.806m/$98.327m= 40.5% < 90%

    Result: PASS TEST
    The underlying debt of the company (borrowings removed) according to the full year (FY2015) statement of financial position is:

    $46.020m + $7.869m = $53.889m

    To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:

    $3,359.259m - ($2,862.070m +$24.513m + $329.338m) = $143.348m

    We are then asked to remove the intangible assets from the equation as well:

    $143.348m - $51.119m = $92.229m

    Now we have the information needed to calculate the underlying company debt net of all their lending activities:

    $53.889m/$92.229m= 58.4% < 90%

    Result: PASS TEST

    SNOOPY
    Last edited by Snoopy; 28-07-2018 at 12:51 PM.
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  4. #6934
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    Default EBIT to Interest Expense ratio FY2015

    Quote Originally Posted by Snoopy View Post
    Updating for the full year result FY2014:

    The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

    EBIT (high estimate) = $210.297m - $64.739m= $145.558m

    Interest expense is listed as $101.221m.

    So (EBIT)/(Interest Expense)= ($145.558)/($101.221)= 1.44 > 1.20

    Result: PASS TEST, a significant improvement from the FY2013 position, which confirms the improvement reported during HY2014.
    Updating for the full year result FY2015:

    The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

    EBIT (high estimate) = $260.488m - $68.403m= $192.085m

    Interest expense is listed as $126.041m.

    So (EBIT)/(Interest Expense)= ($192.085)/($126.041)= 1.52 > 1.20

    Result: PASS TEST

    More progress here. A steady improvement from the FY2014 figure of 1.44

    SNOOPY
    Last edited by Snoopy; 22-01-2016 at 06:27 PM.
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  5. #6935
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    Default Liquidity Buffer Ratio FY2015

    Quote Originally Posted by Snoopy View Post
    Time to update the Liquidity Buffer ratio, the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

    (Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%

    On one side of the equation, we have borrowings.

    HNZ BORROWINGS

    HNZ has total borrowings of $2,524.460m (see note 28). This is made up of:

    1/ Term deposits ($1,736.751m) lodged with Heartland. However, in a big change from FY2013…
    2/ $555.708m of Bank Borrowings now appears on the balance sheet.
    3/ Securitized Borrowings total $228.623m
    4/ Subordinated Bonds (new for FY2014 but only worth $3.378m)

    Note 28 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

    Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are, I believe, in relation to the recently acquired reverse mortgage portfolio. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. Additional borrowing capacity is available up until 30th June 2016, but only if certain scheduled repayments are met by the Heartland group. It follows that Heartland can’t rely on CBA Australia as a source of short-term funds.

    The information given in note 28 on the securitized borrowing facilities is as follows:

    -------

    The group has securitized bank facilities totalling $400m, all in relation to the Heartland ABCP Trust 1. (ABCP Trust) has a maturing facility of $400m maturing 4th February 2015,

    These facilities are drawn by $229m (c.f. FY2013: $259m).

    --------

    Bank borrowings no longer explicitly rank equally with the securitized bonds. Therefore, I think it is safe to assume that if HNZ got into cashflow difficulty, the different classes of borrowings would be repaid in the following order:

    1/ Bank Borrowings,
    2/ Securitized Borrowings,
    3/ Subordinated Bond (new for FY2014 but only worth $3.378m) and finally
    4/ deposits from debenture holding customers.

    IMO that represents a large new incremental risk for Heartland depositors that has received no media attention.

    All securitized asset activity relates to a time-frame no more than one year out in the future, in this case just 6 months. Nevertheless, maturity date rollover renegotiations have happened without trouble over the last two years.

    The amount of securitized holdings drawn has decreased by $30m (12%). This is a significant drop. The maximum amount that can be borrowed under securitized arrangements has dropped too since FY2013, from $500m to $400m. This is because the extra CBS Trust securitization arrangements, worth up to $100m, have been wound up. The net result of all this is that the borrowing headroom available using securitized bonds is now:

    $400m - $226.6m = $173.4m

    All four sources of drawn funds itemized have been on loaned to customers who want loans.


    HNZ LENDINGS

    Customers owe HNZ 'Finance Receivables' of $2,607,393,000. There is no breakdown in note 20 as to what loans are current or longer terms. However, if we look at note 39, we can see the expected maturity profile of total finance receivables due over the next twelve months.

    $50.234m + $629.645m + $483.727m = $1,163.426m

    These are offset by short-term borrowings for repayment over twelve months of

    $18.922m + $242.431m + $195.682m = $457.035m

    Thus the net expected maturity of receivables is:

    $1,163.426m - $457.035m = $706.391m

    If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity. There is no need to increase corporate borrowings to supplement debenture repayments.

    => Pass Short term liquidity test

    I do note is that the amount borrowed as ‘debentures and deposits’ (borrowings) from customers has gone up by $426.9m (+21%) and the amount lent to customers (receivables) has gone up by $597.0m (+30%). This is a huge turnaround. In its formative years (FY2012 and FY2013) Heartland did nothing but shrink and now for the very first time it is growing. However finance receivables at fair value acquired as a result of the newly acquired “Heartland Home Equity Release” business were valued at $715.222m. That means the underlying legacy business at Heartland is continuing to shrink, down:

    $715.2m - $597.0m = $118.2m

    This is a drop of 6% in finance receivables terms.

    Borrowing facilities have gone down by at least $100m over the same annual comparative period. So Heartland have upped their current period risk profile by having a smaller buffer to cover a growing mismatch between borrowings and receivables. It is still well within limits though!
    Time to update the Liquidity Buffer ratio, the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

    (Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%

    On one side of the equation, we have borrowings.

    HNZ BORROWINGS

    HNZ has total borrowings of $2,825.245m (see note 13). This is made up of:

    1/ Term deposits ($2,097.458m) lodged with Heartland.
    2/ $465.779m of Bank Borrowings.
    3/ Securitized Borrowings total: $258.630m
    4/ Subordinated Bonds: $3.378m

    Note 13 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

    Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are, I believe, in relation to the recently acquired reverse mortgage portfolio. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. Additional borrowing capacity is available up until 30th June 2016, but only if certain scheduled repayments are met by the Heartland group. It follows that Heartland can’t rely on CBA Australia as a source of short-term funds.

    The information given in note 13 on the securitized borrowing facilities is as follows:

    -------

    The group has securitized bank facilities totalling $350m, all in relation to the Heartland ABCP Trust 1. (ABCP Trust) has a maturing facility of $400m maturing 3rd February 2016. I do not expect any problem in rolling this facility over for another year.

    The current level of drawings against this facility is not highlighted. (c.f. FY2014: $229m).

    --------

    Bank borrowings no longer explicitly rank equally with the securitized bonds. Therefore, I think it is safe to assume that if HNZ got into cashflow difficulty, the different classes of borrowings would be repaid in the following order:

    1/ Bank Borrowings,
    2/ Securitized Borrowings,
    3/ Subordinated Bond (new from FY2014 but only worth $3.378m) and finally
    4/ deposits from debenture holding customers.

    IMO that represents a large new incremental risk for Heartland depositors that has received almost no media attention.

    The maximum amount that can be borrowed under securitized arrangements has dropped too since FY2014, from $400m to $350m. The net result of this is that the borrowing headroom available using securitized bonds is now:

    $350.0m - $258.6m = $91.4m

    All four sources of drawn funds itemized have been "on loaned" to customers who want loans.


    HNZ LENDINGS

    Customers owe HNZ 'Finance Receivables' of $2,862,070,000. There is no breakdown in note 11 as to what loans are current or longer terms. However, if we look at note 20, we can see the expected maturity profile of total finance receivables due over the next twelve months.

    $37.012m + $664.567m + $450.638m = $1,152.2175m

    These are offset by short-term borrowings for repayment over twelve months of

    $748.332m + $1,219.450m + $686.159m = $2,653.941m

    Thus the net expected maturity of receivables is:

    $1,152.2175m - $2,653.941m = -$1,501.724m

    If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity. However, that is not the case here. There is possibly a need to renegotiate/increase corporate borrowings to supplement debenture repayments.

    => Fail Short term liquidity test

    I do note is that the amount borrowed as ‘debentures and deposits’ (borrowings) from customers has gone up by $300.8m (+11.9%) and the amount lent to customers (receivables) has gone up by $254.7m (+9.7%).

    Securitized borrowing facilities have gone down by $50m over the same annual comparative period. So Heartland have upped their current period risk profile by having a smaller buffer to cover a growing mismatch between borrowings and receivables.

    SNOOPY
    Last edited by Snoopy; 22-01-2016 at 06:53 PM.
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  6. #6936
    Reincarnated Panthera Snow Leopard's Avatar
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    Arrow Admire you tenaciousness.

    You will be able to do this all over again in about one month Snoopy.

    Best rest up, so you all refreshed for your next dive into the Heartland depths.

    Best Wishes
    Paper Tiger
    om mani peme hum

  7. #6937
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    Well done Snoopy , your pass rate is getting better . I presume that is because your accuracy is improving!?

  8. #6938
    Reincarnated Panthera Snow Leopard's Avatar
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    Exclamation While there is confidence the contractual is not expected

    Quote Originally Posted by Snoopy View Post
    ...Customers owe HNZ 'Finance Receivables' of $2,862,070,000. There is no breakdown in note 11 as to what loans are current or longer terms. However, if we look at note 20, we can see the expected maturity profile of total finance receivables due over the next twelve months.

    $37.012m + $664.567m + $450.638m = $1,152.2175m

    These are offset by short-term borrowings for repayment over twelve months of

    $748.332m + $1,219.450m + $686.159m = $2,653.941m

    Thus the net expected maturity of receivables is:

    $1,152.2175m - $2,653.941m = -$1,501.724m

    ...
    Can I just point out that the figures you use are not the expected maturity numbers but the contractual maturity figures.

    So for instance that $748.332m was probably sitting in peoples current accounts, on call savings accounts, etc.
    So while people will demand some of that money now, by going to a hole in the wall and getting cash out or paying for the weeks supply of dog food with their debit card, they will not want it all. And on the flip side of this is that people also put their wages and dividend payments back in.

    With both term deposits and loans, there is the expectation that people will take up new ones.

    All banks work this way and fail your test on the contractual profile (you passed Heartland last year because you did use the expected numbers).

    This contractual profile becomes important if there is a significant loss of confidence in the bank and everybody wants their money out asap.

    Best Wishes
    Paper Tiger
    Last edited by Snow Leopard; 23-01-2016 at 12:11 PM. Reason: completely mis-worded a bit
    om mani peme hum

  9. #6939
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    Quote Originally Posted by Paper Tiger View Post
    Can I just point out that the figures you use are not the expected maturity numbers but the contractual maturity figures.
    Fair point PT, 'contractual maturities' is a better term to use than 'expected maturities' in the context of the data that I used. As you point out, the important thing is that an alternative method of funding becomes available. And the rollover of deposits is a way of alternative funding.

    95% of the time none of this matters, in practice. Deposits roll over, loans roll over and the finance company goes about its finance business. However, there are times when 'rollover' is not a given.

    ------

    EDIT
    I have just noticed that in AR2014, Note 39, Heartland provides both 'contractual maturites' and 'expected maturities'. Last year I used 'expected maturities' for my calculation. However in AR2015, the equivalent Note 20, only 'contracted maturities' are given. The 'expected maturities' have been quietly dropped from company reporting procedures! This is very annoying, becasue as you point out PT 'expected maturities' is actually much more useful information than 'contractual maturites'!

    From AR2014
    "Expected maturities of financial assets are based on management's best estimate having regard to current market conditions and past experience."
    "Historical deposit reinvestment levels have been applied to borrowings. Other financial liabilities reflect contractual maturities."

    So maybe I can calculate my own 'expected maturities' for FY2015?

    ------

    There are times when a company that deals in finances is making good profits and to the casual observer is 'solid as'. Yet if confidence wains, be that because:

    1/ The underlying assets being financed have to be sold at a loss, OR
    2/ The company cannot attract enough depositors becasue of a run on funds. Suddenly loans have to be wound up to pay depositors back.

    In these circumstances, a profitable 'solid as' company can collapse, which is exactly what happened to the likes of Hanover. It is very unlikely that an apparently healthy company in finance will publish accounts showing it is on the brink of collapse because of mismanagement. Nevertheless investors can look at the published results and compare today's results with prior period results. If there are any problems, this is where shareholders will get the first hint of them!

    So for instance that $748.332m was probably sitting in peoples current accounts, on call savings accounts, etc.

    So while people will demand some of that money now, by going to a hole in the wall and getting cash out or paying for the weeks supply of dog food with their debit card, they will not want it all. And on the flip side of this is that people also put their wages and dividend payments back in.

    With both term deposits and loans, there is the expectation that people will take up new ones.
    Possibly. I know that Heartland have been promoting their call accounts quite steadily, to both consumers and businesses. I notice comparing 'contractual liabilities' 'on demand' FY2015 to FY2014, the amount has increased from $629.125m to $748.332m - an increase of 19%.

    Last year the 'expected maturities' at call were only $18.922m. This was only:

    $18.922m/$629.125m = only 3% of on call assets!

    This year, because 'expected maturities' are not reported, there is no equivalent figure.

    SNOOPY
    Last edited by Snoopy; 23-01-2016 at 02:46 PM.
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  10. #6940
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    Default Equity Ratio FY2015

    Quote Originally Posted by Snoopy View Post
    Updating this number for the full year FY2014

    Equity Ratio = (Total Equity)/(Total Assets)

    Using numbers from the Heartland FY2014

    = $452.622m/ $3016.888m = 15.0%

    As at EOFY2014, there is a significant jump in the capital base of Heartland compared to last year. $20m of the increase has come from a capital raising on 18th February 2014 (note 30). New Zealand and Australian Home Equity Release mortgage businesses were purchased from Seniors Money International Limited ("SMI"). This acquisition was part paid for by issuing $37.8m worth of Heartland shares on 1st April 2014. That means total new capital put into Heartland during FY2014 was a hefty $57.8m.

    Take the $57.8m worth of new capital away from the end of year equity position and I get $394.82m of residual historical equity. This means that of the new equity in Heartland during the year only

    $394.82 - $370.543 = $24.290m

    or 30% has come from re-organizing the FY2013 model Heartland business.

    The customer loan base has increased in proportion, meaning the whole business has upsized.

    Updating this number for the full year FY2015

    Equity Ratio = (Total Equity)/(Total Assets)

    Using numbers from the Heartland FY2015

    = $480.125m/ $3359.259m = 14.3%

    The customer loan base has increased a little faster than the company equity. This means the balance sheet is being worked a little harder. This isn't a problem if the risk of loans becoming distressed is going down.

    Unlike FY2014, there was no major external acquisition. The most significant increase in share capital over the year was therefore from (reference "Statement of Changes in Equity")

    1/ Retained Earnings: $48.538m - $30.188m = $18.350m
    2/ Dividend Reinvestment Plan: $7.621m
    3/ Share Based Payments: $1.491m
    4/ Treasury Shares Sold: $0.041m

    Total $27.503m

    This is slightly more than the the new capital generated within the existing Heartland in FY2014 ($24.290m)


    SNOOPY
    Last edited by Snoopy; 23-01-2016 at 03:17 PM.
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