HGH - Heartland Group Holdings

[percy]

True, percy, but that's in the NZ-only context. Their exposure on a group basis is much lower, it's the mining sector that's worrying them!

Yes,mining,manufacturing,retail,residential property.
I expect NZ dairying is insignificant,but ANZ's $11billion can not be easily dismissed.
May be I have it wrong and ANZ's $11billion exposure may be NZ Rural,including dairying.
I note The Queensland Government is blaming their $3 billion deficit to the mining down turn.

[percy]

I believe the mining sector exposure is about 3-5% of the major aussie banks books... so like Dairy in NZ, I don't know why everyone is jumping up and down so much about a sector (ie Dairy for HBL, mining for aussie banks) with exposure of mid single digit percentages... of course some impairments and losses may be in order, but I doubt HBL or ANZ will be plunging into losses anytime soon

I think you are correct and you are inline with Paper Tiger's sensible post.#7681.

[Snoopy]

Looking forward the current situation with the dairy industry will obviously have a greater effect on the short & possibly medium term profitability of Heartland Bank the longer it lasts, as will the decisions and impairments that are made in other areas of lending.

However the Bank is well capitalised, the management are well aware of the situation, being open and communicating their updated assessments as the process unfolds.

It is probable that it will survive.

I will reiterate the important of remembering that dairy is just one string in the Banks bow and at different times different sectors have their ups and down.

This is what being a Bank is all about, spreading and managing risk for the benefit of their shareholders and creditors.

I do note the smilie in PT's post. But I don't recall anyone on this forum suggesting Heartland is at risk of demise. The questions from me for today are about:

1/ Risk that might slow the development of Heartland ( i.e. maybe should be accored a lower PE ratio than some think).
2/ Whether Heartland is really value when measured against alternative peer investments.

SNOOPY

[Snoopy]

A bank will always have some loans that cause real concern. Indeed the impairment provisions in the accounts are there to allow for just such a contingency. But sometimes these accounting contingencies are not enough. Sure there are the annual adjustments to impairment to allow an annual 'stock take' of risk. But these do not cover every possible loan problem. This is why I have concluded that further risk assessment is warranted.

Here is the information behind today's Heartland 'Question of the day'.

Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (V)	Write Off (W)	Gross Financial Receivables (Z)	(V)/(Z)	(W)/(Z)
EOHY2012	$87.728m	$2,075.211m	4.23%	$1.854m	$12.138m+$1.685m	$2,104.591m	0.18%*	1.32%*
EOFY2012	$90.489m	$2,078.276m	4.35%	$3.788m	$14.636m+$3.180m	$2,105.702m	0.18%	0.85%
EOHY2013	$80.383m	$2,044.793m	3.93%	$5.254m	$4.079m+$0.745m	$2,072.270m	0.50%*	0.46%*
EOFY2013	$48.975m	$2,010.393m	2.43%	$17.313m	$6.679m+$1.981m	$2,060.867m	0.84%	0.42%
EOHY2014	$42.498m	$1,905.850m	2.23%	$3.325m	$17.523m+$1.523m	$1,940.064m	0.34%*	1.96%*
EOFY2014	$41.354m	$2,566.039m	1.59%	$2.570m	$35.258m+$3.260m	$2,631.754m	0.03%	1.46%
EOHY2015	$33.469m	$2,722.433m	1.23%	$5.102m	$0.423m+$1.003m	$2,749.232m	0.38%*	0.10%*
EOFY2015	$32.824m	$2,862.070m	1.15%	$7.003m	$1.555m+$1.910m	$2,893.724m	0.24%	0.12%
EOHY2016	$29.147m	$2,928.601m	1.00%	$5.610m	$11.086m+$3.186m	$2,951.075m	0.38%*	0.96%*

{Note * ratios are annualised because they relate to impairments and write offs over a six month period only}

First a couple of definitions based on how Heartland present their books.

An [ADD]fully[/ADD]impaired loan is something that in the judgement of Heartland has zero balance sheet value. It was 'written off' during the period covered by the accounts.

Heartland in their breakdown of the 'Asset Quality of Financial Receivables' list the following three mutually exclusive problem loan categories.

a/ Loans at least 90 days past due.
b/ Loans individually impaired.
c/ Restructured assets.

[REMOVE]I find this slightly confusing. But[/REMOVE] the 'loans individually impaired' does not mean that those loans are written off [REMOVE], despite them being listed as impaired[/REMOVE]. If I interpret the accounts correctly, it means that these loans are partially written off, and accounted for in the 'Provision for Impairment' (a separate listing category, d/).

My definition of a 'stressed loan' total can be calculated as follows:

'Stressed Loan Total' = (a)+(b)+(c)-(d)

The column (W) lists the actual dollar amount in bad debts written off over that period.

SNOOPY

[Snoopy]

Here is the information behind today's Heartland 'Question of the day'.

<snip>

The ratio of:

'Stressed Loans' / ' Size of Net Loan Book'

presents a very favourable picture. Investors can see that the 'stressed loans' in dollar terms are steadily reducing as the total net loan book size is increasing. Put simply four years ago evey hundred dollars of loan on the books was associted with just over $4 of 'stressed debt'. Today every hundred dollars of loan on the books was associated with just $1 of 'stressed debt'. It is a wonderful story. And 'the fans' would say it is entirely due to management taking hold of what was a 'rag tag' of lending institutions and blending them together into the slick Heartland operation we see today. The smooth progression looks almost too good to be true, with a seemless unbroken descent towards loan portfolio perfection. But sometimes when things look too good to be true, that is because they are!

Contrast this trend to Heartland's actual debt write off record, normalised in the last column. This last column is not 'spinnable' by management. When a debt actually goes bad, the payments stop coming in and the underlying asset is sold for recovery purposes, there can be no doubt that that asset is bad.

The 'impaired asset expense' is actually quite lumpy. The biggest lump was during the period 2HY2013. That $17m written down was connected with the problem property portfolio. Take out that 'outlier', and the latest three half yearly write downs are high in historical terms. Not high enough to be a problem: Writing off 20% of a $30m stressed loan book is not going to cripple a company like Heartland. But the divergence between the trends of the X/Y and V/Z ratios is stark.

OK, I'm coming out with it. I think this evidence here that the 'Stressed Loans' picture is being massaged for the benefit of making management look good. A further hint of this is the much higher percentage of stresssed loan provisions on the books of UDC, a comparable lender. I don't think this is a problem for Heartland now. But I am wondering how an ever lower level of stressed loan provisions, in absolute and relative terms, can be justified when the actual loan 'impaired asset expenses' at Heartland follow no such trend!

SNOOPY

[Snow Leopard]

...
An impaired loan is something that in the judgement of Heartland has zero balance sheet value. It was 'written off' during the period covered by the accounts.
...

Wrong. This definition is unique to yourself and helps cause the confusion that follows.

So your first step must be to reboot, determine the correct definition and then proceed to analysis.

Best Wishes
Paper Tiger

[clips]

Honestly, don't know what they were talking about...figures, debts, ex finance company n etc. but guess what..HBL net profit is around 50 m plus n 9 cents dividend in year 2017...that is what matter n certainly HBL will get better from now on...

good call....

[macduffy]

Spot on there, Tiger.

Impaired loans aren't necessarily expected to be total losses, just judged not to be recoverable at full balance sheet value.

[percy]

Wrong. This definition is unique to yourself and helps cause the confusion that follows.

So your first step must be to reboot, determine the correct definition and then proceed to analysis.

Best Wishes
Paper Tiger

I hope no one minds me having a bit of a chuckle to myself.!!!

[K1W1G0LD]

There is a difference between a forum and a book publishing site!

The stuff I write on this site is the sort of stuff I formerly would have written on a dog eared bit of paper, then filed it away to relook at come next results time. These kind of notes are by their nature error prone, either in mathematics or judgement. Yet by filing these notes away and coming back to them later you can often get a better view of the 'big picture'. And sometimes, when posted here, fellow contributors can point these errors out, they can be corrected, and a better view of the big picture emerges.

There is an alternative. I could keep all my notes in my self constructed ivory tower. Pour over them with candles at midnight, until months later I publish my self congratulated 'magnum opus' result. At that point the errors are found and I come crashing down with my ziggurat, the spire of which promptly impails me through my rear end. I then limp off into the sunset never to seen or heard from again. Now I am sure there are some on this forum who would relish such a happening. Yes it would be entertaining. But it wouldn't help anyone understand Heartland any better!

Don't be too quick to dish the mistakes. One usually learns a lot more from one's mistakes than from one's correctness. It is the end result that matters. The path taken to get there has many divides and many dead end corners.

As for being long winded, the best analysis of any situation is to make it as simple as possible, but no simpler. I generally work by starting out with a few more complex ideas, different ways of measuring the things I deem that need measuring. Then I hone the procedures to make them simpler. Don't think analysing a bank can be reduced to rehashing a couple of quotes from the results presentation.

SNOOPY

Snoopy, I suspected that If i got a reply it would be a long one and as my attention span is rather short I fell asleep whilst reading it . But never mind we live in a democracy and freedom of speech is paramount, if slightly taxing at times.
cheers kiwigold