HGH - Heartland Group Holdings

[Snoopy]

Lot's of numbers here. So what does it all mean?

Our second comparison is between two buckets that have little directly in common. "Stressed Loans" is one of those statistics that I have made up. Making up a statistic can be useful. Because if I am measuring something that management don't measure, it is very unlikely that management will be trying to manipulate it.

"Stressed loans" are a wider collection of problem loans that specifically exclude the impairment provision. All the actual "write offs" come out of the impairment provision. So there is no particular reason for a "stressed loan" measure should correlate with a "write off" measure in any particular period.

Longer term, you might expect that impaired loans arise out of stressed loans. So you might expect some correlation in the "normalised" trend X/Y vs W/Z.

Now X/Y shows a beautifully monotonic reducing proportion, down to a mere 1% at the latest reporting period. The trend for W/Z is less clear, as might be expected from the more highly expected volatility. W/Z numbers tend to be less than X/Y values. That is also expected, because you wouldn't expect all the stressed loans to turn into write off amounts. Many of those stressed loans would eventually recover or at least be eased off the books with no loss for Heartland.

With X/Y representing 'Normalised Stressed Loan Percentage" and W/Z representing "Normalised Write Off Percentage", a table compiled from the above table might make things clearer.

Date	Normalised Stressed Loan Percentage (J)	Normalised Write Off Loan Percentage (K)	(K)/(J)
EOHY2012	4.23%	0.66%	16%
EO2HY2012	4.35%	0.19%	4.4%
EOHY2013	3.93%	0.23%	5.9%
EO2HY2013	2.43%	0.43%	18%
EOHY2014	2.23%	0.98%	44%
EO2HY2014	1.59%	0.74%	47%
EOHY2015	1.23%	0.05%	4%
EO2HY2015	1.15%	0.12%	10%
EOHY2016	1.00%	0.48%	48%

The table above shows that in general, the actual half yearly right offs (a yes/no decision by management) is looking higher as a proportion of stressed loans (a management qualitative decision). If there were more stressed loans then this broad trend would not be apparent. So even looking outside of the impaired loan box, it seems that the stressed loans are unexpectedly lower than they should be. One conclusion from this is that there is a culture of systematic underestimation of risk that is progressing right through the Heartland loan book. Is this an imminent problem for Heartland? No. But once again the comparative trend implies that declared profits on average are higher than they should be.

SNOOPY

[percy]

Not quite a murder, but certainly a 'Where did the money go?' mystery, now revised and updated into a less than exciting second edition!



Percy: "This is the story that no-one wanted to hear, let alone rehear."


Lot's of numbers here. So what does it all mean?

SNOOPY

After all said and done there has been more said than done.
The answer you are looking for is;
Bad debt ratio.2012 0.5%..2013 0.04%.2014 0.03% and 2015 0.02%..It is clear the ratio is reducing,which is very positive..
A postscript ,
While bad debt ratio has been decreasing The Net Interest Margin has been increasing.
NIM ratio.2012 4.0%.2013 4.2%.2014 4.2%,2015 4.4%.Fantastic.
Makes me look forward with a sense of excitement to the 2016 result which will be announced late August.Just over two months away.
Be careful your book is not out of date before you finish it.!.lol.

[Snoopy]

The answer you are looking for is;
Bad debt ratio.2012 0.5%..2013 0.04%.2014 0.03% and 2015 0.02%..It is clear the ratio is reducing,which is very positive..

The above is from p8 in the June 2nd shareholder presentation Percy. The small print foot note gives more information you should consider.

"(1) Bad debt ratio includes: Impaired asset expense and Decrease in fair value of investment properties; 2013 added back change in strategy provisions ($18.0m)"

Look at note 19e in the annual report Percy (AR2015). The impaired asset expense comes from there. This figure is actually a judgement from management. It bears little relation to the actual write off of bad debts in each year. Management can manipulate this "Impaired Asset Expense" figure within certain boundaries to present a picture they want shareholders to see.

SNOOPY

[percy]

. Management can manipulate this "Impaired Asset Expense" figure within certain boundaries to present a picture they want shareholders to see.

SNOOPY

As do every bank in Australasia.
They all have their accountants audited .I can't remember any of them having them qualified.
Investors and shareholders do have "the peace of mind security" in knowing all banks in NZ have to report quarterly to The Reserve Bank of New Zealand,are monitored by rating agencies,KMPG and brokerage houses.

[Snoopy]

As do every bank in Australasia.
They all have their accountants audited. I can't remember any of them having them qualified.
Investors and shareholders do have "the peace of mind security" in knowing all banks in NZ have to report quarterly to The Reserve Bank of New Zealand,are monitored by rating agencies, KMPG and brokerage houses.

Well I'm calling out the figures that you have transcribed from the Heartland presentation Percy as being ten times less that Heartland said! I have also redone my own calculated figures on an annual basis so you can see how they match up with Heartland's claims:

	FY2012	FY2013	FY2014	FY2015
Bad Debt Ratio (Heartland)	0.5%	0.4%	0.3%	0.2%
Actual Write Off Ratio (Snoopy)	0.84%	0.66%	1.46%	0.17%

Now you could say that even my actual write off ratio is showing a favourable trend, if you take out the FY2014 blip. But we already have a high figure for HY2016 (not shown in my annual chart) which will see my 'downward trend' well and truly broken once the FY2016 results come in.

I am not accusing Heartland of putting out 'wrong' figures. I am sure they are satisfying all their legal requirements as regards reserve bank compliance. I am saying that selecting the figures they have, and massaging out one off property losses in 2013, such that bad debts are apparently on a steady downward trend is a disingenuous presentation of the facts.

There is no reserve bank requirement to present the multi year table they did, for reserve bank reporting purposes. And if they produce the same table incorporating FY2016 results for this year's results presentation, I think it will show the downward trend in bad debts - in the most general sense- has well and truly ceased, if it ever existed.

SNOOPY

[percy]

Take your concerns up with HBL's auditors.

[Arbroath]

Snoopy,

I really enjoy reading your posts as it is always important to consider alternative or critical points of view. My summation of Heartland would be as follows (disc: I'm an ex-banker)...
- the company in its present state represents something of a roll-up with the mergers and acquisitions that have occurred over the past 5 years. This clouds the trend analysis and there is no doubt they have neutralised several areas of weakness in property and the loan book but there will likely be some pockets of weakness they are still carrying.
- in my view management have done a sound job tidying up the loan books and growing new business lines and this has been rewarded with increased profits, dividends and a rising share price.
- however, in the next downturn there will definitely be some skeletons in the closet. It is natural for management to underestimate provisioning if there is a sharp recession but remember economists have predicted 9 of the last 3 recessions and Australian and NZ bank management generally overestimate provisioning across the cycle and are only caught out in a late 80's bubble (BNZ) or severe recession (1991-92).
- the equation to consider is overall loan quality across the book keeping in mind the NIM is 4%+. Heartland should suffer higher loan write-offs than the main banks due to the nature of there lending book. All of this can be factored into the price one pays for the stock. My personal opinion is $1.20 or thereabouts compensates for the risks around loan quality given their capital position and profit generating ability. Of course a sharp recession would probably see the share price back to $0.70-0.80 maybe if it started now but if its another 5 years away that's 5 years of 9-10cps dividends and a share price that might be retreating from $1.50+

As they say timing is everything and who knows when the next economy wide recession will be (as opposed to just dairy)

[kizame]

Snoopy,

I really enjoy reading your posts as it is always important to consider alternative or critical points of view. My summation of Heartland would be as follows (disc: I'm an ex-banker)...
- the company in its present state represents something of a roll-up with the mergers and acquisitions that have occurred over the past 5 years. This clouds the trend analysis and there is no doubt they have neutralised several areas of weakness in property and the loan book but there will likely be some pockets of weakness they are still carrying.
- in my view management have done a sound job tidying up the loan books and growing new business lines and this has been rewarded with increased profits, dividends and a rising share price.
- however, in the next downturn there will definitely be some skeletons in the closet. It is natural for management to underestimate provisioning if there is a sharp recession but remember economists have predicted 9 of the last 3 recessions and Australian and NZ bank management generally overestimate provisioning across the cycle and are only caught out in a late 80's bubble (BNZ) or severe recession (1991-92).
- the equation to consider is overall loan quality across the book keeping in mind the NIM is 4%+. Heartland should suffer higher loan write-offs than the main banks due to the nature of there lending book. All of this can be factored into the price one pays for the stock. My personal opinion is $1.20 or thereabouts compensates for the risks around loan quality given their capital position and profit generating ability. Of course a sharp recession would probably see the share price back to $0.70-0.80 maybe if it started now but if its another 5 years away that's 5 years of 9-10cps dividends and a share price that might be retreating from $1.50+

As they say timing is everything and who knows when the next economy wide recession will be (as opposed to just dairy)

Or maybe 3 of the last 9 recessions. You would think they could do better than that.

[kiora]

Or maybe 3 of the last 9 recessions. You would think they could do better than that.

Or maybe economists predicted 9 recessions but there was only 3 ?

[percy]

Motor Trade Finance has rejected all offers from parties looking to acquire all or part of their business,saying they undervalued the business.
Interesting?