HGH - Heartland Group Holdings

[iceman]

Snoopy, your posts are bordering on sophistry.

Actually they have crossed the border and well and truly invaded the territory.

Leaving aside all that is apocryphal, or at least wildly inaccurate, and the weird set of criteria by which you measure the performance of the bank, I am now totally at loss as to what point you are actually trying to prove.

Read my words: HBL is a good well run company and has been for at least 5 years.


Whilst not the bargain it was, the current market price is a fair price for HBL.

Best Wishes
Paper Tiger

PS: Dividend reinvestment schemes are not new capital.
PPS: There is a very big difference between requesting new capital to enhance returns and needing new capital to survive.

Very good points PT. Luckily HBL asked us shareholders for funds for acquisitions to further grow the business. Snoopy's comments could be read differently, i.e. that HBL needed capital to survive which is very far from the truth.

[percy]

[/B]

Very good points PT. Luckily HBL asked us shareholders for funds for acquisitions to further grow the business. Snoopy's comments could be read differently, i.e. that HBL needed capital to survive which is very far from the truth.

This is easy for us to see using www.4-traders.com figures.
While HBL have been using funds to grow earnings per share,the Australian banks have used funds just to stay in business.
eps..............2014..................2015....... ......2016
ANZ..............257......................257 ............189.....= minus 26.5%
WBC..............237......................248..... .........218...= minus 8%
CBA...............519......................529.... .........530 =Plus 2.1% Well done CBA.
HBL.................9..........................10. ..............11= Plus 22.2% And that is REAL growth!!!!!!!!!!!!!!!!.

[Snoopy]

PT wrote: "PPS: There is a very big difference between requesting new capital to enhance returns and needing new capital to survive."

Very good points PT. Luckily HBL asked us shareholders for funds for acquisitions to further grow the business. Snoopy's comments could be read differently, i.e. that HBL needed capital to survive which is very far from the truth.

Iceman. What I wrote was:

"In only one year was no new capital needed. By showing the whole picture, I am hoping to put the bed the idea that, for the ambitions that Heartland has, Heartland has 'excess capital'. "

"In all years since Heartland has become a bank (FY2013 onwards), Heartland has satisfied Reserve Bank requirements for capital. But having a buffer on the minimum capital required, and having enough capital to allow Heartland to realise their business ambitions are different things."

This last quote is exactly the same point as PT was making in his 'PPS'. I don't believe anyone reading that could interpret what I wrote as " HBL needed capital to survive "

SNOOPY

[Snoopy]

PS: Dividend reinvestment schemes are not new capital.

PT, if you really believe that, perhaps you might like to explain why back in FY2014 (the last reported year with a substantial increase in new capital and when the drp was operating) as shown in AR2014 (p20 'Statements of Changes in Equity') the new capital (including $48m worth of new shares issued as part of the "Seniors Money International" acquisition) along with $7.231m from the DRP are added up together when summing the 'Total Equity'.

Or in non-technical speak, how it is possible to add two things together to form one total when they are not the same class of thing?

SNOOPY

[Snoopy]

Leaving aside all that is apocryphal, or at least wildly inaccurate, and the weird set of criteria by which you measure the performance of the bank, I am now totally at loss as to what point you are actually trying to prove.

From an investments perspective there are two broad questions to ask:

1/ How well is Heartland performing?
2/ What level of risk is being taken to extract that performance?

To answer 1/ I use my 'Buffet Point' criteria. There is nothing weird or unusual about looking at 'Return on Shareholder Equity' and 'Earnings Per Share' as measures of performance. These are well established measurement yardsticks. However, it does not matter what the performance of the bank is if the risks taken to achieve that performance are so high that shareholders can expect 'an equity bail out' at the next broader financial market hurdle. And this is where all the rest of my tests on 'equity ratios' and 'liquidity' come in.

To directly answer your question I am not trying to 'prove' anything. My aim is to produce the information so that others can take it in and comment (or not) on what they see as any implications.

Ultimately it would be nice to know if Heartland is a good investment prospect or not, as well as have something more than 'gut feel' to back that up.

Read my words: HBL is a good well run company and has been for at least 5 years.

Given Heartland now have five years of solid results under their belt, it would be hard to disagree with that. But what does being a "good well run company" really mean? If the share price suddenly drops, does that mean the company is no longer well run?

SNOOPY

[Snoopy]

Any readers still believe that Heartland has 'plenty of capital' and won't be requiring more?

Because so much water has gone under the bridge, I think it is worthwhile reprising where my ideas about the capital needs for Heartland came from.

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Standard A: 20%

My interest in Heartland came about because a company that I held shares in, PGG Wrightson, sold their Agricultural Loan book, in the form of PGG Wrightson Finance, to Heartland. PGG Wrightson Finance was never in any trouble and had a good reputation at the time of sale. There were more than enough debenture holders rolling over their investments and new debenture investors to keep things solid. A pre-recapitalisation assessment of PGW outlined what the banks expected of PGGW Finance Limited.

"Minimum Equity Contribution: Tier 1 Risk Share Lending (basic equity capital and disclosed reserves) > 20%",

I figured that if this standard was good enough for the parent banks, then it was good enough for me. So I started applying it to Heartland as a whole.

------

Once PGGW Finance was integrated into a wider Heartland, it would be reasonable to assume that as a portfolio entity the risk of investing in Heartland would be less than the risk of investing in a 'stand alone' PGGW Finance. But how much less? One could take a cue from Reserve Bank Governor Graeme Wheeler, at the time he approved Heartland's 'bank' status.

Standard B/ 17%

Apparently, just before the purchase of the reverse mortgages, Heartland had 'surplus' cash of $28.3m -

(Explanatory Note: Total Heartland cash contribution to this deal was $48.3m, made up of the $28.3m 'surplus cash' on the balance sheet at 31st December 2013 plus $20m yet to be raised from shareholders at the time the half yearly report was published.)

- on the balance sheet. If we look at the 31st December 2013 HY2014 balance sheet, then $178.5m in cash was there. So we can deduce that:

$178.5m - $28.3m = $150.2m

of cash is required , as part of a more comprehensive asset package, to fund all the rest of the Heartland business. Put another way, the 'total equity' (again from the balance sheet) needed to fund the rest of the Heartland business is:

$382.5m - $28.3m = $354.2m

The size of the loan book at balance date was $2,077.0m

So the equity to loan book ratio for the rest of the business, as judged acceptable under the watchful eye of Mr Wheeler, is:

$354.2m/$2,077m = 17.0%

Of course, this doees not preclude Wheeler being happier with a lower Tier 1 ratio. Just how much lower he would have been prepared to go, we don't know. But we do know that Heartland themselves 'required' this amount ($354.2m) of capital to operate their normal ongoing business at the time.

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Standard C/ 8%+2.5% (buffer)

I missed this. But some time between EOFY2014 and EOFY2015, the Minimum Capital Ratio requirements reduced from "12%" to "8% plus a 2.5% buffer" (10.5%). This information can be found under

1/ section 25j of the Heartland June 2015 declaration made to the Reserve Bank.
2/ section 26j of the Heartland June 2016 declaration made to the Reserve Bank.

The "capital conservation buffer is held over and above minimum capital ratio requirements used to absorb losses during periods of financial and economic stress.""

Furthermore "A countercyclical buffer is to be held to be used at RBNZ's discretion, to assist in attaining the Reserve Bank's macro-prudential goal of protecting the banking sector from periods of extraordinary excess aggregate credit growth."

Those explanations speak to me of a 'business as usual' scenario, with no allowance made for extra capital that might be needed for growth initiatives.

---------

Up until the FY2016 results, I have been sticking to 'Standard A/' which, although a high standard to meet, is met by some other finance companies. Five years on, I think Heartland has earned the right to be judged at the slightly more relaxed 'Wheeler' standard (Standard B/).

How does one separate what capital is allocated required to meet 'Minimum Reserve Bank Capital Requirements', and what capital should be allocated to allow 'Future Business Growth'? This is a question that I do not have an answer to. One approach would be to take the 'growth capital' to be the difference between the actial Tier 1 capital ratio and the minimum required under "Standard C." One might call that difference "Latent Growth Capital", waiting to be deployed into a business expansion. Yet if there really was a crisis and this "Latent Growth Capital" had to be put to another use, it could be. Furthermore there would be no difference, as I see it, between the "Latent Growth Capital" waiting to be used and the "Buffer Capital" waiting to be used. They are merely two separate money bins waiting to be drawn on with different labels. Given this, I am not even sure if the concept of "Growth Capital" being distinct from "Reserve Capital" has any meaning.

SNOOPY

[Snow Leopard]

Iceman. What I wrote was:

"In only one year was no new capital needed. By showing the whole picture, I am hoping to put the bed the idea that, for the ambitions that Heartland has, Heartland has 'excess capital'. "

"In all years since Heartland has become a bank (FY2013 onwards), Heartland has satisfied Reserve Bank requirements for capital. But having a buffer on the minimum capital required, and having enough capital to allow Heartland to realise their business ambitions are different things."

This last quote is exactly the same point as PT was making in his 'PPS'. I don't believe anyone reading that could interpret what I wrote as " HBL needed capital to survive "

SNOOPY

You can not cherry pick a little part of your entire post (including the quote and especially including the embolden parts) and try and wiggle out of it.

The semantics of your posts are unambiguous.


Best Wishes
Paper Tiger

[Snow Leopard]

PT, if you really believe that, perhaps you might like to explain why back in FY2014 (the last reported year with a substantial increase in new capital and when the drp was operating) as shown in AR2014 (p20 'Statements of Changes in Equity') the new capital (including $48m worth of new shares issued as part of the "Seniors Money International" acquisition) along with $7.231m from the DRP are added up together when summing the 'Total Equity'.

Or in non-technical speak, how it is possible to add two things together to form one total when they are not the same class of thing?

SNOOPY

This one is definitely about taxonomy and we need to delve into classes and sub-classes.
Or maybe hierarchies would sit better in your mind?

But in this case we have equity and it's assorted sub classes: share capital, retained earnings and a positive plethora of reserves.

Let us ignore the glib 'if there are the same why are then on different rows then?' reply and let us follow the money.
It is after all, all money.

So where did the dividend reinvestment plan stuff come from?
From the dividends paid !
And where did the dividends paid come from?
From the retained earnings !

Read the table and you will also notice the morphing of many other sub-classes.

So maybe it is a bit of the old semantics as well then!

Best Wishes
Paper Tiger

[Snow Leopard]

From an investments perspective there are two broad questions to ask:

1/ How well is Heartland performing?
2/ What level of risk is being taken to extract that performance?

To answer 1/ I use my 'Buffet Point' criteria. There is nothing weird or unusual about looking at 'Return on Shareholder Equity' and 'Earnings Per Share' as measures of performance. These are well established measurement yardsticks. However, it does not matter what the performance of the bank is if the risks taken to achieve that performance are so high that shareholders can expect 'an equity bail out' at the next broader financial market hurdle. And this is where all the rest of my tests on 'equity ratios' and 'liquidity' come in.

To directly answer your question I am not trying to 'prove' anything. My aim is to produce the information so that others can take it in and comment (or not) on what they see as any implications.

Ultimately it would be nice to know if Heartland is a good investment prospect or not, as well as have something more than 'gut feel' to back that up.



Given Heartland now have five years of solid results under their belt, it would be hard to disagree with that. But what does being a "good well run company" really mean? If the share price suddenly drops, does that mean the company is no longer well run?

SNOOPY

But your tests and/or your interpretation of the results are failing you Snoopy!
Are you sure that you are actually applying the correct tests in the correct way?

If the share price drops, all other things being equal, then you have a better risk/reward ratio for a purchase.

Best Wishes
Paper Tiger

[Snow Leopard]

Because so much water has gone under the bridge...

...Given this, I am not even sure if the concept of "Growth Capital" being distinct from "Reserve Capital" has any meaning.

SNOOPY

There is too much equity, where you are not earning enough rewards;
There is too little equity, where you are taking too much risk;
and there is the Goldilocks zone .

But that is just part of the story.

Best Wishes
Paper Tiger