HGH - Heartland Group Holdings

[iceman]

Somewhat relative to previous discussion on this thread ! http://www.nzherald.co.nz/business/n...ectid=11789973

[Snow Leopard]

...
Your 15% baseline is for companies with a long track record. HBL is young and started with low profits and high equity. If you start on a low base, of course it is going to take time to get to 15%.

noodles

Whilst Snoopy has a nice shiny toolkit for evaluating companies it continually pains me to see him hammering nails into the wall with a screwdriver.

"Snoopy you are supposed to use this hammer" we tell him.

"But then I keep hurting my thumb" he replies "Anyway the nail is in".

We look at the badly bent nail and note that you can not hang your hat on it.

If HBL get past 13% ROE then I will be impressed. That will be one lean lending machine.

Best Wishes
Paper Tiger

[Snoopy]

Whilst Snoopy has a nice shiny toolkit for evaluating companies it continually pains me to see him hammering nails into the wall with a screwdriver.

"Snoopy you are supposed to use this hammer" we tell him.

"But then I keep hurting my thumb" he replies "Anyway the nail is in".

We look at the badly bent nail and note that you can not hang your hat on it.

If HBL get past 13% ROE then I will be impressed. That will be one lean lending machine.

A 15% hurdle on 'return on equity' has not in the past been an unsurmountable hurdle for the big Aussie bank 'competition'. Granted I haven't crunched my own normalised numbers for a few years on, for example, ANZ (make a mental note to myself to do this again). The big Aussie banks had been a place for stellar returns, at least until the GFC. Since that time banking regulations have tightened. More equity to back up the loan book has been required. It follows that ROE for the banking industry will have decreased. Commentators are on record as saying that the big Aussie banks are not going to generate the same returns going forwards as they once did.

If a 15% ROE hurdle strikes some as 'unrealistic', this is correlated with the lower growth outlook for banks. Not being able to meet this 15% ROE hurdle is a consequence of the lower profit outlook for banks. This doesn't mean investors should not invest in banks. The dividend yields in particular, in this time of low bank deposit rates, look particularly juicy.

Heartland has had an ROE average of just 9.2% over the last five years. Yes it is improving. But it is still a below average margin for an NZX listed business. And to requote Buffett form an investor perspective:

"Below average is not what we are looking for."

My reading is that this low return on assets leaves Heartland's earnings vulnerable to shock. This is not the same as saying earnings will definitely go down. But sticking your head in the sand won't make the shock potential go away.

SNOOPY

[Snoopy]

Snoopy,
HBL started with a low return on equity and has been growing the return on equity ever since.

In 2011, the profit was $7m. Now it is $54m. A 670% increase in NPAT.
In 2011, the equity was $296. Now it is $498. A 68% increase in equity

So you can see that the profit growth far exceeds the equity growth. That does not seem like a "below average" business to me. In fact it appears that the management of HBL are best of breed.

I think there is plenty for Heartland management to be proud of in their achievements since listing. What you have observed Noodles, ties in with my observations on the increasing earnings per share trend (a significant achievement) and increasing underlying profitability, in line with my 'ncreasing margin' observations (well done to management). My point is that these improvements have come off a low base. In absolute terms, taking into account the growth to date which is welcome, the ciurrent absolute position is still 'below average returns on shareholder equity'. IOW there is still some way to go before I see Heartland as even an 'average' business in absolute terms.

Your 15% baseline is for companies with a long track record. HBL is young and started with low profits and high equity. If you start on a low base, of course it is going to take time to get to 15%.

My recollection of Heartland history is a little different to this. Heartland started as an investment bucket that contained a number of difficult assets. Heartland was generously recapitalised by PGC amongst other shareholders at the time into a financial entity with a fighting chance. And come out fighting they did. There was no mention at the time that this first recapitalisation of Heartland was inadequate. Yes Heartland is a young company. But I don't think you can associate that statement with Heartland having a deprived start. Nevertheless I think it might be worth looking at ROE excluding the difficult loan book capital ( Heartland call their difficult loans 'investments' (sic) ) and see what difference that makes to the Heartland ROE figures.

I should add that a 15% ROE goal is not a statistic to be pursued at the expense of all others. Being undercapitalised and overleveraged are two ways of increasing ROE that I do not recommend!

EDIT: Average return on equity for US banks is 9%. Looks like HBL is above average.

https://ycharts.com/indicators/us_re..._for_all_banks

Interesting chart. But I think your comparison of putting a minnow bank from New Zealand into the US banking Sector as a comparative measuring stick is probably not representative.

SNOOPY

[percy]

A game of spot the difference.
Earnings per share,from www.4-traders.com
.................2014........2015.....2016.......2 017......2018.......2019..
ANZ............257.........257........189........2 35........245.........256.
CBA............519..........529.......530........5 58.........573.........592
NAB............215,,,,,,,,,,245.........15.5...... 243........247.........254
WBC...........237...........248........218........ 241........250.........254
Very difficult to spot any difference.Minimal if any growth.
Now should we add HBL's ???
HBL............9.............10...........11...... ....12.........13.1.........13.7.
And that is real eps growth.
EPS growth means HBL will have the capacity to continue to grow and pay increasing dividends.

[Snoopy]

Nevertheless I think it might be worth looking at ROE excluding the difficult loan book capital ( Heartland call their difficult loans 'investments' (sic) ) and see what difference that makes to the Heartland ROE figures.

Financial Year	Net Sustainable Profit (A)	Shareholder Equity EOFY (B)	ROE (A)/(B)	Investment Properties (C)	ROE adjusted (A)/{(B)-(C)}
2012	$26.606m + 0.72($5.642m + $3.900m) =$30.476m	$374.798m	8.1%	$55.504m	9.5%
2013	$6.912m + 0.72($22.527m+ $5.101m)= $26.804m	$370.542m	7.2%	$58.287m	8.6%
2014	$36.039m	$452.622m	8.0%	$24.888m	8.4%
2015	$48.163m - 0.72(0.588m) = $47.743m	$480.125m	9.9%	$24.513m	10.5%
2016	$54.164m - 0.72(1.136m) = $53.346m	$498.341m	10.7%	$8.384m	10.9%

I have already removed windfall profits from the sale of investment properties from the earnings picture. Removing the one off effects of the legacy investment property portfolio from the results show the improvement in ROE is 'not as great'. Is this 'flattening ROE adjusted trend' a sign that projected profit increases going forwards will likewise be 'not as great' as some shareholders hope?

SNOOPY

[winner69]

What would you say if someone offered you an investment with a promised real return of close to 15 per cent? You might say: “How much can I buy?” Alternatively, you might say: “What is the catch?” Sensible people must take the latter view. If you thought that you were being offered a reliable real return at such an exalted level, you would buy as much as you could.

Higher the banks ROE the greater the 'risk' they are taking?

[Snoopy]

What would you say if someone offered you an investment with a promised real return of close to 15 per cent? You might say: “How much can I buy?” Alternatively, you might say: “What is the catch?” Sensible people must take the latter view. If you thought that you were being offered a reliable real return at such an exalted level, you would buy as much as you could.

Just to be clear my ROE 15% return target is based on 'shareholder capital'. An investor today can only get that return on investment if they can buy that shareholder capital at a dollar for dollar rate. Unfortunately $1 spent on a bank share does not buy $1 work of 'bank shareholder capital'. So investors today will not get that 15% return on the investment capital they put in today buying bank shares.

Higher the banks ROE the greater the 'risk' they are taking?

Yes quite true, the 'other side of the investment coin.' I would be very suspicious if ROE got too high.

SNOOPY

[percy]

' I would be very suspicious if ROE got too high.

SNOOPY

Only sensible statement you have ever posted on this thread.[and you have posted a good many].lol.

[winner69]

Just to be clear my ROE 15% return target is based on 'shareholder capital'. An investor today can only get that return on investment if they can buy that shareholder capital at a dollar for dollar rate. Unfortunately $1 spent on a bank share does not buy $1 work of 'bank shareholder capital'. So investors today will not get that 15% return on the investment capital they put in today buying bank shares.



Yes quite true, the 'other side of the investment coin.' I would be very suspicious if ROE got too high.

SNOOPY

Point was that banks making/targeting high ROEs not (always?) a good thing.

If Heartland achieved a ROE of 15% every year and paid no divies it's equity would double every 5 years. In no time they would be a multi billion company. Makes you wonder why they pay divies if returns on equity are so lucrative.