HGH - Heartland Group Holdings

[percy]

Still would have had $50m odd in cash at that time .....so it looks like some key ratios needed fixing before quarter end

Methinks more capital raisings (prob bonds) on way as they say 'optimise' the balance sheet - some just call it fionancial engineering.

I thought they would have done a good size bond issue by now.
Would make sense.

[ziggy415]

And I still haven't, the got my money back........getting little concerned now

Just got the mail....I've now got a cheques to deposit.......bit of a pain realy

[artemis]

Just got the mail....I've now got a cheques to deposit.......bit of a pain realy

You can change this on Link to bank account.

[Snoopy]

Tier 1 or Tier 2 capital adequacy is noted under section 19A (Capital Ratios) in the Heartland HY2016 report.

$2,928.621m of loans are outstanding. 20% of that figure is:

0.2 x $2,928.621m = $585.7m

Heartland has total equity of $485.688m. But from note 19A, only $427.084m is Tier 1 capital. The difference is because intangible assets, deferred tax assets, hedging reserve effects and defined benefit superannuation fund assets on the books must be adjusted for.

On top of the Tier 1 assets, there is a subordinated bond of $1.455m

Nevertheless, however the total tier capital is added together, it is still below the "20% of loan" target no matter what the tier classification of capital buffering any potential problems with the loans.

Result: FAIL TEST

PS I do note that while other posters have protested at my 20% of equity to back up the loan measuring stick in the past, it 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.

Using current period Tier 1 capital and loan book figures:

$427.084m/$2,928.621m = 14.6%

So it seems Heartland's position has deteriorated significantly, compared to when it qualified as a bank.

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.

Note that in comparison to last year, I have revised my standard so that Heartland should carry 17% of sharehiolder equity in relation to the value of its loan book. This change of standard is in recognition of Heartland now being able to be thought of as a 'middle tier' finance player, insyead the smaller rather more risky player that it started out as.

Tier 1 or Tier 2 capital adequacy is noted under section 19A (Capital Ratios) in the Heartland HY2017 report.

$3,334.800m of loans are outstanding. 17% of that figure is:

0.17 x $3,334.800m = $575.4m

Heartland has total equity of $528.002m. But from note 18A, only $457.631m is Tier 1 capital. The difference is because intangible assets, deferred tax assets, hedging reserve effects and defined benefit superannuation fund assets on the books must be adjusted for.

On top of the Tier 1 assets, there is Tier 2 Capital: a subordinated bond of $0.970m, offset by a $2.095m 'Foreign Currency Translation Reserve' adjustment. Somewhat bizarrely, this results in a negative Tier 2 equity balance of $1,125m being declared on the books.

Nevertheless, however the total tier capital is added together, it is still below my "17% of loan" target no matter what the tier classification of capital buffering any potential problems with the loans.

Result: FAIL TEST

Note: Post balance date, Heartland has raised an additional $20m capital from shareholders which will go some way to fixing this issue. If the loan book has not enlarged further since balance date, this would result in a loan book to total equity ratio of:

($528.002m + $20m) / $3,334.800m =16.4%

This brings the 'Total Tier Capital' to loan book ratio back to the level it was at FY2016 balance date (30/06/2016). If this is the level of capital that Heartland are comfortable with and the loan book continues to grow, then logic would suggest further capital raising initiatives could be required by Heartland in the near future.

In fact, a new offer of approximately A$15m of Tier 2 regulatory capital to wholesale investors in Australia, has already been signalled in p13 of the half year results presentation.

SNOOPY

[kiwico]

Some of the discussion on this thread is about how much of a bank HBL is. The RBNZ has HBL as a registered bank and so HBL is subject to different regulation than a Non Bank Deposit Taker. But HBL was born out of NBDTs (finance companies, building societies, credit unions and the like) so is it still run as one?.

Secondhand car retailers like this bunch promote finance for those with bad credit and beneficiaries and bankrupts, with HBL one of two the lenders listed on their finance page.

Being involved with activities and customers like this to me places HBL more in the NBDT / finance company area even if they are registered bank (the duck test again).

I hold but only as a small part of my portfolio because we know what happened to finance companies and the like the last time the economy slowed down.

[iceman]

At first glance it looks like a nice steady as she goes report. A modest growth in vehicle lending, good growth in small business, particularly good growth for reverse mortgages in Australia but more modest in NZ.
Certainly looks like the “Open for Business” strategy is delivering with growth of $ 16m or just over 140% (from a low base though).

Costs down and ROE continues to increase, now up to 11.6%. Still forecasting close to $60M for the FY. Looks fairly good to me.

Anyone found anything negative in the report ?

[BlackPeter]

At first glance it looks like a nice steady as she goes report. A modest growth in vehicle lending, good growth in small business, particularly good growth for reverse mortgages in Australia but more modest in NZ.
Certainly looks like the “Open for Business” strategy is delivering with growth of $ 16m or just over 140% (from a low base though).

Costs down and ROE continues to increase, now up to 11.6%. Still forecasting close to $60M for the FY. Looks fairly good to me.

Anyone found anything negative in the report ?

Just a couple of observations:

• I guess it would be interesting to find out why the increased write off of impaired vehicle loans ... 2016 was not a particular bad year for car owners - was it?
• One thing I missed ... it would have been nice if they would have at least retrospectively explained the need to rush the latest CR ... and maybe some acknowledgement of the discussion about the fairness of the method they choose
• I note they talk in the outlook about "not taking in account the impact of any capital management initiative" ... is this the pointer to the next capital rise?

Otherwise ... the purpose of reports is not to convey news ; This one is not different.

[Beagle]

Some of the discussion on this thread is about how much of a bank HBL is. The RBNZ has HBL as a registered bank and so HBL is subject to different regulation than a Non Bank Deposit Taker. But HBL was born out of NBDTs (finance companies, building societies, credit unions and the like) so is it still run as one?.

Secondhand car retailers like this bunch promote finance for those with bad credit and beneficiaries and bankrupts, with HBL one of two the lenders listed on their finance page.

Being involved with activities and customers like this to me places HBL more in the NBDT / finance company area even if they are registered bank (the duck test again).

I hold but only as a small part of my portfolio because we know what happened to finance companies and the like the last time the economy slowed down.

Yes many lost skin in the finance company collapses but I am sure you will have noted that car dealers like that have a wide range of finance companies with whom they work.
I note Geneva finance are one of the companies they use and I think you will find that people with bad and poor credit records are referred to one of the, (putting this as kindly as I can), third or fourth tier lenders.

Iceman - Mate I can't see any issues but I am sure the other hound will find something to pontificate about at quite some length and "intrigue" us with.

[Snoopy]

The following information for FY2016 is derived from note 20 in AR2016 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is dervied from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.

Loan Maturity	Expected Behaviour Multiple	FY2016 Financial Receivables Maturity: Contracted/ Expected
On Demand	100%	$84.154m / $84.154m
0-6 months	132%	$743.389m / $961.274m
6-12 months	132%	$484.420m / $639.962m

Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.

Deposit Maturity	Expected Behaviour Multiple	FY2016 Financial Liabilities Maturity: Contracted/ Expected
On Demand	3.01%	$718.587m / $21.630m
0-6 months	32.4%	$892.944m / $289.314m
6-12 months	36.4%	$837.844m / $304.975m

Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.

Deposit Maturity	FY2016: 'Expected' combined Loan and Deposit Cashflow
On Demand	$62.524m
0-6 months	$691.960m
6-12 months	$334.987m
Total	$1,089.471m

Time to update the "Liquidity Buffer ratio" for FY2016.

When dear old Colin told us all those years ago that a certain finance company was 'solid as' with reference to investing debenture money, the end result was that this cash became tied up in illiquid property developments. So although the company had enough money to pay out their debenture holders 'on paper' and appeared to be operating profitably, the debenture holders could not get their cash back. The 'Meads Test' (as christened by Snoopy) is one method of finding out if a finance sector company really is 'solid as'. The basic date I need to check this out has already been calculated (see above). So let's get going.

To check out 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)/(Expected Net Current Loans Outstanding) > 10%

On the numerator of the equation, we have borrowings.

HNZ BORROWINGS

1/ Term deposits lodged with Heartland.	$2,282.876m
2/ Bank Borrowings	$429.304m
3/ Securitized Borrowings total	$284.429m
4/ Subordinated Bonds	$3.378m
Total Borrowings of (see note 13)	$2,999.987m

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 Australian part of the 'Seniors Reverse Mortgage Portfolio'. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These CBA loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. 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:

	Total FY2016	Total FY2015	Facility Maturity Date FY2016
Securitized bank facilities total all in relation to the Heartland ABCP Trust 1	$350.000m	$350.000m	1st February 2017 (*)
less Current level of drawings against this facility	$284.429m	$258.630m
equals Borrowing Headroom	$65.571m {A}	$91.370m

(*) I do not expect any problem in rolling this facility over for another year.


HNZ LENDINGS vs HNZ DEBENTURES

Customers owe HNZ 'Finance Receivables' of $3,113,957,000. There is no breakdown in AR2016 (note 11) as to what loans are current or longer terms. However, if we look at note 20, we can derive the expected maturity profile of total finance receivables due over the next twelve months.

	On Demand	0-6 Months	6-12 Months	Total
Expected Receivables Due	$84.154m	+ $961.274m	+ $639.962m	= $1,685.390m
less Expected Deposits for Repayment	$21.630m	+ $289.314m	+ $304.975m	= $615.919m
equals Net Expected Cash Into Business	$62.524m	$671.960m	$334.987m	$1,069.471m {B}

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 debenture holder liquidity. That is the case here.

Summing up:

(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding)
= $65.571m / $1,069.471m
= 6.1% < 10%

=> Fail Short term liquidity test

On the surface this is an odd result. The expected cashflow outstanding is hugely positive, much greater than the pcp. So how can I fail Heartland on this liquidity test? One answer is that getting more net money in than in previous years could mean that Heartland might have difficulty applying that money into new loans.

	FY2016	FY2015
Amount lent to Customers (Receivables)	$3,113.957m (+8.8%)	$2,862.070m
Total Borrowings	$2,999.987m (+6.2%)	$2,825.245m
Amount borrowed from Customers (Debentures and Deposits)	$2,282.876m (+8.8%)	$2,097.458m

Securitized borrowing facilities have gone up by $25.799m over the same annual comparative period, while the $350m borrowing ceiling remains the same. So Heartland have upped their current period risk profile yet again by having a smaller declared available loan buffer to cover any mismatch between maturing borrowings and maturing receivables.

SNOOPY

[Snoopy]

Thus the net expected maturity of receivables is:

$1,685.390m - $625.919m = $1,059.471m

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 debenture holder liquidity. That is the case here.

Summing up:

(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding)
= $65.571m / $1,059.471m
= 6.2% < 10%

=> Fail Short term liquidity test

The above conclusion, at first glance doesn't make sense. Here we have a mismatch with over a billion dollars worth more of loans maturing than maturing deposits to be paid out. That sounds really good, and is a record surplus from a security of deposits viewpoint. So how can I turn around and fail Heartland on this liquidity test?

Two comments:

1/ The total ability of Heartland to borrow is not declared in the Annual Report. Yes $65.571m can be borrwed from the banking syndicate in Australia. But there is no mention of what the equivalent figure is in New Zealand. This undeclared parent bank borrowing ability will very likely see Heartland pass this liquidity test. It is just on the publicly declared part of their ability to borrow that Heartland fails.
2/ I pulled this liquidity test from a time where the GFC had just happened. This meant that the real risk at the time was with debenture depositors not getting their money back becasue of liquidity issues. This kind of risk with supposedly reputable finance companies stunned me at the time. But I wonder if there is a converse kind of liquyidity risk for on the loan book now? Could it be that Heartland might have a problem lending out their depositors money?

SNOOPY