HGH - Heartland Group Holdings

**Snow Leopard** · 27-03-2017, 10:24 PM

Originally Posted by Snoopy

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

The simple answer is 'Garbage In, Garbage Out' or to put it a little more kindly:
Have you considered the possibilities that you are using the wrong inputs, failing to understand the original test and are so negatively biased towards Heartland that you can not see the facts for the fiction?

So why not sit down with a bowl of your favourite dog-food and Peanuts.

Best Wishes
Paper Tiger

**percy** · 28-03-2017, 08:21 AM

Originally Posted by Paper Tiger

The simple answer is 'Garbage In, Garbage Out' or to put it a little more kindly:
Have you considered the possibilities that you are using the wrong inputs, failing to understand the original test and are so negatively biased towards Heartland that you can not see the facts for the fiction?

So why not sit down with a bowl of your favourite dog-food and Peanuts.

Best Wishes
Paper Tiger

You should be congratulated for even reading his posts.
I can no longer bring myself to read them.

**Snoopy** · 28-03-2017, 10:00 AM

Originally Posted by Paper Tiger

Have you considered the possibilities that you are using the wrong inputs,

The problem with looking at 'future liquidity' (note 20, AR2016) over twelve months is that you are looking at a highly movable future. The bare information in the annual report is all based on 'current contractual obligations'. This kind of information is independently verifiable by auditors. But the reality of changes that can happen after the auditors have given the accounts the 'big tick' is that:

1/ Over the shorter term (up to a year) there is a propensity for those borrowers from Heartland to repay their 'account receivable' early.
2/ The source of short term debenture funding is normally much better than contractually indicated, because, on average, depositors tend to roll over their debentures once the official debenture contract period ends.

This means that none of the information presented in the liquidity section of the Annual Report is very useful in predicting the future liquidity of Heartland Bank. However, Heartland Bank themselves use this information only as an input values that they assign to a probabilistic client behaviour model. This model uses past customer behaviour to assess the likely real impacts of cashflows from the contracted cashflows. From FY2015 onwards, the information that Heartland use in their modelling has stopped being declared to shareholders. So I cannot be sure that my own modelling along these principles is in accordance with what Heartland managment are doing now. I am, however, confident that I am making the best use of information that is available to me. Conseqently I believe my data inputs on the most likely way loans will be cashed in and also funded are likewise the best available.

So to answer the question succinctly, yes I am concifident that I am using the right inputs.

failing to understand the original test?

I am less confident on this point. I may have misunderstood the original test. The exact wording, which was part of a wholesale banking agreement covering PGW Finance (now part of Heartland) was as follows:

----

[Liquidity Buffer Ratio (including Bank Lines)] > or = 10%

----

This was written in the period immediate post GFC where the main concern was a finance company not having enough liquidity to pay their depositors back. If you don't have enough 'account receivable money' to pay your depositors back, one solution is to take out a short term bank loan to do it. This is why I assume short term bank lines are included as a repayment resource. But we don't know what the parent Bank Lines available to Heartland amount to in total. We do know what bank lines are available to Heartland in Australia. We do know that having bank lines available costs money. We do know that Heartland until FY2016, have gradually been reducing the quantum of bank line funding available in Australia. So I have thought that Heartland could be reducing their bank borrowing headroom in NZ as well (although I admit I might be wrong to think that).

The point is that up to now, none of this has mattered. The bank line funding in Australia on its own has been sufficient to covering any likely funding gap for the whole group (even though technically it can't be unpicked from the Australian home assets it is funding). But for the first time at EOFY2016, this has now changed. This is nothing to worry about in itself. As Roger has pointed out in the post below:

a/ Problem: Want for depositors money?
a/ Solution: Offer depositors a more attractive interest rate to attract more funds.

b/ Problem: Not enough short term loans on the books to utilise all depositors funds?
b/ Solution: Offer loans on more attractive terms.

So, in summary there is a 'work around' available for whatever liquidity problem looks to be appearing on the horizon. The interesting thing about Heartland's position at the end of FY2016 is that the potential problem on the horizon was a 'type b' problem. I don't think that Heartland has had this 'type b' problem before.

Heartland can easily make more loans to solve their 'type b' problem. The question is, what is the quality of those new loans?

For an answer, look at the impaired asset expense, note 4 in HYR2017, just published.

	FY2106	FY2015	Change YOY
Total Impaired Asset Expense	$6.892m	$5.610m	+22.9%

In reality I don't see a liquidity problem for Heartland in FY2017. But, as you can see, 'solving the liquidity problem' can have 'overflow effects', not entirely good, into other areas of the accounts, as BlackPeter has already noted.

SNOOPY

**Beagle** · 28-03-2017, 10:17 AM

Originally Posted by Paper Tiger

The simple answer is 'Garbage In, Garbage Out' or to put it a little more kindly:
Have you considered the possibilities that you are using the wrong inputs, failing to understand the original test and are so negatively biased towards Heartland that you can not see the facts for the fiction?

So why not sit down with a bowl of your favourite dog-food and Peanuts.

Best Wishes
Paper Tiger

Classic post Paper Tiger

I wonder if its ever crossed Snoopy's mind that if they need more deposit money they simply put their deposit rates up a bit ! This is not rocket science Snoopy...perhaps you'd like to borrow this hounds slightly less rusty steam powered abacus for a few days.

**Felonius** · 28-03-2017, 11:13 AM

Percy & Tiger. Why so rude to Snoopy ?

Thanks to you Percy I am a shareholder in HBL. Determining whether it was / is a good investment is beyond me and without your excellent record & advice I would not have considered buying in. Could it be that Snoopy is generously trying to prevent us losing money on a risky investment ?

I can only assume that you have spent time reading his arguments carefully, understand the issues that he is attempting to discuss, and are quite sure that what he is saying does not make sense.

I spend little time reading Snoopy's posts. To my simple mind his views & spreadsheets appear carefully considered & well expressed. Agreed, he does seem somewhat fixated on Heartland Bank and I don't know whether it's warranted or not, but please try to be more kind (or respectful).

**percy** · 28-03-2017, 11:54 AM

Felonius.
You must do your own research if you want to be a successful investor.I have found the more research I do the better the results I get.I have done a great deal of research on HBL.Attended AGMs,special meetings,presentations and phoning the company to learn more.I have read a large number of analysts' reasearch papers.
You should never rely on me or any other poster.
To find out the reasons for my rudeness to Snoopy,go back to the start of this thread and read his posts.Then you can decide for yourself whether I should ignore him or not.If you can not understand his posts,you are not alone. Neither can I.The ones I did bother to read. turned out to be wrong.
I would point out replying to his posts takes a lot of time.It is a waste of my time,so I can no longer be bothered.That is why I take my hat off to Paper Tiger.

**Snow Leopard** · 28-03-2017, 01:20 PM

Originally Posted by Felonius

Percy & Tiger. Why so rude to Snoopy ?

Thanks to you Percy I am a shareholder in HBL. Determining whether it was / is a good investment is beyond me and without your excellent record & advice I would not have considered buying in. Could it be that Snoopy is generously trying to prevent us losing money on a risky investment ?

I can only assume that you have spent time reading his arguments carefully, understand the issues that he is attempting to discuss, and are quite sure that what he is saying does not make sense.

I spend little time reading Snoopy's posts. To my simple mind his views & spreadsheets appear carefully considered & well expressed. Agreed, he does seem somewhat fixated on Heartland Bank and I don't know whether it's warranted or not, but please try to be more kind (or respectful).

Felonius >> felon >> convicted of a serious crime >> robbed a bank

& got caught

?

Here is the Tiger take on the important question that Snoopy is trying to answer.

If has a result of some people actually believing Snoopy's posts that Heartland always was, currently is and always will be a failing bank, that 10% of the money on loan to Heartland is [attempted to be] withdrawn at the earliest contractual moment can Heartland actually pay them.

The answer to that would appear to be (from reading the accounts) a pretty definite YES.

Best Wishes
Paper Tiger

**Snoopy** · 28-03-2017, 01:31 PM

Originally Posted by Felonius

I can only assume that you have spent time reading his arguments carefully, understand the issues that he is attempting to discuss, and are quite sure that what he is saying does not make sense.

Sometimes when you have a significant stake (for you) in a company and someone else comes forward with views that indicate your investment might not be as rock solid as you think, you can take these alternative views as a personal attck on your position. And sometimes if you don't like the message, there is a tendency to attack the messanger.

PT is known for his great knowledge and Percy for his wonderful enthusiasm. Investments need champions with knowledge and enthusiasm. But any investment also has a flipside, at least from a value perspective. When I express a flipside, it is important to detail where such a view has come from, so as a reader you can decide whether to accept, reject or choose what shade of grey you apply to that view. I choose to express my views, and share the building blocks that form those, and let readers draw their own conclusions. I can assure any readers that if there are any holes in my arguments, then someone like PT (and there are others on this forum too) are smart enough to find them.

As for the personal attack and ridicule game, I don't play that.

SNOOPY

**kizame** · 28-03-2017, 01:44 PM

Even though for the most part I don't understand your posts as they are a bit too technical for me,and I may not agree with your views,never the less you have put some fire into the HBL thread.
A big positive is that more people read the thread and can draw their own conclusions. Keep it up.

**Snoopy** · 28-03-2017, 01:55 PM

Originally Posted by Snoopy

This is the most imprtant calculation that most nvestors in finance companies never do. I have rechristened it the 'Meads Test'. The Meads Test is way to find out if dear old Colin says a profitable finance company is 'solid as', whether that company will run out of cash when it comes time to repay your debenture. "Liquidity Buffer Ratio" sounds a bit pompous, so I will adopt the term 'Meads Test' in the future, as I think most investors will relate to that term better.

We are looking at 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%

Heartland provides a nice projection of forward cashflows in note 14 of IRFY2016. But these are contacted cashflows. In practice depositors roll over their Heartland debentures. And when customers repay a Heartland loan, they often take out another loan. So what we as investors need to concentrate on is the expected behaviour of those that take out loans from Heartland and those that loan money to Heartland. Expected behaviour is not written in stone. But we can make an educated guess at this by looking at what happened in prior periods where both 'contracated' behaviour and 'expected' behaviour was tabulated. "Adjustment factors" in the table below:

HY2016 Loan Maturity (Financial Receivables)	Contracted	CE Factor	Expected
On Demand	$31.879m	1.000	$31.879m
0-6 months	$618,779m	1.32	$816.778m
6-12 months	$277.017m	1.32	$345.662m

HY2016 Deposit Maturity (Financial Liabilities)	Contracted	CE Factor	Expected
On Demand	$728.056m	0.0301	$21.914m
0-6 months	$1,360.508m	0.324	$440.805m
6-12 months	$498.705m	0.364	$181.529m

Now I have generated the expected cashflow data over the ensuing twelve months, I can proceeed to make some 'Meads Test' calculations.

The 'Meads Test' is way to find out if dear old Colin says a profitable finance company is 'solid as', whether that company will run out of cash when it comes time to repay your debenture. "Liquidity Buffer Ratio" sounds a bit pompous, so I have adopted the term 'Meads Test'. I think most investors will relate to that term better.

We are looking at 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%

Heartland provides a nice projection of forward cashflows in note 14 of IRFY2017. But these are contracted cashflows. In practice depositors roll over their Heartland debentures. And when customers repay a Heartland loan, they often take out another loan. So what we as investors need to concentrate on is the expected behaviour of those that take out loans from Heartland and those that loan money to Heartland. Expected behaviour is not written in stone. But we can make an educated guess at this by looking at what happened in prior periods where both 'contracted' behaviour and 'expected' behaviour were tabulated. "Adjustment factors" in the table below: