ANZ.NZX - Anyone holding?

[Snoopy]

Time to normalise the UDC figures for 2015 so they can be compared more directly with the likes of Heartland Bank.

Heartland in FY2015 had selling and administration expenses of $68.403m (Heartland FY2015 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $32.278m (UDC prospectus note 4). That is a difference of $36.125m. The two are comparable in that they have a similarly sized loan book (UDC:$2,347.183m, Heartland $2,862.070m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin on assets?

FY2015: ($108.701-$36.125+ $10.464)/$2,347.183 = 3.53%

Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $10.464m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $36.125m 'extra operating expenses (p43 note 4). The $10.464m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $10.464m which largely reflects a branch network allowance must be removed from my comparison.

This calculation shows the underlying margin at UDC to be slightly improved from FY2014's 3.37%.

Time to normalise the UDC figures for 2016 so they can be compared more directly with the likes of Heartland Bank.

Heartland in FY2016 had selling and administration expenses of $69.872m (Heartland FY2016 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $31.623m (UDC Financial Statement 2016, note 4). That is a difference of $38.249m. The two are comparable in that they have a similarly sized loan book (UDC:$2,573.030m, Heartland $3,133.957m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin on assets?

FY2016: ($107.233-$38.249+ $10.011)/$2,573.030 = 3.07%

Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $10.011m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $38.249m 'extra operating expenses (calculated above, using figures from Financial Statements 2016, note 4). The $10.011m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $10.011m which largely reflects a 'branch network allowance payment' must be removed from my comparison.

This recent year trend in the underlying margin at UDC is

FY2016	3.07%
FY2015	3.53%
FY2014	3.37%
FY2013	2.58%

SNOOPY

[Snoopy]

An update on the post financial crisis profitability trends. The Heartland comparative figures only start from FY2012, because that is when Heartland started to exist in its current form.

	UDC			Heartland
	EBT	Loan Book	EBT/Loan Book	EBT	Loan Book	EBT/Loan Book
FY2009	$34.024m	$1,829.156m	1.86%
FY2010	$45.012m	$1,968.771m	2.29%
FY2011	$46.382m	$1,948.552m	2.38%
FY2012	$58.476m	$2,014.473m	2.90%	$29.377m	$2,078.276m	1.41%
FY2013	$66.787m	$2,065.117m	3.23%	$36.540m	$2,010.376m	1.82%
FY2014	$83.501m	$2,272.081m	3.68%	$57.416m	$2,607.393m	2.20%
FY2015	$89.750m	$2,347.163m	3.82%	$76.304m	$2,862.070m	2.67%

Reference for data (UDC): (p32 of 2015 prospectus (No.69) , p33 of 2014 prospectus) (Profit before Income tax & Credit Impairment, Net loans and advances)
Reference for data (Heartland): AR2015, AR2014 Statement of Comprehensive Income Operating profit, Statements of Financial Position)

	UDC			Heartland
	EBT	Loan Book	EBT/Loan Book	EBT	Loan Book	EBT/Loan Book
FY2009	$34.024m	$1,829.156m	1.86%
FY2010	$45.012m	$1,968.771m	2.29%
FY2011	$46.382m	$1,948.552m	2.38%
FY2012	$58.476m	$2,014.473m	2.90%	$29.377m	$2,078.276m	1.41%
FY2013	$66.787m	$2,065.117m	3.23%	$36.540m	$2,010.376m	1.82%
FY2014	$83.501m	$2,272.081m	3.68%	$57.416m	$2,607.393m	2.20%
FY2015	$89.750m	$2,347.163m	3.82%	$76.304m	$2,862.070m	2.67%
FY2016	$88.835m	$2,573.030m	3.45%	$87.689m	$3,113.957m	2.82%

Note:

1/ UDC data for FY2016 is drawn from the 'UDC Finance Annual Report 2016' 'Statement of Comprehensive Income' (EBT) and 'Balance Sheet' (Loan Book Balance).
2/ Heartland Bank data for FY2016 'Statement of Comprehensive Income' (EBT) and 'Statement of Financial Position' (Loan Book Balance).
3/ All EBT figures are before 'credit and impairment charge'.

Note that the absolute figures year to year are not comparable between UDC and Heartland. This is because Heartland has a physical branch structure whereas UDC works out of ANZ bank branches. The inter company year on year trend is interesting though. For the first time we see Heartland's earnings to loan book ratio rising, as the equivalent UDC metric is falling. For all previous comparative periods this measure has been moving in the same direction for both UDC and Heartland.

SNOOPY

[Snoopy]

I am using the Heartland business categories, Table 18c Heartland AR2015 for comparison purposes. The UDC figures come from the 2015 prospectus (No.69) Note 11c, page 50.

	HNZ (FY2015)	UDC (FY2015)
Agriculture Forestry & Fishing:	$572.412m (17.6%)	$456.195m (18.8%)
Mining:	$14.105m (0.4%)	$9.183m (0.4%)
Manufacturing:	$93.779m (2.9%)	$78.327m (3.2%)
Finance & Insurance:	$377.318m (11.6%)	$87.179m (3.6%)
Retail & Wholesale Trade:	$276.527m (8.5%)	$292.686m (12.0%)
Households:	$1,397.003m (43.0%)	$552.061m (22.7%)
Property & Business Services	$396.939m (12.2%)	$130.419m (5.4%)
Transport & Storage:	$20.068m (0.6%)	$425.302m (17.5%)
Other Services:	$102.317m (3.1%)	$398.984m (16.4%)

Total for Heartland $3,250.2m (100%) , with the collectively impaired assets yet to be adjusted for. This equates to a loan book YOY growth of 11.8%.

Total for UDC $2,429.7m (100%), with credit impairment already adjusted for. This equates to a loan book YOY growth of 3.7%.

So how good a measuring stick -still- is UDC for Heartland? Both companies have grown mostly organically as opposed to making big new acquisitions. Heartland has grown through a shareholding in P2P platform Harmony during the year. More significant in strategic than absolute terms at this stage. The Heartland non core residential mortgage business has been reduced. The Heartland non core legacy property portfolio is down to $27.0m.

The fact that UDC has a much higher percentage rating of loans in Transport and Storage is another long standing difference.

The rural lending book for UDC has grown by 2.4% YOY. The Heartland rural lending book has grown by 16.5% YOY. One interpretaion of this is that Heartland are 'helping' more of their customers by capitalising more interest payments.

'Construction' ($344.072m) is a category that UDC breaks down, that I have included in 'Other'. If instead I had included this in 'Finance & Investment' then the 'Finance and Investment' comparison would have been a lot more even.

On balance though, I believe the comparison between the two is still useful.

	HNZ (FY2016)	UDC (FY2016)
Agriculture Forestry & Fishing:	$680.680m (19.7%)	$494.192m (18.6%)
Mining:	$14.912m (0.4%)	$11.428m (0.4%)
Manufacturing:	$88.412m (2.7%)	$66.429m (2.5%)
Finance & Insurance:	$339.646m (9.8%)	$88.535m (3.3%)
Retail & Wholesale Trade:	$296.550m (8.6%)	$342.734m (12.9%)
Households:	$1,498.261m (43.3%)	$640.521m (24.1%)
Property & Business Services	$405.469m (11.7%)	$133.353m (5.0%)
Transport & Storage:	$26.715m (0.8%)	$460.450m (17.3%)
Other Services:	$110.747m (3.2%)	$418.199m (15.7%)

Total for Heartland $3,461.4m (100%) , with the collectively impaired assets yet to be adjusted for. This equates to a loan book YOY growth of 6.5%.

Total for UDC $2,655.8m (100%), with credit impairment already adjusted for. This equates to a loan book YOY growth of 9.3%.

My question is, can any of the underperformance of UDC in 'underlying earnings terms' be explained by the markets both UDC and Heartland are lending into?

Looking at the year on year figures, comparing each company to itself one year earlier, I am struck by the following observations:

1/ Heartland's rural loan book grew by 19% YOY. UDC's rural loan book only grew by 8% YOY. One explanation is that Heartland was more generous in rolling over marginal rural loans. This was confirmed on p7 of Heartland AR2016

"Despite the difficult circumstances facing the dairy industry, Heartland continues to support existing clients – which was the primary reason for the growth."

Some might see that as a high risk strategy, as this rollover growth decreased cashflow. Recent dairy price recovery in particular suggests that if a high risk gamble was made, it has paid off.

2/ Heartland's 'finance & insurance' book shrunk by 10% YOY. UDC's 'finance & insurance' book grew by 2% YOY. In big picture terms, finance and insurance is far more important to Heartland (nearly 10% of all business vs only just over 3% for UDC). Curiously the shrinkage of 'finance and insurance' at Heartland came in the year that Heartland acquired the 50% of Marac Insurance (general insurance and income protection) they did not own for $2.3m (a small fish acquisition?). So it must be the 'finance' bit of 'finance & insurance' that did most of Heartland's sector shrinking. Reading through the Heartland annual report, I can't find a mention of any business unit shrinking. So I am mystified as to where the shrinkage in the 'finance & insurance' book at Heartland came from. Given the evidence is that this shrinkage probably did Heartland more good than harm I am interested in solving this riddle. Any ideas? Did Heartland wind up some less profitable loans to large businesses during the year? (refer to p26 of Annual Results 2016 presentation).

3/ UDC are very up front that financing construction is part of their business mix. Heartland do not report 'construction' as a separate business category. So I have combined UDC's 'Construction' figures into the broad 'other services' basket.

UDC construction loans totalled $355.757m at EOFY2016, up from $344.072m at EOFY2015, and a not insignificant 13% of the total loan book. This construction increase of 3% YOY, is well below the average 9.3% YOY growth for the whole of UDC. One explanation for this modest growth is that some construction projects have become problematic. Developer margins have shrunk and UDC margins on these developments have shrunk consummately. Many fortunes have been made on property over the years. But less well advertised is that many have been lost through risky property development. I have heard anecdotal evidence that property developments around Auckland have been shelved. Are UDC feeling the construction pain?

SNOOPY

[Snoopy]

Can't find a 'prospectus 70' that details the performance of UDC over FY2016.

It also seems that the previous links to past year prospectuses that I have given have been wiped by the company. I am always suspicious of companies that try to obliterate their financial history.

According to the HY2016 UDC news sheet, regulations may be to blame:

"Another development that we are currently working towards is transitioning to the new Financial Markets Conduct Act 2013 (FMCA). The FMCA overhauls existing securities and financial markets laws. For UDC this means a change to the offer documents that are produced and instead of a Prospectus and an Investment Statement there will be single product disclosure statement. In addition, all UDC’s material information will be available on a public register known as the Disclose Register where all similar offers will be available to view. We hope to be in a position to transition in the next few months but will keep you posted."

Personally I don't buy it. It should be possible to satisfy legal requirements without obliterating your comparative measures of company history and a formal annual commentary.

SNOOPY

[percy]

Snoopy,
I have always looked at UDC results and taken them as an indicator of how HBL will be performing,as both businesses are in the same sector and very well run.
However,this year it is different,because UDC is being put up for sale.This means the buyer will want to look at their accounts.I take it they will therefore have to show an "honest" factual set of accounts.This will mean the "special" tie up with ANZ will have to be unwound.Maybe the accounts for the last 3 years will have to be redone.?
So comparing HBL which is growing and has "clean" accounts,with UDC which has to tidy up their business and accounts could be another futile exercise.
The worthwhile exercise will be comparing the ratios UDC is sold for,with HBL's...
I expect that will raise a few eyebrows.!
The fun question is why do ANZ want to sell UDC to the Chinese, and not HBL,and what will that mean to UDC's staff and customers?
I expect the answers to all questions is,Heartland Bank is "well positioned."

[Snoopy]

Snoopy,
I have always looked at UDC results and taken them as an indicator of how HBL will be performing,as both businesses are in the same sector and very well run.
However,this year it is different,because UDC is being put up for sale.This means the buyer will want to look at their accounts.I take it they will therefore have to show an "honest" factual set of accounts.

With finance companies I have always associated 'honesty' with taking a realistic view on compromised loans and the amount of money realistically recoverable. Interestingly, the annual provision for bad loans at UDC was lower in FY2016 than FY2015. That in turn allowed UDC to declare a higher NPAT YOY, even though the underlying profit (before bad loan provision) was lower. However, I have yet to do my more forensic analysis on UDC's bad debt position.

This will mean the "special" tie up with ANZ will have to be unwound. Maybe the accounts for the last 3 years will have to be redone?

Rather vaguely in the latest 'Product Disclosure Statement', UDC disclose that up to 20% of their exposure is to related parties as a percentage of capital (p15). These related parties include ANZ (big surprise there ;-P). It wouldn't surprise me if 19.9% of related party exposure relates to ANZ, with ANZ being the 100% owner of UDC.

So could UDC suffer a sudden 20% decline in business overnight if it is sold? This is possible, although no doubt there will be an earn out provision for whoever buys UDC if profits remain above a certain target. In that circumstance it wouldn't make sense for ANZ to suddenly pull all their related business from UDC.

So comparing HBL which is growing and has "clean" accounts,with UDC which has to tidy up their business and accounts could be another futile exercise.

Personally I still think the comparison still has merit, although I acknowledge your concerns are realistic and the UDC window dressing is something to be watched.

I expect the answers to all questions is, Heartland Bank is "well positioned."

I could have explained the relative performance of both by saying the Heartland outperformance was due to "the brilliance of Heartland CEO Geoff Greenslade." Some investors here I imagine would be very satisfied with such an explanation. For myself, I like to look for the layer below that, just in case Geoff was to make an untimely exit under the wheels of a bus (not that I would wish for such a thing, but accidents do happen).

SNOOPY

PS Happy new year to you Percy

[percy]

Snoopy,
Happy new year to you too Snoopy.
Yes JEFF Greenslade has done a great job,but really what I guess I am trying to convey is ,the past year UDC have had to concentrate on getting their business ready for sale,while Heartland have been able to concentrate on growing their business.Very different objectives.Some one buying UDC must know what UDC is without ANZ.
To me it means UDC have had their hands tied,and that is the real reason HBL have outperformed them.

[Bobdn]

Good start to the New Year for ANZ (ASX). Up 1.5% so far. From the SMH

"ANZ is selling its stake in a Chinese bank for $1.8 billion, will use proceeds to beef up Tier 1 capital"

For more check out: http://www.smh.com.au/business/banki...14-gtapf2.html

[Snoopy]

Updating the actual bad debt write offs in relation to the size of the loan book at the end of FY2015. Section 7 in the UDC 2015 prospectus is named "Provision for Credit Impairment". Bad debts actually written off are compared against the 'provision for loan impairment' stated on page 32, the 'Summary Financial Statement', which were $10.427m (FY2015) and $11.733m (FY2014).

UDC	Bad Debt Write Off	New Bad Debt Provision
FY2010		$17.343m
FY2011		$4.891m
FY2012	$10.164m	$6.031m
FY2013	$12.399m	$7.123m
FY2014	$18.633m	$11.733m
FY2015	$12.162m	$10.427m

Actual write offs are down, coming off a spike from FY2014

Putting these actual write offs as a percentage of the end of year loan book gives them better context.

FY2012: $10.164m/$2,014.473m = 0.505%
FY2013: $12.399m/$2,065.117m = 0.600%
FY2014: $18.633m/$2,272.081m = 0.820%
FY2015: $12.162m/$2,347.163m = 0.518%

This is an improvement back towards FY2012 values.

For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. Note 6 (AR2015) details impaired asset expense as follows:

FY2012: $5.642m
FY2013: $22.527m
FY2014: $5.895m
FY2015: $12.105m

Normalize these against the total finance receivables

FY2012: $5.642m/ $2078.3m = 0.271%
FY2013: $22.527m/ $2010.4m = 1.12%
FY2014: $5.895m/ $2607.4m = 0.226%
FY2015: $12.105m/ $2862.1m = 0.423%

It is interesting to see that Heartland's write offs are increasing whereas UDC write offs are decreasing. The overall write offs for Heartland are nevertheless still less in percentage terms than UDC.

	UDC Debt Write Off	Heartland Debt Write Off
FY2012	0.505%	0.271%
FY2013	0.600%	1.12%
FY2014	0.820%	0.226%
FY2015	0.518%	0.423%

Updating the actual bad debt write offs in relation to the size of the loan book at the end of FY2016. Section 7 in the UDC 2016 Financial Statements is named "Provision for Credit Impairment". Bad debts actually written off are compared against the 'provision for loan impairment' stated on page 3, the 'Statement of Comprehensive Income'.

UDC	Bad Debt Write Off	New Bad Debt Provision
FY2010		$17.343m
FY2011		$4.891m
FY2012	$10.164m	$6.031m
FY2013	$12.399m	$7.123m
FY2014	$18.633m	$11.733m
FY2015	$12.162m	$10.427m
FY2016	$11.055m	$7.418m

Actual write offs look to be in a range of $10m to $12m, excluding the spike from FY2014

Putting these actual write offs as a percentage of the end of year loan book gives them better context.

FY2012: $10.164m/$2,014.473m = 0.505%
FY2013: $12.399m/$2,065.117m = 0.600%
FY2014: $18.633m/$2,272.081m = 0.820%
FY2015: $12.162m/$2,347.163m = 0.518%
FY2016: $11.055m/$2,573.030m = 0.430%

For FY2016, UDC has the lowest percentage of write offs for the last five years.

For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. Note 6 (AR2016) to work out the latest details of 'impaired asset expense' as follows:

FY2012: $5.642m
FY2013: $22.527m
FY2014: $5.895m
FY2015: $12.105m
FY2016: $13.501m

Normalize these against the total finance receivables

FY2012: $5.642m/ $2078.3m = 0.271%
FY2013: $22.527m/ $2010.4m = 1.12%
FY2014: $5.895m/ $2607.4m = 0.226%
FY2015: $12.105m/ $2862.1m = 0.423%
FY2016: $13.501m/ $3114.0m = 0.434%

The nomalised write offs for UDC and Heartland have very curiously converged to close agreement!

	UDC Debt Write Off	Heartland Debt Write Off
FY2012	0.505%	0.271%
FY2013	0.600%	1.12%
FY2014	0.820%	0.226%
FY2015	0.518%	0.423%
FY2016	0.430%	0.434%

SNOOPY

[Biscuit]

The nomalised write offs for UDc and Heartland have very curiously converged to close agreement!
SNOOPY

Curiously converged, or just very similar on average?