ANZ.NZX - Anyone holding?

[Snoopy]

Curiously converged, or just very similar on average?

You could certainly argue that bad debts, as in actual debt write offs as a percetage of the loan book, have now converged to the same percentage of the loan book for both UDC and Heartland. For two 'similar' companies in the NZ finance market that is exactly what I would expect.

I wrote 'curioiusly converged' because I don't understand why they were so different in previous years. If the annual impaired asset expense was not the same (2012 to 2015 inclusive), then I would take this as evidence that the two companies were not strictly comparable. And maybe the fact that the impaired asset write off as a percentage is now the same is just a one year anomoly? If the two companies are different, then I would like to understand 'how'. Any theories out there?

My theory is this (hot off the press). The Aussie banks have been under pressure to hold more capital to prop up their loan books. By having the NZ finance arm as a separate company, the ultimate ANZ parent in Australia, does not need the keep extra capital on their own balance sheet to support UDC. However, with a large collection of 'risky loans' shuffled off and tied up together in a UDC box, it would be natural to expect a higher percentage of loans than the finance industry average to be written off. Hence the reason UDC has had a comparatively high rate of loan write offs. Plausible?

SNOOPY

[Snoopy]

Note 11d (page 50 UDC for 2015 prospectus (No.69)) lists the internal risk grading of the loan assets on a scale of 0 to 9. On this scale 0 is the lowest risk while 9 means a default.

	UDC Vulnerable Loans
	Judgement	Total
	Grade 6+
2012	$975.744m +$80.745m +$55.403m	$1,111.892m
2013	$1,157.111m +$83.790m +$24.814m	$1,265.715m
2014	$811.700m +$92.366m +$34.883m	$938.949m
2015	$904.338m +$81.156m +$32.640m	$1,018.134m

The grade 6 and below categories for EOY2015 added up represents a fraction of the total loans outstanding as follows:

$1,018,134m / $2,461.224m = 41.4% of total loan assets.

Credit impairment is noted as $31.529m (note 11d)

========

For comparative purposes it is interesting to see what happens when we take the same statistics for Heartland bank. The situation is not strictly comparable because Heartland has a different credit risk system for so called 'Behavioral Loans'. Behavioral loans consist of consumer and retail receivables usually relating to the financing of a single asset.

OTOH 'Judgement Loans' are graded on the 1-9 system. Grade 1 represents a 'Very Strong' loan. Grade 9 represents a loan 'At Risk of Loss'. Grade 6 represents a loan that should be monitored. A 'Judgement loan' within Heartland consists mainly of business and rural lending, including non-core property, where an ongoing and detailed working relationship has been developed.

The grade 6 and below categories of 'Judgement Loans' plus the equivalently vulnerable 'Behavioural Loans' sum up to a total amount of Heartland Vulnerable Loans'. represent a fraction of the total loans outstanding as follows:

$149,011m / $2,878,513m = 5.18% of total loan assets.

Some impairment ($10,201m) (Note 18b) has already been taken onto the book over the years. Add to this a reverse mortgage fair value adjustment of ($6.242m) This total impairment of $16.433m represents

$16.433m / $126.382m = 13.0% of the Grade 6 (monitor) and below grade assets.

		Heartland Vulnerable Loans
	Behavioural			Judgement	Total
	Arrangement	Non Performing Repossession	Recovery	Grade 6+
2012	$13.750m	$4.386m	$2.740m	$185.315m +$53.360m +$14.036m +$13.741m	$287.118m
2013	$8.416m	$2.226m	$1.936m	$198.370m +$18.034m +$21.518m +$27.761m	$278.051m
2014	$7.571m	$2.113m	$2.113m	$165.776m +$14.833m +$13.520m +$3.412m	$159.338m
2015	$15.855m	$3.087m	$3.687m	$99.849m +$14.937m +$4.514m +$7.082m	$149.011m

A summarized comparative table between UDC (Year ending 30th September) and Heartland (Year ending 30th June) is below:

	UDC					Heartland
	Impaired Loans (A)	Grade 6+ Loans [total Vulnerable](B)	(A)/(B)	Total Loans (C)	(A)/(C)	Impaired Loans (A)	Total Vulnerable Loans (B)	(A)/(B)	Total Loans (C)	(A)/(C)
2012	$38.481m	$1,111.892m	3.46%	$2,141,780m	1.79%	$8.032m	$287.118m	2.80%	$2,086.303m	0.785%
2013	$37.460m	$1,265.765m	2.95%	$2,198,653m	1.70%	$15.961m	$278.051m	5.74%	$2,026.337m	0.788%
2014	$31.805m	$938,899m	3.38%	$2,375.936m	1.34%	$14.999m	$159.338m	9.41%	$2,622,392m	0.571%
2015	$31.529m	$1,018,134m	3.10%	$2,461.224m	1.28%	$16.433m	$149.011m	11.0%	$2,878,513m	0.571%

Note 11d (page 17 UDC Financial Statements for FY2016), lists the internal risk grading of the loan assets on a scale of 0 to 9. On this scale 0 is the lowest risk while 9 means a default.

	UDC Vulnerable Loans
	Judgement	Total
	Grade 6+
2012	$975.744m +$80.745m +$55.403m	$1,111.892m
2013	$1,157.111m +$83.790m +$24.814m	$1,265.715m
2014	$811.700m +$92.366m +$34.883m	$938.949m
2015	$904.338m +$81.156m +$32.640m	$1,018.134m
2016	$1,127.677m +$96.727m +$17.657m	$1,242.061m

The grade 6 and 'more risky' categories for EOY2016 added up represents a fraction of the total loans outstanding as follows:

$1,242.061m / $2,684.750m = 46.3% of total loan assets.

The Credit impairment provision on the books, not yet removed from the above total, is noted as $28.909m (note 11d)

========

For comparative purposes it is interesting to see what happens when we take the same statistics for Heartland bank. The situation is not strictly comparable because Heartland has a different credit risk system for so called 'Behavioral Loans'. Behavioral loans consist of consumer and retail receivables usually relating to the financing of a single asset.

OTOH 'Judgement Loans' are graded on the 1-9 system. Grade 1 represents a 'Very Strong' loan. Grade 9 represents a loan 'At Risk of Loss'. Grade 6 represents a loan that should be monitored. A 'Judgement loan' within Heartland consists mainly of business and rural lending, including non-core property, where an ongoing and detailed working relationship has been developed.

The grade 6 and 'more risky' categories of 'Judgement Loans' plus the equivalently vulnerable 'Behavioural Loans' sum up to a total amount of Heartland Vulnerable Loans' represent a fraction of the total loans outstanding as follows:

$204.029m / $3,135.203m = 6.51% of total loan assets.

Some impairment ($16.259m) (Note 18b) has already been taken onto the book over the years. Add to this a reverse mortgage fair value adjustment of ($4.987m) This total impairment of $21.246m represents

$21.246m / $175.428m = 12.1% of the Grade 6 (monitor) and below grade assets.

		Heartland Vulnerable Loans
	Behavioural			Judgement	Total
	Arrangement	Non Performing Repossession	Recovery	Grade 6+
2012	$13.750m	$4.386m	$2.740m	$185.315m +$53.360m +$14.036m +$13.741m	$287.118m
2013	$8.416m	$2.226m	$1.936m	$198.370m +$18.034m +$21.518m +$27.761m	$278.051m
2014	$7.571m	$2.113m	$2.113m	$165.776m +$14.833m +$13.520m +$3.412m	$159.338m
2015	$15.855m	$3.087m	$3.687m	$99.849m +$14.937m +$4.514m +$7.082m	$149.011m
2016	$14.923m	$6.507m	$7.171m	$125.902m +$20.434m +$16.904m +$12.188m	$204.029m

A summarized comparative table between UDC (Year ending 30th September) and Heartland (Year ending 30th June) is below:

	UDC					Heartland
	Impaired Loans (A)	Grade 6+ Loans [total Vulnerable](B)	(A)/(B)	Total Loans (C)	(A)/(C)	Impaired Loans (A)	Total Vulnerable Loans (B)	(A)/(B)	Total Loans (C)	(A)/(C)
2012	$38.481m	$1,111.892m	3.46%	$2,141,780m	1.79%	$8.032m	$287.118m	2.80%	$2,086.303m	0.785%
2013	$37.460m	$1,265.765m	2.95%	$2,198,653m	1.70%	$15.961m	$278.051m	5.74%	$2,026.337m	0.788%
2014	$31.805m	$938,899m	3.38%	$2,375.936m	1.34%	$14.999m	$159.338m	9.41%	$2,622.392m	0.571%
2015	$31.529m	$1,018,134m	3.10%	$2,461.224m	1.28%	$16.433m	$149.011m	11.0%	$2,878.513m	0.571%
2016	$28.909m	$1,242.061m	2.33%	$2,684.750m	1.08%	$21.246m	$204.029m	10.4%	$3,135.203m	0.678%

SNOOPY

[Biscuit]

You could certainly argue that bad debts, as in actual debt write offs as a percetage of the loan book, have now converged to the same percentage of the loan book for both UDC and Heartland. For two 'similar' companies in the NZ finance market that is exactly what I would expect.

I wrote 'curioiusly converged' because I don't understand why they were so different in previous years. If the annual impaired asset expense was not the same (2012 to 2015 inclusive), then I would take this as evidence that the two companies were not strictly comparable. And maybe the fact that the impaired asset write off as a percentage is now the same is just a one year anomoly? If the two companies are different, then I would like to understand 'how'. Any theories out there?

My theory is this (hot off the press). The Aussie banks have been under pressure to hold more capital to prop up their loan books. By having the NZ finance arm as a separate company, the ultimate ANZ parent in Australia, does not need the keep extra capital on their own balance sheet to support UDC. However, with a large collection of 'risky loans' shuffled off and tied up together in a UDC box, it would be natural to expect a higher percentage of loans than the finance industry average to be written off. Hence the reason UDC has had a comparatively high rate of loan write offs. Plausible?

SNOOPY

I don't think that is indicated by the data. Simply because: 1. over the 5 years they are not on average different; 2. in the last two years they have been very similar so you would need to argue that even if they were in fact different in earlier years, something specific has changed in the last two years to make those recent years not representative of the underlying difference. My thoughts from your data is that they are much the same.

[macduffy]

I don't think that is indicated by the data. Simply because: 1. over the 5 years they are not on average different; 2. in the last two years they have been very similar so you would need to argue that even if they were in fact different in earlier years, something specific has changed in the last two years to make those recent years not representative of the underlying difference. My thoughts from your data is that they are much the same.

Furthermore, it would seem to be a strange move by ANZ to sell off its finance arms - Esanda had been sold previously - if it had been using them to quarantine its more risky loans from the increased/increasing capital requirements these days. I think that you're following a false scent there, Snoopy!

[Snoopy]

Furthermore, it would seem to be a strange move by ANZ to sell off its finance arms - Esanda had been sold previously - if it had been using them to quarantine its more risky loans from the increased/increasing capital requirements these days. I think that you're following a false scent there, Snoopy!

Good point Macduffy, re Esanda.

But to further explain, my thinking was on the following lines. If the ANZ parent was a fully New Zealand owned company, then having a 100% owned subsidiary UDC woudl not change the risk required to be presented to ANZ shareholders. That's because the 100% owned subsidiary UDC would have to be consolidated into the 'parent' ANZ New Zealand accounts anyway. However, ANZ is fundamentally an Australian commpany. Could it be that they are not required to consoldiate an obscure NZ sudsidiary (UDC) from a shakey country in the South Pacific (New Zealand) in the ultimate parent Australian ANZ accounts? Anyone know?

SNOOPY

[macduffy]

I think so, Snoopy. The Basel 111 documentation seems to me to imply that if profit accounting for a subsidiary is included in a bank's published results then that subsidiary is also included in the capital requirements calculations. Happy to be corrected or confirmed on this.

[Snoopy]

	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%
Average	0.574%	0.495%
Average Removing Highest Outlier	0.513%	0.339%

I don't think that is indicated by the data. Simply because: 1. over the 5 years they are not on average different; 2. in the last two years they have been very similar so you would need to argue that even if they were in fact different in earlier years, something specific has changed in the last two years to make those recent years not representative of the underlying difference. My thoughts from your data is that they are much the same.

I guess you could look at the data and see that they are all fractions of a percent and so not much different. Note that I have added a couple of averages to the data chart one showing a 14% difference , the other showing a 34% difference, between what some may see still as 'small figures' in the grand scheme of things.

However, if I was to express the data in a different way, as a percentage of profits, you can see that the numbers I am talking about (teh annual impaired asset expense) are not so small.

UDC FY2016

$11.055m / $58.537m = 18.9%

Heartland FY2016

$13.501m / $54.164m = 24.9%

In practical terms, if Heartland are under-reporting their bad debts by up to one third, they are presenting a false PE picture to the market. They could be overstating their annual profit by around 8%. If a 'well informed market' prices Heartland shares at $1.50, that would mean a 'better informed market' would value the Heartland share price at $1.38. Being falsely lead to believe that your Heartland shares are worth 8% more than they actually are, I would think might be of great interest to Heartland investors. And it all comes about because of what some would see as a 'tiny' difference bad debt valuation.

Of course even we dogs can sometimes see patterns when none actually exist. So I wouldn't discount your alternative view that here really is no difference in the figures Biscuit.

SNOOPY

[Snoopy]

I am trying to put the information below into a format so that it can be compared with Heartland Bank (my post 7700 on the Heartland thread) over the same period.

Heartland
Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Write Offs (W)	Gross Financial Receivables (Z)	(W)/(Z)
EOHY2012	$87.728m	$2,075.211m	4.23%	$12.138m+$1.685m	$2,104.591m	0.66%
EOFY2012	$90.489m	$2,078.276m	4.35%	$14.636m+$3.180m	$2,105.702m	0.85%
EOFY2013	$48.975m	$2,010.393m	2.43%	$6.679m+$1.961m	$2,060.867m	0.42%
EOFY2014	$41.354m	$2,607.393m	1.59%	$35.258m+$3.260m	$2,631.754m	1.46%
EOFY2015	$32.824m	$2,862.070m	1.15%	$1.555m+$1.910m	$2,893.704m	0.12%

Unfortunately there are little differences in reporting standards that make this difficult.

For example, Heartland have a class of loans called 'Judgement Loans'. They pass annual judgement on these loans by rating them on a scale of 1 to 9 plus 'default'.
There is a second broad category called 'Behavioural Loans' which are separately rated, not using a scale.

UDC appear to rate all of their loans on a scale of 1 to 8 plus default (UDC prospectus December 2015, note 11d). I have previously defined UDC 'Vulnerable Loans' as classes 6,7 and 8. But category 6 is very large. So I am now going to change my mind and talk about 'Stressed Loans' which are calculated by:

Take loan total from categories 7 and 8
add 'Default' loans
less Provision for Credit Impairment.

I have redefined the 'Total Financial Assets' as listed in note 11d to be 'Net Financial Receivables'.

UDC
Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (W)	Gross Financial Receivables (Z)	(W)/(Z)
EOFY2011	$126.218m	$2,007.012m	6.29%	$15.103m	$2,049.504m	0.74%
EOFY2012	$96.670m	$2,102.299m	4.60%	$10.164m	$2,141.780m	0.47%
EOFY2013	$86.877m	$2,161.193m	4.02%	$12.399m	$2,198.653m	0.56%
EOFY2014	$95.364m	$2,344.131m	4.07%	$18.633m	$2,375.936m	0.78%
EOFY2015	$82.267m	$2,429.695m	3.39%	$12.162m	$2,461.224m	0.49%

There are a couple of outlier points to note. The EOFY2011 X/Y is quite high. Over FY2014, the impairment expense for that year is larger than normal. But generally this picture is much steadier than the equivalent figures for Heartland. I realise comparing just two companies is no way to draw conclusions about one or the other verses their peers. But unfortunately most of those peers got wiped out in the GFC :-(

OK back to this comparison. The 'stressed loans' at UDC are typically three times the 'stressed loans' at Heartland when compared on a normalised basis. Furthermore the actual annual impaired asset expense at UDC is roughly twice that at Heartland. OK there are differences between the two companies. But not differences that would suggest such a wide divergence in comparative statistics. There is another key difference though!

Heartland is a listed company. But UDC is not listed. This means there are no UDC performance shares to vest for UDC managers. No incentive to massage the UDC loan books. The UDC accounts tell a consistent story in a way the Heartland accounts do not. IMO the UDC are consistent in presenting a picture of 'real' profits in the way the Heartland accounts may not , if Heartland have deliberately underestimated their 'Stressed' debts.

During FY2016 'Heartland New Zealand Limited' and 'Heartland Bank Limited' combined into a single listed entity.

Heartland in their breakdown of the 'Asset Quality of Financial Receivables' (AR2016 Note 19a) list the following three mutually exclusive problem loan categories.

a/ Loans at least 90 days past due.
b/ Loans individually impaired.
c/ Restructured assets.

these loans are partially written off, and accounted for in the 'Provision for Impairment' (a separate listing category, d/).

My definition of a Heartland 'stressed loan' total can be calculated as follows:

'Stressed Loan Total' = (a)+(b)+(c)-(d)

The column (W) lists the actual dollar amount in bad debts written off over that period, as detailed in AR2016 note 19e.

Heartland
Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Write Offs (W)	Gross Financial Receivables (Z)	(W)/(Z)
EOHY2012	$87.728m	$2,075.211m	4.23%	$12.138m+$1.685m	$2,104.591m	0.66%
EOFY2012	$90.489m	$2,078.276m	4.35%	$14.636m+$3.180m	$2,105.702m	0.85%
EOFY2013	$48.975m	$2,010.393m	2.43%	$6.679m+$1.961m	$2,060.867m	0.42%
EOFY2014	$41.354m	$2,607.393m	1.59%	$35.258m+$3.260m	$2,631.754m	1.46%
EOFY2015	$39.066m	$2,862.070m	1.36%	$1.555m+$1.910m	$2,893.704m	0.12%
EOFY2016	$37.851m	$3,113.957m	1.21%	$12.010m+$6.653m	$3,135.203m	0.60%

The objective here is to take the Heartland figures and compare those to the equivalent figures for UDC. There are little differences in reporting standards that make this difficult.

For example, Heartland have a class of loans called 'Judgement Loans'. They pass annual judgement on these loans by rating them on a scale of 1 to 9 plus 'default'.
There is a second broad category called 'Behavioural Loans' which are separately rated, not using a scale.

UDC appear to rate all of their loans on a scale of 1 to 8 plus default (UDC Financial Statements 2016, note 11d). I have previously defined UDC 'Vulnerable Loans' as classes 6,7 and 8. But category 6 is very large. So I am now going to change my comparative and talk about 'Stressed Loans' which are calculated by:

Take loan total from categories 7 and 8
add 'Default' loans
less Provision for Credit Impairment.

I have redefined the 'Total Financial Assets' as listed in note 11d to be 'Net Financial Receivables', because they have already had their 'Provision for Credit Impairment' deducted.

UDC
Date	'Stressed' Loans on the books (X)	Net Financial Receivables (Impairments deducted) (Y)	(X)/(Y)	Impaired Asset Expense (W)	Gross Financial Receivables (Z)	(W)/(Z)
EOFY2011	$126.218m	$2,007.012m	6.29%	$15.103m	$2,049.504m	0.74%
EOFY2012	$96.670m	$2,102.299m	4.60%	$10.164m	$2,141.780m	0.47%
EOFY2013	$86.877m	$2,161.193m	4.02%	$12.399m	$2,198.653m	0.56%
EOFY2014	$95.364m	$2,344.131m	4.07%	$18.633m	$2,375.936m	0.78%
EOFY2015	$82.267m	$2,429.695m	3.39%	$12.162m	$2,461.224m	0.49%
EOFY2016	$85.475m	$2,655.841m	3.22%	$11.055m	$2,684.750m	0.41%

The key point to note here is that the 'impaired loan expense' / 'write offs' (represented by letter 'W' in each case) only occur when that portion of the loan has gone through the whole loan review system and is 'done and dusted'. OTOH 'Stressed Loans' are very much a judgement call by management.

They may
1/ recover,
2/ stay stressed or
3/ have to be written off.

As a shareholder in either ANZ or Heartland, I would hope that management would have a robust process that identifies problem loans before they have to be written off. So as a shareholder I would hope such loans were seen as 'stressed' before an actual write off was declared. So how to check that this is what happens in reality? One way is to look at the 'stressed loans' for both companies on an annual trending basis and see how this compares with the equivalent trend in write offs.

In the case of both UDC and Heartland, the normalised stressed loan percentage is consistently going down. However, the actual write offs per year are not going down in proportion. One interpretation of this is that both companies are assuming a lower number of loan write offs will be necessary in the future (because stressed loans are reducing). However, because this is not happening, this could suggest that both companies are pumping their declared results by making insufficient stressed asset provisioning for the future.

Alternatively it could mean that both companies are getting much better at identifying what are really stressed loans, and that allows them to have relatively lower stressed asset monitoring.

SNOOPY

[Snoopy]

UDC	Bad Debt Write Off	New Bad Debt Provision
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

I have been plastering a fair bit of data on this thread of late. Like all data you can choose to interpret it in different ways. But now I want to change tack and tell a few stories. Dig into these cautionary tales and you might get an insight into what I think all this data means.

-----

The modern school teacher is under a lot of stress. Badly behaved pupils are a distraction for those who want to learn. Yet just becasue a pupil is badly behaved this does not mean it is a permanent condition. In simple terms a badly behaved pupil will:

a/ Come right
b/ Continue to be badly behaved
c/ Become so badly behaved that expulsion is the only resort left.

Generally bad behaviour will require some kind of monitoring. I would like to contrast the approach of two different schools. In a futile attempt to keep their identities secret, let's call them 'School H' and 'School U'.

'School H' has a strong monitoring regime but has a policy of keeping classes together. 'School U' also has a strong monitoring regime. But, unlike 'School H', the badly behaved students are transferred to a special stand alone classroom. There they can receive special attention away from their well behaved classmates. Some say there is no such thing as a 'well behaved' or 'badly behaved' pupil. Even the best pupil has the potential to go off the rails. But by putting the known badly behaved pupils out of sight, the bad behaviour problem can seem less to the casual school visitor. In 'School U', rather than wait for a pupil to 'go bad', we can instead consider those pupils in the normal class that are vulnerable. 'Vulnerable' is a term that is subject to a teachers judgement. So when the school inspectors come around, the teachers can adjust the number of 'vulnerable pupils' to make the class look better.

Back in 'School H' the teachers have no such luxury. If bad behaviour deteriorates, there is no half way 'holding pen'. Those pupils go out on the street. Yes it looks bad to the school inspectors. But really bad pupils must go. Contrast this to 'School U' where the really bad pupils in the separate class are quietly let out of the back door of the bad room. The school inspectors often don't see the 'bad room' buried out the back of the school. It is there if they look, but many choose not to. The pupils slipping out of the back of the bad room are quietly out of sight of the public eye.

In 'School H' bad pupils are thrown out of the front door by the deputy headmaster. In 'School U' propensity to badness is adjustable at the discretion of the teachers. There is an old expression 'Bad will ultimately bust out!" But if you can keep how bad things are getting out of the public eye for a while, and that gets the headmaster a pay rise as a result, why not do it?

SNOOPY

PS Just in case you haven't joined the dots. 'School H' represents 'Heartland bank', 'School U' represents 'UDC Finance', the 'bad pupils' are the 'bad loans' and the 'bad pupils classroom' is the UDC bad loan provisioning system.

[Bobdn]

I have been plastering a fair bit of data on this thread of late. Like all data you can choose to interpret it in different ways. But now I want to change tack and tell a few stories. Dig into these cautionary tales and you might get an insight into what I think all this data means.

-----

The modern school teacher is under a lot of stress. Badly behaved pupils are a distraction for those who want to learn. Yet just becasue a pupil is badly behaved this does not mean it is a permanent condition. In simple terms a badly behaved pupil will:

a/ Come right
b/ Continue to be badly behaved
c/ Become so badly behaved that expulsion is the only resort left.

Generally bad behaviour will require some kind of monitoring. I would like to contrast the approacjh of two different schools. In a futile attempt to keep their identities secret, let's call them 'School H' and 'School U'.

'School H' has a strong monitoring regime but has a policy of keeping classes together. 'School U' also has a strong monitoring regime. But, unlike school H the badly behaved students are transferred to a special stand alone classroom. Ther they can receive special attention away from their well behaved classmates. Some say there is no such thing as a 'well behaved' or 'badly behaved' pupil. Even the best pupil has the potential to go off the rails. But by putting the known badly behaved pupils out of sight, the bad behaviour problem can seem less to the casual school visitor. Rather than wait for a pupil to 'go bad', we can instead consider those pupils in the normal class that are vulnerable. 'Vulnerable' is a term that is subject to a teachers judgement. So when the school inspectors come around the teachers can adjust the number of vulnerable pupils to make the class look better.

Back in School H the teachers have no such luxury. If bad behaviour deteriorates, there is no 'holding pen'. Those pupils go out on the street. Yes it looks bad to the school inspectors. But really bad pupils must go. Back in School U the really bad pupils in the separate class are quietly let out of the back door. The school inspectors often don't see the 'bad room' buried out the back of the school

SNOOPY

Snoopy,is ANZ a big part of your portfolio?