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  1. #31
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    Quote Originally Posted by Snoopy View Post

    The 'profit before tax' is listed as $59.664m (p35). But this includes a provision for credit impairment of $7.123m which I would remove to get the picture of ongoing operational performance. So I get EBT of $66.787m.

    Now go to note 4 (p43) on interest expense. There is underlying interest over and above what is due to debenture holders of $16.623m.

    So total underlying EBIT = $66.787m + $16.623m = $83.07m

    Now turn to page 45 (note 8) and you will see total loans and advances of: $2,065.117m

    So the operating margin based on the end of year loan balance book is:

    $83.07/$2065.11 = 4.02%

    That is almost twice the margin of the underlying ANZ bank in NZ, which is not what I was expecting. I will have to consider.

    1/ whether I have made a mistake.
    2/ what all this means for the likes of the potential of Heartland.
    The above is from the December 2013 prospectus. From that document the figures are also supplied for the previous year (FY2012) for comparative purposes. So time to crunch those numbers too.

    The 'profit before tax' is listed as $52.445m (p35). But this includes a provision for credit impairment of $6.031m which I would remove to get the picture of ongoing operational performance. So I get EBT of $58.476m.

    Now go to note 4 (p43) on interest expense. There is underlying interest over and above what is due to debenture holders of $19.529m.

    So total underlying EBIT = $58.476m + $19.529m = $78.01m

    Now turn to page 45 (note 8) and you will see total loans and advances of: $2,014.473m

    So the operating margin based on the end of year loan balance book is:

    $78.01/$2014.47 = 3.87%

    No quite as good as FY2013, but not bad.

    SNOOPY
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  2. #32
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    Quote Originally Posted by macduffy View Post
    Hi Snoopy.

    Why wouldn't you expect that a finance company would have a higher operating margin than a retail bank? In relatively favourable economic conditions? After all, the finance company is lending to the higher risk end of the market - at higher interest rates. Certainly, their cost of funds is likely to be higher but its noticeable these days that UDC's debenture rates are very similar to ANZ's deposit rates for the same term. I don't know about relative overheads but UDC doesn't support an extensive branch network with the costs involved there.

    My instinct would be that the finance arm would have the better operating margin. Until the next recession!
    Yes I agree that in a favourable environment, it is probably in line with expectations for a finance company to be earning a better return on assets than a bank.

    Your point about the the relative overheads is an important one. Heartland in FY2013 had selling and administration expenses of $70.347m (Heartland FY2013 report, note 9). UDC had total operating expenses of $30.887m (UDC prospectus note4). That is a difference of $39.46m. The two are comparable in that they have a similarly sized loan book. If we add this figure onto the UDC cost structure, what would that do to the UDC operating margin on assets?

    FY2013: ($83.07-$39.46)/$2065.11 = 2.11%

    That is almost exactly the figure for the parent ANZ New Zealand and Westpac New Zealand! So looks like your hunch was right Macduffy. Add on the costs of operating a branch network and the operating margin on assets is right back in the ballpark that Heartland have set for FY2014.

    SNOOPY
    Last edited by Snoopy; 17-01-2014 at 04:46 PM.
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  3. #33
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    Hi Snoopy/

    Do your calculations factor in any transfer-priced amount that UDC pays to ANZ for services rendered via the latter's branch network?

  4. #34
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    Default UDC Underlying margin for FY2013

    Quote Originally Posted by macduffy View Post
    Hi Snoopy/

    Do your calculations factor in any transfer-priced amount that UDC pays to ANZ for services rendered via the latter's branch network?
    Macduffy, note 4 (expenses) on the UDC prospectus has an item as follows:

    'Fees paid to related parties' $9.715m

    This is further explained as 'Fees paid to ANZ NZ for information technology, property and other services all of which are charged on an arms length basis'.

    When I imposed by 'virtual branch structure' on UDC this would be expected to include the above. So by doing that and leaving the $9.715m fees to related parties in the accounts I have effectively charged for those services twice. So yes, a very good point you have brought up. I should return the double charging of those fees to the bottom line, and I can do so as follows:

    FY2013: ($83.07-$39.46+$9.72)/$2065.11 = 2.58%

    That is a bit more encouraging 'operating margin on end of year assets' as a target for Heartland to aim at. I do need to add a disclaimer here. ANZ wholly own UDC. So they have total control as to what costs are passed through to their subsidiary. If UDC were to fully split from ANZ, to become a real equivalent of Heartland, they would almost certainly incur extra costs for a new independent board, sharemarket listing fees and all the associated costs of being a small(er) business. So 2.58% as a return on the end of year loan book as measured by assets is very likely a stretch target for the likes of Heartland.

    SNOOPY
    Last edited by Snoopy; 31-12-2016 at 07:09 PM.
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  5. #35
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    Quote Originally Posted by belgarion View Post
    Snoopy, "operating" or "operating & one-off expensed developing cost"? Will it the same 70.3m next year?
    OK we are talking Heartland bank now? The selling and administrative expenses" of $70.347m as summarized in note 9 of the HNZ FY2013 annual report include a $7.7m RECL termination fee. This is unlikely to be repeated. So you might conclude that Heartland selling and administration fees might reduce to:

    $70.347m - $7.7m = $62.647m, plus an allowance for inflation of course.

    SNOOPY
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  6. #36
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    Default Profit vs Loan Book Size

    Today's homework from the UDC prospectus. I am trying to get a feel for the 'normal' level of business over the business cycle. All the information in the last 2013 prospectus relates to the post GFC era. But perhaps in today's financial environment that

    The profit before provision for income tax and impairment is given on page 33 of the prospectus, as part of a five year summary. Likewise the corresponding loans and advances, part of the assets of the balance sheet

    FY2009: $34.024m/ $1,829.156m= 1.86%
    FY2010: $45.012m/ $1,968.771m= 2.29%
    FY2011: $46.382m/ $1,948.522m= 2.38%
    FY2012: $58.476m/ $2,014.473m= 2.90%
    FY2013: $66.787m/ $2,065.117m= 3.23%

    By contrast the equivalent figures for Heartland are as follows:

    FY2012: $29.337m/ $2,078,276m= 1.41%
    FY2013: $36.540m/ $2,010,376m= 1.82%

    SNOOPY
    Last edited by Snoopy; 20-01-2014 at 02:55 PM.
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  7. #37
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    Quote Originally Posted by Snoopy View Post
    Today's homework from the UDC prospectus. I am trying to get a feel for the 'normal' level of business over the business cycle. All the information in the last 2013 prospectus relates to the post GFC era. But perhaps in today's financial environment that

    The profit before provision for income tax and impairment is given on page 33 of the prospectus, as part of a five year summary. Likewise the corresponding loans and advances, part of the assets of the balance sheet

    FY2009: $34.024m/ $1,829.156m= 1.86%
    FY2010: $45.012m/ $1,968.771m= 2.29%
    FY2011: $46.382m/ $1,948.522m= 2.38%
    FY2012: $58.476m/ $2,014.473m= 2.90%
    FY2013: $66.787m/ $2,065.117m= 3.23%

    By contrast the equivalent figures for Heartland are as follows:

    FY2012: $29.337m/ $2,078,276m= 1.41%
    FY2013: $36.540m/ $2,010,376m= 1.82%
    The above are raw figures as found in the respective annual report or prospectus. We do know that Heartland has branch structure to service, whereas UDC piggybacks on the ANZ network. That means the above numbers are not strictly an apples with apples comparison.

    We can adjust for this by adjusting the effects of an equivalent virtual ANZ imposed cost structure onto the equivalent Heartland profit. 'Fees paid to related parties', under explanatory note 4 'Expenses' represents fees paid to ANZ bank New Zealand for services supplied under an arms length basis [ $9.715m(2013) and $9.709m(2012) from p43 UDC prospectus 2013]. These have to be subtracted from operating expense difference to avoid double charging for the same services.

    IMO a comparison between UDC and HNZ is fair because they have very close to the same size loan book. Thus I assume they have very similar 'inherent costs' in their operating structure.
    The difference in selling and administration expenses (from Heartland AR2013 p21, and UDC prospectus 2013 p35), between the two entities is therefore:

    FY2012: $65.567m - ($30.950m - $9.709m) = $44.326m
    FY2013: $70.437m - ($30.877m - $9.715m ) = $49.275m

    So removing this equivalent 'branch cost structure' from the Heartland result gives

    FY2012: ($29.337m+$44.326m)/ $2,078,276m= 3.54%
    FY2013: ($36.540m+$49.275m)/ $2,010,376m= 4.27%

    By this measure, Heartland is already outperforming UDC on an underlying business basis

    SNOOPY
    Last edited by Snoopy; 20-01-2014 at 03:36 PM.
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  8. #38
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    Default Write Offs vs Loan Book Size

    Today I want to focus on the actual bad debt write offs in relation to the size of the loan book at the end of the year. Section 10 in the UDC 2013 prospectus is named "Provision for Credit Impairment on Loans and Advances". Bad debts actually written off were:

    FY2013: $12.399m
    FY2012: $10.164m

    I note in both instances these exceed the 'provision for loan impairment' stated on page 33, the 'Summary Financial Statement', which were $7.123m (FY2013) and $6.031m (FY2012). I am reading between the lines when I say the actual write offs probably reflect the worse times immediately following the GFC. With a more benign business environment going forwards we might expect future write offs to be smaller, trending towards the current year write off figure.

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

    FY2013: $12.399m/$2,065.117m = 0.600%
    FY2012: $10.164m/$2,014.473m = 0.505%

    For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. Note 10 details impaired asset expense as follows:

    FY2013: $22.527m
    FY2012: $5.642m

    Normalize these against the total finance receivables

    FY2013: $22.527m/ $2010.4m = 1.12%
    FY2012: $5.642m/ $2078.3m = 0.271%

    We know that last year was a particularly bad one for Heartland, regarding bad debts. Taken on a two year average performance though, the amount written off at UDC and Heartland was similar.

    SNOOPY
    Last edited by Snoopy; 21-01-2014 at 03:27 PM.
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  9. #39
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    Default UDC Credit Risk via Internal Risk Grading.

    Note 17d (page 53 UDC 2013 prospectus) lists the internal risk grading of the loan assets on a scale of 1 to 9. On this scale 1 is the lowest risk while 9 means a default. The grade 6 and below categories for EOY2013 add up as follows:

    $1,157.111m + $83.790m + $24.814m = $1,265.765m.

    These represents a fraction of the total loans outstanding as follows:

    $1,265.765m / $2,198.653m = 57.6% of total loan assets.

    Some impairment ($37.46m) has already been taken onto the book over the years. This impairment of $37.46m represents

    $37.46m / $1,265,765m = 2.96% of the Grade 6 (monitor) and below grade assets.

    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. 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' for Heartland EOY2013 add up as follows:

    $198.370mm + $18.034m + $21.518m + $27.761m = $265.683m.

    These represents a fraction of the total loans outstanding as follows:

    $265.683m / $1,068.531m = 24.9% of total Judgement loan assets.

    Some impairment ($15.96m) has already been taken onto the book over the years. This impairment of $15.96m represents

    $15.96m / $265.683m = 6.00% of the Grade 6 (monitor) and below grade assets.

    SNOOPY
    Last edited by Snoopy; 03-07-2018 at 05:00 PM.
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  10. #40
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    Default Industry Sector Risk, UDC vs Heartland

    Heartland are not so generous with their breakdown of sector business. So I will use the Heartland business categories, p36 Heartland AR2013 for comparison purposes. The UDC figures come from the 2013 prospectus Note 17c, page 53.

    HNZ UDC
    Agriculture Forestry & Fishing: $529.507m (22.3%) $374.264m (17.3%)
    Mining: $19.044m (0.8%) $5.224m (0.2%)
    Manufacturing: $79.915m (3.4%) $108.477m (5.0%)
    Finance & Insurance: $348.166m (14.7%) $100.994m (4.7%)
    Retail & Wholesale Trade: $232.776m (9.8%) $247.856m (11.5%)
    Households: $629.854m (26.5%) $443.089m (20.5%)
    Property & Business Services $320.198m (13.5%) $113.745m (5.3%)
    Transport & Storage: $25.267m (1.1%) $387.356m (17.9%)
    Other Services: $189.028m (8.0%) $380.188m (17.6%)

    Total for Heartland $2,373m (100%) , with the collectively impaired assets yet to be adjusted for.

    Total for UDC $2,161m (100%), with credit impairment already adjusted for.

    I am really surprised at the big difference between the two in 'Finance & Insurance'. However UDC has a category 'Construction' ($282.407m) which I grouped as 'other'. If this were included in 'finance & insurance' then the finance and insurance categories would be much more comparable, with UDC now having the higher percentage of funds in that area.

    Despite HNZ seemingly lightening their 'household' business, it is still substantially bigger than UDC on a percentage basis (not unexpected).

    The property and business services is also substantially greater at HNZ, although I presume this includes the non core property business that HNZ is exiting.

    Very different is transport and storage. UDC has nearly 18% of its business in this category verses only 1% for Heartland.

    SNOOPY
    Last edited by Snoopy; 07-12-2014 at 12:58 PM.
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