ANZ.NZX - Anyone holding?

[Snoopy]

UDC is ANZ's wholly owned finance subsidiary and probably a better measuring stick for some of those other NZ listed finance companies.

https://www.udc.co.nz/pdf/UDC_Prospectus.pdf

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.

The December 16th 2014 UDC Prospectus release, at last gets the details of what happened at UDC during FY2014 out into the public arena.

https://www.udc.co.nz/pdf/udc-prospectus-2014.pdf

The 'profit before tax' is listed as $71.768m (p35). But this includes a provision for credit impairment of $11.733m which I would remove to get the picture of ongoing operational performance. So I get EBT of $83.501m.

Now go to note 4 (p44) on interest expense. There is underlying interest over and above what is due to debenture holders of $16.783m.

So total underlying EBIT = $83.501m + $16.783m = $100.28m

Now turn to page 46 (note 8) and you will see total loans and advances of: $2,272.281m

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

$100.28m/$2272.281m = 4.41%

A significant improvement on FY2013 and it continues the improvement from a 3.87% margin in FY2012

SNOOPY

[Snoopy]

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 note 4). 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+$9.72)/$2065.11 = 2.58%

Note: The $9.72m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $39.46m 'extra operating expenses and would have been double charged if not added back.

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.

Time to normalise the UDC figures for 2014 so they can be compared more directly with the likes of Heartland Bank.

Heartland in FY2014 had selling and administration expenses of $64.739m (Heartland FY2014 report 'Selling & Administration Expenses', note 11). UDC had total operating expenses of $31.306m (UDC prospectus note 4). That is a difference of $33.433m. The two are comparable in that they have a similarly sized loan book (UDC:$2,272.081m, Heartland $2,607.393m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin on assets?

FY2014: ($100.28-$33.433+ $9.79)/$2,272.08 = 3.37%

Note: The $9.79m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $33.433m 'extra operating expenses and would have been double charged if not added back

This calculation shows the underlying margin at UDC to be significantly improved from FY2013's 2.58%.

SNOOPY

[Snoopy]

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.

Note 11 of the HNZ Annual Report for FY2014 shows selling and administration fees of $64.739m. This is an increase of 3.3% from FY2013 on an underlying basis.

SNOOPY

[Snoopy]

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%

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%

Reference for data (UDC): p33 of 2014 prospectus (profit, loans and advances)
Reference for data (Heartland): AR2014 Statement of Comprehensive Income Operating profit, Statements of Financial Position)

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%

Reference for data (UDC): p33 of 2014 prospectus (profit, loans and advances)
Reference for data (Heartland): AR2014 Statement of Comprehensive Income Operating profit, Statements of Financial Position)

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 UDC prospectus 'Expenses' represents fees paid to ANZ bank New Zealand for services supplied under an arms length basis [ $9.979m(2014) and $9.870m(2013) from p44 UDC prospectus 2014]. 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 AR2014 'Statements of Comprehensive Income'), and UDC (prospectus 2014 p35), between the two entities is therefore:

FY2013: $70.347m - ($30.887m - $9.870m ) = $49.330m
FY2014: $64.739m - ($31.306m - $9.979m) = $43.412m

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

FY2013: ($36.540m+$49.330m)/ $2,010,376m= 4.27%
FY2014: ($57.416m+$43.412m)/ $2,607,393m= 4.88%

By this measure, Heartland is still outperforming UDC on an underlying business basis. However the relative improvement year to year:

UDC: a gain from a 3.23% margin to a 3.68% margin is a 13.9% lift.
Heartland: a gain from a 4.27% margin to a 4.88% margin is a 14.2% lift.

The improvement is very similar.

SNOOPY

[Snoopy]

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.

Updating 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 2014 prospectus is named "Provision for Credit Impairment on Loans and Advances". Bad debts actually written off are compared against the 'provision for loan impairment' stated on page 33, the 'Summary Financial Statement', which were $7.123m (FY2013) and $6.031m (FY2012).

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

"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."

I wrote the above in relation to the FY2013 results. Looks like I was wrong though. Write offs are getting larger, back up towards GFC levels!

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%

But it doesn't change the interpretation. Annual write offs at UDC are getting bigger in relation to the size of the loan book as well!

For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. Note 12 (AR2014) details impaired asset expense as follows:

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

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%

We know that 2014 year was a particularly bad one for Heartland, regarding bad debts. But look how Heartland have bounced back, relative to UDC in FY2014.

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

SNOOPY

[Snoopy]

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.

Note 17d (page 54 UDC 2014 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 EOY2014 add up as follows:

$811,700m + $92,366m + $34,833m = $938,899m.

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

$938,899m / $2,375.936m = 39.5% of total loan assets.

Some impairment ($31,805m) has already been taken onto the book over the years. This impairment of $31,805m represents

$31,805m / $938,899m = 3.38% 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 EOY2014 add up as follows:

$115,776m + $14,833m + $13,520m + $3,412m = $147,541m.

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

$147,541m / $979,354m = 15.1% of total Judgement loan assets.


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 ($6,999m) has already been taken onto the book over the years. Add to this a reverse mortgage fair value adjustment of $8.000m This total impairment of $14.999m represents

$14.999m / $147.596m = 10.1% of the Grade 6 (monitor) and below grade assets.

SNOOPY

[Snoopy]

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.

I am using the Heartland business categories, Table 37c Heartland AR2014 for comparison purposes. The UDC figures come from the 2014 prospectus Note 17c, page 54.

	HNZ	UDC
Agriculture Forestry & Fishing:	$491.321m (16.90%)	$445.299m (19.0%)
Mining:	$11.148m (0.38%)	$11.000m (0.5%)
Manufacturing:	$77.321m (2.66%)	$90.962m (3.9%)
Finance & Insurance:	$291.223m (10.02%)	$76.220m (3.3%)
Retail & Wholesale Trade:	$251.903m (8.67%)	$277.662m (11.8%)
Households:	$1,313.977m (45.20%)	$510.484m (21.8%)
Property & Business Services	$330.860m (11.38%)	$120.881m (5.2%)
Transport & Storage:	$15.873m (0.55%)	$412.633m (17.6%)
Other Services:	$123.070m (4.23%)	$398.984m (17.0%)

Total for Heartland $2,906.6m (100%) , with the collectively impaired assets yet to be adjusted for. This equates to a loan book YOY growth of 22.6%.

Total for UDC $2,344.1m (100%), with credit impairment already adjusted for. This equates to a loan book YOY growth of 8.5%.

So how good a measuring stick is UDC for Heartland? Heartland has grown a lot more with the purchase of the Seniors Money International home equity release business during the year. These are likely to be classified as 'household' loans. That accounts for the big jump in household category loans (from 26.5% to 45.2%) of the total Heartland loan book. It looks like it has been lumped in with the residual mortgage business for risk category classiication purposes. Total 'household' loans are substantially higher at Heartland.

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

'Construction' ($340.228m) 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.

SNOOPY

[noodles]

Aussie banks misbehaving
http://pickeringpost.com/story/bastard-banks/4237

[Snoopy]

UDC and ANZ New Zealand have the same balance date. So it is legitimate to work out the distribution of loans on their respective books using 30th September end of year data. First I need to slightly rearrange the above categories so that they correspond to those listed in the December 2013 UDC prospectus. Then I need to subtract the UDC equivalent figures (page 53, December 2013 prospectus) to get the underlying ANZ bank figure.

	All ANZ.NZ		UDC		Underlying ANZ.NZ
Agriculture forestry, fishing and mining:	$20,674m	(14.3%)	$379m	(17.5%)	$20,295m	(14.3%)
Business and property services:	$11,334m	(7.9%)	$114m	(5.3%)	$11,220m	(7.9%)
Construction:	$1,748m	(1.2%)	$282m	(13.0%)	$1,466m	(1.0%)
Entertainment, leisure and tourism:	$1,389m	(1.0%)	$19m	(0.9%)	$1,370m	(1.0%)
Finance and insurance:	$18,412m	(12.8%)	$101m	(4.7%)	$18,311m	(12.9%)
Government and local authority:	$9,910m	(6.9%)	$4m	(0.2%)	$9,906m	(7.0%)
Manufacturing:	$5,051m	(3.5%)	$108m	(5.0%)	$4,943m	(3.5%)
Personal & Other lending:	$68,069m	(47.2%)	$517m	(23.9%)	$67,552m	(47.5%)
Retail and Wholesale:	$5,563m	(3.9%)	$248m	(11.5%)	$5,315m	(3.7%)
Transport and storage:	$2,147m	(1.5%)	$387m	(17.9%)	$1,760m	(1.2%)
Total:	$144,315m	(100%)	$2,161m	(100%)	$142,514m	(100%)

UDC and ANZ New Zealand have the same balance date. So it is legitimate to work out the distribution of loans on their respective books using 30th September end of year data. First I need to slightly rearrange the ANZ (NZ) categories (ANZ September 30th 2014 Bank Disclosure Statement, p48) so that they correspond to those listed in the December 2014 UDC prospectus. Then I need to subtract the UDC equivalent figures (page 54, December 2014 prospectus) to get the underlying ANZ bank figure. The results are below:

	All ANZ.NZ		UDC		Underlying ANZ.NZ
Agriculture forestry, fishing and mining:	$20,860m	(13.4%)	$456m	(19.5%)	$20,404m	(13.3%)
Business and property services:	$12,061m	(7.8%)	$121m	(5.2%)	$11,940m	(7.8%)
Construction:	$2,154m	(1.4%)	$340m	(14.5%)	$1,814m	(1.2%)
Entertainment, leisure and tourism:	$1,294m	(0.8%)	$11m	(0.5%)	$1,283m	(0.8%)
Finance and insurance:	$20,254m	(13.0%)	$76m	(3.3%)	$20,178m	(13.2%)
Government and local authority:	$11,363m	(7.3%)	$3m	(0.1%)	$11,360m	(7.4%)
Manufacturing:	$5,312m	(3.4%)	$91m	(3.9%)	$5,221m	(3.4%)
Personal & Other lending:	$74,191m	(47.7%)	$555m	(23.7%)	$73,636m	(48.1%)
Retail and Wholesale:	$5,721m	(3.7%)	$278m	(11.8%)	$5,443m	(3.6%)
Transport and storage:	$2,264m	(1.5%)	$412m	(17.6%)	$1,851m	(1.2%)
Total:	$155,474m	(100%)	$2,344m	(100%)	$153,130m	(100%)

We have to remember that UDC is roughly equivalent to Heartland in size. Heartland is an NZX top 50 company. So it is quite a surprise to me when UDC are removed from the New Zealand division of ANZ (which in itself is only a fraction of the total ANZ) and the result is not much different. This highlights what an extremely large company just the New Zealand division of ANZ has become in its own right.

In a slight change to funding, ANZ has strengthed the equity position of UDC with shareholders funds now supporting 17% of the loan book, up from 15% in FY2013. Consumately the debenture funding from the public has decreased from 70% to 68% (p8 UDC prospectus for 2013 and 2014).

SNOOPY