HGH - Heartland Group Holdings

[percy]

The case was based on 39 MTF-Sportzone loans written between 2006 and 2008.
So the industry has watched this case with interest for a good number of years..
What has not been qualified is whether this is where MTF's liability ends,or will CCC chase them for other loans written during this period.
The judgement affects all lenders,whether they are banks or finance companies.Level playing fields for everyone.
I guess banks have had to adapt to changing regulations, since the first bank was formed in 1327.
689 years of change???

[Grunter]

My read of the Supreme court's decision is that finance companies and banks are going to have to be extremely careful going forward that they can justify their loan application fees based on the cost of the process, not as a separate revenue stream. The supreme court has effectively said interest charges are where banks and finance companies should make their profits not loan application fees. I think we all know that with standardised loan application procedures and credit and employment checking processes the banks and finance companies have been doing very nicely thank you very much out of loan application fees in the past. Harmoney has had to modify there's recently, tip of the iceberg in terms of what's coming ? The Supreme court's decision is very much focused on protecting the consumer and forcing finance companies to make their profit out of the interest rate as opposed to currying the real cost of credit through expensive loan application fees and therefore enhances the transparency of the cost of the loan from the consumers viewpoint. Many consumers will cross shop to get the best interest rate.

Greater transparency in my opinion reduces the opportunity to make unusually high profits, especially from small loans. Is it a coincidence that the SP is down the day after the Supreme court's decision or are we in a slightly different credit environment now where profits on loans going forward could be slightly lower ?...you folks be the judge.

I think it's more due to the environment signalling consumer interest rate decreases are becoming more likely - Kiwisaver announced a 3.99% mortgage, ASB 4.10% etc etc. This will further squeeze margins lenders earn.

[Snoopy]

Thanks for that Snoopy.

We will have to disagree on the validity of the calculations you made and on the conclusions you drew.

Best Wishes
Paper Tiger

PT, I have reviewed my calculation. The Seniors acquisition, early in CY2014, was the last time Heartland issued a serious number of new shares to fund an acquisition. So I think it is stilll the best guide we have to that window in management's mind as to what constitutes 'sufficient shareholder capital' for Heartland to keep on the books.

However, this Senior's transaction was before the 14th January 2015 easing in reserve bank capital requirements. From that date Heartland had their 'introductory' 12% of loan book requirement reduced to:

(a)the Total capital ratio of the banking group is not less than 8% (10.5% incl 2.5% buffer ratio);
(b)the Tier 1 capital ratio of the banking group is not less than 6% (8.5% incl 2.5% buffer ratio);
(c)the Common Equity Tier 1 capital ratio of the banking group is not less than 4.5% (7.0% incl 2.5% buffer ratio).

Prior to 14th January 2015, there was no separate 'buffer ratio' requirement for Heartland.

The most streched covenant that Heartland currently must comply with is (a). This means that Heartland have been given an extra 1.5% (12% - 10.5% = 1.5%) "wriggle room" to remain in compliance with their debt covenants. IOW while my calculation I believe was correct at the time it was done, I now need to revise it becasue I am using it as a forecasting tool for today. Specifically I need to take into account the lesser amount of capital that the reserve bank now dictates Heartland must hold.

SNOOPY

[Baa_Baa]

The folks on the Harmoney thread are grappling with a few issues, recently the fraud case and now an unexpected significant hike in fees. Worth a read. Not sure whether this is weighing on Heartland, it might be just small beer.

[Snow Leopard]

PT, I have reviewed my calculation. The Seniors acquisition, early in CY2014, was the last time Heartland issued a serious number of new shares to fund an acquisition. So I think it is stilll the best guide we have to that window in management's mind as to what constitutes 'sufficient shareholder capital' for Heartland to keep on the books.

However, this Senior's transaction was before the 14th January 2015 easing in reserve bank capital requirements. From that date Heartland had their 'introductory' 12% of loan book requirement reduced to:

(a)the Total capital ratio of the banking group is not less than 8% (10.5% incl 2.5% buffer ratio);
(b)the Tier 1 capital ratio of the banking group is not less than 6% (8.5% incl 2.5% buffer ratio);
(c)the Common Equity Tier 1 capital ratio of the banking group is not less than 4.5% (7.0% incl 2.5% buffer ratio).

Prior to 14th January 2015, there was no separate 'buffer ratio' requirement for Heartland.

The most streched covenant that Heartland currently must comply with is (a). This means that Heartland have been given an extra 1.5% (12% - 10.5% = 1.5%) "wriggle room" to remain in compliance with their debt covenants. IOW while my calculation I believe was correct at the time it was done, I now need to revise it becasue I am using it as a forecasting tool for today. Specifically I need to take into account the lesser amount of capital that the reserve bank now dictates Heartland must hold.

SNOOPY

Surely the answer to the question what "window in management's mind as to what constitutes 'sufficient shareholder capital'" is answered simply by reading the capital adequacy section from the disclosure statements?

Or am I missing the point here?

Best Wishes
Paper Tiger

PS With regard to the Post Title: See this video clip from the original "The Italian Job" movie, which I watched last night.

[Snow Leopard]

ANZ Half Year Disclosure Statement is out and on page 15 their current Capital Adequacy Ratios are down to:

12.8% for the group (appears to be the one that matters) and
11.8% for the bank.


Best Wishes
Paper Tiger

[777]

This is the Heartland thread - keep it on topic

Bit harsh. Comparisons are justified.

[Snoopy]

Surely the answer to the question what "window in management's mind as to what constitutes 'sufficient shareholder capital'" is answered simply by reading the capital adequacy section from the disclosure statements?

Or am I missing the point here?

What you are telling me is part of the picture PT. But no bank would be foolish enough to run their actual loan to equity ratio as low as the minimum reserve bank requirements. Otherwise a customer like young Percy could go into Heartland to withdraw $100 to buy a bunch of flowers for his good wife. But he would be kept waiting until Joe Driver from the coin arcade, puts in the morning coin take to make the balancing $100 deposit required to avoid tipping Heartland into administration!

The question is, what level of buffer over and above the reserve bank requirements do management regard as acceptable? To answer that you would have to

1/ Do a 'scenario analysis' based on less likely withdrawal and deposit scenarios.
2/ Look at the asset loan base and assess the prospect of what quantum of loans going bad is required to degrade company equity to unacceptable levels.

Shareholders are not in possession of enough information to answer those questions. But bank management are. So I say the best way to look out for what equity to loan ratio is 'acceptable' is to look at what Heartland's chief bank manager does in practice. And the window of buying Seniors was one opportunity to do just that.

Now going back to the raw data we have from that transaction:

-----

'Total equity' (from the balance sheet) needed to fund the rest of the Heartland business is:
$382.5m - $28.3m = $354.2m

The size of the loan book at balance date was $2,077.0m

So the equity to loan book ratio for the rest of the business, as judged acceptable under the watchful eye of Mr Wheeler, was:

$354.2m/$2,077m = 17.0%

------

However, that transaction was under the old equity to loan book rules (12% ratio required). The current limiting factor is a 10.5% requirement.

So the lesser 'management acceptable' equity required to manage the same sized loan book today would be:

$354.2 x ( 10.5/12 ) = $309.9m

and the adjusted 'management acceptable' equity to loan portfolio value ratio is now:

$309.9m / $2,077m = 14.9%

Note: This figure includes an extra margin of 14.9 -10.5 = 4.4 percenatge points above the minimum reserve bank guidelines.

SNOOPY

[Snoopy]

The adjusted 'management acceptable' equity to loan portfolio value ratio is now:

$309.9m / $2,077m = 14.9%

Note: This figure includes an extra margin of 14.9 -10.5 = 4.4 percenatge points above the minimum reserve bank guidelines.

Refer to the interim report of FY2016 for the latest audited Heartland information. Time has rolled on and the total loan portfolio at the latest balance date (31-12-2015) was: $2,928.621m (Interim Statement of Financial Position)

Home equity release loans, which apparently have separate capital requirements total $422.706m (note 18c).

So the loan portfolio, less home equity release loans, was:

$2,928.621m - $422.706m = $2,505.915m

Balance date shareholder equity was: $485.688m
(Explanation: I know that assessable Tier capital is reduced to $428.539m as outlined in note 19a. But this is a recent report disclosure. So I need to use the 'slightly incorrect' earlier quoted higher number to maintain compatability with my previous calculation).

So firstly, I can calculate the 'equity' to support the Reverse Mortgage Business as:

0.114 x $422.706m = $48.188m

And that measn the equity left to support the rest of the business is:

$485.688m - $48.188m = $437.5m

So the equity to loan book ratio, with the reverse mortgage business taken out of the equation, at balance date was:

$437.5m / $2,505.915m = 17.4%

Now let's imagine for a moment that Heartland only had share capital of $373.4m

$373.4m / $2,505.915m = 14.9% (the same value that mangement were comfortable with before).

By this measure then, Heartland currently has:

$437.5m - $373.4m = $64.1m of 'surplus capital' on the books.

The total of individually impaired and restructured assets still on the books amount to just over $30m (note 6). So if the impairment people have done their job correctly, you would have to conclude that Heartland, relative to their position of a year ago, is getting stronger in terms of balance sheet strength. And in absolute terms, if you take management's past judgement as 'reasonable', they are now in 'more than reasonable' shape.

SNOOPY

[percy]

So HBL have $64.1mil of "surplus capital" on the books.
I am not surprised,as they said they had "surplus capital."
Yet all the Australian Banks have been raising capital.
Big difference,