HGH - Heartland Group Holdings

[Beagle]

This can't be right. They have repeatedly told shareholders they want to be known as the Maori employer of choice and told us ad nauseum about their multitude of cultural sensitivity and inclusiveness programs and all the time while the CEO makes sure he is extremely well paid for a modest sized bank. Surely the employees are not paying for all this politically correct nonsense ?

[iceman]

This can't be right. They have repeatedly told shareholders they want to be known as the Maori employer of choice and told us ad nauseum about their multitude of cultural sensitivity and inclusiveness programs and all the time while the CEO makes sure he is extremely well paid for a modest sized bank. Surely the employees are not paying for all this politically correct nonsense ?

Do you reckon they may take this to the Waitangi Tribunal rather than the Employment Tribunal

[Cyclical]

I think I can get that net interest margin up a bit Cyclical. A home loan has an RWA (Risk Weightings Adjustment) as low as 35%. That means the loan capital to back up a 35% RWA $100,000 mortgage is not $15,000, but only 0.35 x $15,000 = $5,250. So the bank's cost of 'income in' verses 'funding' on that loan now look like this:

At today’s rates:
Loan Amount	$100,000.00	1.99%	$1,990.00
Funding Sources:
Term Deposit	$5,250.00	1.05%	$55.13
RBNZ	$94,750.00	0.25%	$236.88
Total Loan Cost			$292.01
		NIM ($)	$1,697.99
		NIM (%)	1.70%

That is of course is just the interest charge bit of the NIM. Normally on top of that there are application fees, approval fees, variation fees etc. Looking on the Heartland website for 'mortgage fees', this particular 1.99% offer looks clean (although that 20% deposit requirement might knock out some applicants). However, I think the key point here is that historical Heartland's 4% net interest margin is across the whole loan book. In some loan categories, the NIM would be less than 4%. Furthermore the 'net interest margin' is only one input factor into the 'net profit margin'. It might be worthwhile settling for a lower NIM if it meant less follow up was required to manage payments due, which implies a positive effect on the 'net profit margin'.

SNOOPY

Yep, clear as mud now Snoopy. I think I may have been a bit too focused on the home loan side of things, probably off the back of this paragraph below, as opposed to the entire loan book.

I am trying to show a non-proportional effect that reducing interest rates has on bank loan profits (and how Heartland can still make a profit with loan mortgage rates at 1.99%). This is made possible by retaining the existing 3.99% margin on the non bank backed part of the loan that is facilitated by the Reserve Bank of NZ being supportive of such lending.

IMO there isn't 3-4% margin home loan lending for the sub-set of borrowers with 20%+ equity.

What there is however, is potentially strong returns on the equity HGH needs to put in to back these loans. As Snoopy notes, they are a 5% not 15% equity product. If HGH lends $100m, and get a 1 to 1.5% net margin, its earning $1-1.5m/yr in margins from the $100m lent. With only $5m of equity allocated to the loans, the $1 to $1.5m made is now generating a 20% to 30% return on equity.

Across 2015 to 2020 HGH had a net surplus/equity ratio between 10% and 11%. Operational expenses and tax will lower the returns noted above and any fees charged will increase it. After factoring these in, the lending would look to have the potential to increase, rather than lower surplus/equity ratio - assuming you have an operationally efficient process behind the scenes. This is inherently possible from a web-based application process to borrowers with a low risk profile.

If done properly, lending at 2-2.5% still has the potential to be value creating relative to other lending alternatives. If done on any scale, it would however lower the NIM and lower impairment levels.

Yeah Scrunch, agreed. A bit like retail isn't it, some get hung up on margin, but in this business, margin (NIM) is probably going to continue to track down, so they need to accept that and counter with greater scale, which is what they are gunning for with the 1.99% offer I guess...and is something the RBNZ and consequently the property market seem quite happy to accommodate atm. What could possibly go wrong?

[Scrunch]

Yep, clear as mud now Snoopy. I think I may have been a bit too focused on the home loan side of things, probably off the back of this paragraph below, as opposed to the entire loan book.





Yeah Scrunch, agreed. A bit like retail isn't it, some get hung up on margin, but in this business, margin (NIM) is probably going to continue to track down, so they need to accept that and counter with greater scale, which is what they are gunning for with the 1.99% offer I guess...and is something the RBNZ and consequently the property market seem quite happy to accommodate atm. What could possibly go wrong?

It all depends whether the boffins doing the sums on the pricing have a good handle on the associated operating costs. If they do and growth rolls in, it going to be profitable growth. At a certain level additional equity may be needed to support that growth. Hgh would then have a choice, slow the rate of growth or raise some equity. Neither is really a big problem.

[KJMLimited]

On a completely different issue, it looks like the Harmoney IPO is good to go. Pricing is confirmed with cornerstone investors in place.

[Beagle]

Do you reckon they may take this to the Waitangi Tribunal rather than the Employment Tribunal

That's gold right there....post of the week lol

Good if they float off that harmoney...I don't see ownership of Harmoney as being a very harmonious experience going forward....frankly I have never liked that part of HGH's business. Loaning money to Muppets on an unsecured basis never ends well no matter what interest rate you try and charge them.

[KJMLimited]

Who said that Heartland are selling their Harmoney shares? There's no announcement on that so you might still be stuck with them.

[Snoopy]

http://business.scoop.co.nz/2020/10/...low-pay-rates/

The market doesn't seem too phased by it ATM.

This whole 'bank' thing is starting to rebound on Heartland. Workers now expect to be paid as if they were working in a real bank, even though all the day to day banking functions for Heartland have been outsourced to Westpac.

Even Forsyth Barr have been taken in with their initial investment report on Heartland. ForBarr highlight that 'Heartland Bank' has a loan book amounting to just 1% of bank assets verses the big four Australian's 89%. ForBarr highlight the higher funding costs of Heartland verses the 'big four', - notwithstanding that, despite this, Heartland still easily beats the Aussies's on 'Net Interest Margin'! ForBarr then make the leap that high interest margin means 'high risk' and that means 'big loan right offs' in this Covid-19 environment (not forecast by HGH themselves I might add).

If instead ForBarr saw 'Heartland Bank' as the finance company it is, they would see that Heartland is not a minnow but a big fish in the finance company pond. ForBarr may yet be right about big write offs to come not fully foreseen by Jeff, who has admitted that he is guessing, like everybody else, as to what the real downstream effect of Covid-19 on Heartland will be. Yet even Forbarr is predicting the NPAT will be $80.9m by FY2023 (p1 ForBarr report), above the FY2020 operational result of $78.9m (without the Covid-19 overlay). As a long term investor I am prepared to look through this initial Covid-19 shock and look at what I expect to see coming out the other side. I see a strong finance company, with a strong Reverse Mortgage market share (where else are the oldies going to get their money now their term deposit returns have collapsed) and a strong presence in a resurgent motor vehicle market (remember the NZ motor vehicle fleet was seriously aging before Covid-19 and the vehicle replacement tailwind still exists).

Forbarr are sceptical that the new long term funding from the northern hemisphere at an estimated 3.5% to 4% will deflate Heartland's margins. The real issue though is that this new funding much better matches the timeframe of the reverse mortgages the cash has been taken in to fund. So I see this as serious de-risking of the reverse mortgage business cashflow. That means a reduced 'capital call' demand on HGH shareholders into the future.

Rather than being crushed by the big banks, I can see Heartland gaining market share from the market that C class lenders have had to abandon as they collapse. The need for finance companies that trade in niche markets not favoured by the big banks will not go away. By FY2023, if not before, I see Heartland not only as a Covid-19 survivor, but a Covid-19 winner.

SNOOPY

[Cyclical]

Good if they float off that harmoney...I don't see ownership of Harmoney as being a very harmonious experience going forward....frankly I have never liked that part of HGH's business. Loaning money to Muppets on an unsecured basis never ends well no matter what interest rate you try and charge them.

This referring to Harmoney clients as Muppets is pretty harsh. Why are you labelling people as such? Maybe they're a bit sharper than you think, perhaps they've done the sums and figured that if they need a short term loan it's not a bad place to go, with potentially competitive interest rates if you've got the right kind of credit rating, a quick answer, relatively instantaneous access to the funds and the ability to pay it back as soon as you like without penalty, all without putting security at risk apparently.

As for Heartland's stake, I don't have a problem with them doing some small diversification into that market. I've got every faith in the boffins at HGH to do the risk/reward analysis and draw the conclusion that it complements their business. It may appear slightly out of their comfort zone and it could cause some pain in the next year or two, but nothing ventured, nothing gained. And with the pending public listing, they've got an out if they so desire, likely at a tidy capital gain to boot.

Harmoney themselves do their due diligence on their lending, delving into your bank accounts and credit history and who knows what else, plus they probably limit their exposure to the complete "Muppet" end of the spectrum to ensure the risk is suitably hedged. Certainly there were plenty of happy lenders in the ST peer to peer lending forum when it was possible...

[Beagle]

Agree to disagree on this one mate. Unsecured lending is incredibly risky in a recession and extremely unlikely to be profitable. That's my view on it but fill ya boots if you want more exposure. https://events.miraqle.com/FormBuild...Prospectus.pdf Prospectus just released today. I hope HGH are selling part of their stake.

Snoopy me ol Beagle mate. What's going on. We have a Beagle on the marketing team but the share price is going down
https://www.heartland.co.nz/