ANZ.NZX - Anyone holding?

[winner69]

only 240m? how much did they make 2.9b? so less than 1% 'actual' impact, yet the share price of ANZ fell how much this month? nearly 15% or something? (mostly due to the budget tax I believe)

Calculator / abacus need new batteries t_j?

[winner69]

Customers will cover this - higher mortgage rates and lower deposit rates etc

And the average Aussie thinks the banks are getting their comeuppance - when they themselves are the victims

[trader_jackson]

might want to refresh your calculus lessons ...

240 m would be roughly 8.3% of 2.9 b, quite a significant take.

Yes, my apologies, you are quite right... so this accounts for about half the fall, where was the other half?

[Bjauck]

Yes, my apologies, you are quite right... so this accounts for about half the fall, where was the other half? New Levy + Australia-wide Banking downgrade + Australian Housing debt = lots of negative vibes

S&P cites risk of sharp correction in property prices as it cuts 23 lenders' ratings
http://www.smh.com.au/business/banking-and-finance/sp-cites-risk-of-sharp-correction-in-property-prices-as-it-cuts-23-banks-ratings-20170522-gwa6pd.html

Moody's say Australian bank performance steady, but latent risks rising in household sector
http://www.reuters.com/article/brief-moodys-say-australian-bank-perform-idUSFWN1IJ00L

Fitch: Australia Budget Negative for Banks but Impact Manageable
http://www.reuters.com/article/fitch-australia-budget-negative-for-bank-idUSFit998955

[winner69]

Yes, my apologies, you are quite right... so this accounts for about half the fall, where was the other half?

The wall of worry - impending disaster from interest only loans, the aussie subprime soon to happen

[macduffy]

ANZ on NZX down 3c today, up 3c where it really matters, on ASX. Dare one suggest (hope?) that the downgrades have now been largely digested by the markets?

:mellow:

[BlackPeter]

ANZ on NZX down 3c today, up 3c where it really matters, on ASX. Dare one suggest (hope?) that the downgrades have now been largely digested by the markets?

:mellow:

I wouldn't know whether the downgrades have been digested by the markets or not ... but the old wisdom is to be careful with a stock below the MA200. I sold out of my ANZ shares and plan to enjoy the spectacle from the sidelines ...

[winner69]

only 240m? how much did they make 2.9b? so less than 1% 'actual' impact, yet the share price of ANZ fell how much this month? nearly 15% or something? (mostly due to the budget tax I believe)
(Made a mistake... actually 8 ish %)

The $2.9b was for H1 only - the $240m levy is annual

So much less than the corrected 8% impact

[peat]

yeh, a 5.7 billion annual profit so an estimated 245m levy is pretty insignificant. especially as folks say, it will be passed on to customers.
its all those assets that are the problem huh? $1,154b of them according to a back of the envelope calculation. return on those is pretty abysmal. wouldnt take much of a % loss in those to smash that profit.

discl no holding.

[peat]

Statement to shareholders https://www.nzx.com/files/attachments/258875.pdf

ends with

ANZ is well positioned to continue delivering for shareholders and all our other stakeholders. :p

[Bjauck]

Statement to shareholders https://www.nzx.com/files/attachments/258875.pdf

ends with

ANZ is well positioned to continue delivering for shareholders and all our other stakeholders. :p Sounds like..."keep calm and bank on"

[macduffy]

Statement to shareholders https://www.nzx.com/files/attachments/258875.pdf

ends with

ANZ is well positioned to continue delivering for shareholders and all our other stakeholders. :p

"Well positioned". Does percy write these for ANZ?

;)

[lawson]

Thursday 27th July

I think it could be ahead of schedule. I am waiting to buy when it does hit $28 :)

[huxley]

Anyone know the key dates for the DRP?

[huxley]

Never-mind..

"The Acquisition Price used in determining the number of shares to be provided under the DRP and BOP in connection with the 2017 Interim Dividend is the arithmetic average of the daily volume weighted average sale price of all fully paid ANZ ordinary shares sold on the ASX during the ten trading days commencing 12 May 2017, and then rounded to the nearest whole cent but if the fraction is one half of a cent the amount is to be rounded down to the nearest whole cent. In order to be effective, election notices from ordinary shareholders wanting to commence, cease or vary their participation in the DRP or BOP for the 2017 Interim Dividend must be received by ANZ's Share Registrar by 5.00 pm (Australian Eastern Standard Time) on 10 May 2017."
















Pay date
Record date
Dividend (AUD)
Australian Franking level
NZ Imputation
Credits per
Ordinary Share
(NZD)[1] (https://www.shareholder.anz.com/dividends#fn:4)
DRP price
(AUD)




03/07/2017
09/05/2017
80¢
Fully franked @ 30%
NZ 9 cents
$28.80

[peat]

I think it could be ahead of schedule. I am waiting to buy when it does hit $28 :)

yes the train is certainly moving quickly to the destination

personally, I would wait for a reversal pattern but thats FA vs TA for ya!

[fish]

Never-mind..

"The Acquisition Price used in determining the number of shares to be provided under the DRP and BOP in connection with the 2017 Interim Dividend is the arithmetic average of the daily volume weighted average sale price of all fully paid ANZ ordinary shares sold on the ASX during the ten trading days commencing 12 May 2017, and then rounded to the nearest whole cent but if the fraction is one half of a cent the amount is to be rounded down to the nearest whole cent. In order to be effective, election notices from ordinary shareholders wanting to commence, cease or vary their participation in the DRP or BOP for the 2017 Interim Dividend must be received by ANZ's Share Registrar by 5.00 pm (Australian Eastern Standard Time) on 10 May 2017."
















Pay date
Record date
Dividend (AUD)
Australian Franking level
NZ Imputation
Credits per
Ordinary Share
(NZD)[1] (https://www.shareholder.anz.com/dividends#fn:4)
DRP price
(AUD)




03/07/2017
09/05/2017
80¢
Fully franked @ 30%
NZ 9 cents
$28.80



It would be much appreciated if you could explain the best ways for a potential nz investor to buy into ANZ.
I am totally ignorant but am considering buying-would be my first venture into an overseas company and am hesitant because I perceive the lack of imputation credits disadvantage NZ investors

[BlackPeter]

It would be much appreciated if you could explain the best ways for a potential nz investor to buy into ANZ.
I am totally ignorant but am considering buying-would be my first venture into an overseas company and am hesitant because I perceive the lack of imputation credits disadvantage NZ investors

You are right - while ANZ offers some imputation credits (for their NZ earnings), it is just crumbs compared to many other NZ based business.

However - at the end it is the bottom line which counts, and if you get the timing right, than ANZ can be a nice little earner. However - not really a hold and forget share.

Easiest way to buy them in NZ is on the NZX - they are the same shares as the Australian ones ... Only disadvantage I see (compared to ASX) - lower volumes (i.e. if you want to sell them really fast (and others want that, too), than the NZX might be a less suitable place.

Discl: don't hold at current.

[peat]

I said to a colleague the other day, "we"ll see 28"

So when do you think that will be, peat?

(ANZ at $31.60 today.)



:mellow:


Thursday 27th July




Despite the 27th July not being here just I am prepared to concede that we wont see $28.00 , however we did see $28.xx :p

[Bobdn]

Happy it looks like I won't have to stump up cash as part of some capital raise. I don't have the cash at the moment!

[macduffy]

Despite the 27th July not being here just I am prepared to concede that we wont see $28.00 , however we did see $28.xx :p

It went very close though, peat!

Today's "relief from capital-raising" rally has seen the shareprice in Aus up 4%! As usual, markets have done their over-reaction thing, IMO - but I'm not complaining!

[Bobdn]

Will it be three days in a row for jumbo increases? Hope so, like to head into the weekend on a high.

[dabsman]

I was reading in the SMH and someone said there could be the use of improved DRP to keep more capital in the company. So if you elect into the DRP you get a bigger discount on the shares you pick up to avoid paying these funds out to increase the capital held. I'd love this but I'm not sure my understanding is correct? Happy holder and DRP participant in any regards

[macduffy]

I was reading in the SMH and someone said there could be the use of improved DRP to keep more capital in the company. So if you elect into the DRP you get a bigger discount on the shares you pick up to avoid paying these funds out to increase the capital held. I'd love this but I'm not sure my understanding is correct? Happy holder and DRP participant in any regards

The thinking here is that the banks won't need to raise additional capital through share issues but will be able to gradually increase levels, in line with gradually rising required ratios, through retained profits and DRP's, if necessary by offering discounts on the DRP price. Most DRP plans allow directors some discretion to apply, and to vary, such a discount at their discretion.

[winner69]

UDC sale unlikely now

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANB/312300/272218.pdf


Probably can't blame Jacinda

[macduffy]

UDC sale unlikely now

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANB/312300/272218.pdf


Probably can't blame Jacinda

Only to the extent that the OIO is now under notice to take a more thorough look at such applications. From ANZ's viewpoint it's more of an irritant to their programme to divest activities outside their core interests. I note that it doesn't impact on the planned $1.5b share buyback.

[dabsman]

Now I need someone much smarter than me to help out - not exactly a high hurdle I am adding here haha

Now lets say I get $1,000 ANZ dividend from my NZX listed ANZ share and I am a NZ tax resident. I effectively lose the franking credit (I'm assuming this is Australian term for Imputation credit). Is there a way to make use of this? Anyone got a work around tax wise? Can i sell the NZX share and buy ASX and get any advantage by being non resident in Australia?

[huxley]

Now I need someone much smarter than me to help out - not exactly a high hurdle I am adding here haha

Now lets say I get $1,000 ANZ dividend from my NZX listed ANZ share and I am a NZ tax resident. I effectively lose the franking credit (I'm assuming this is Australian term for Imputation credit). Is there a way to make use of this? Anyone got a work around tax wise? Can i sell the NZX share and buy ASX and get any advantage by being non resident in Australia?


You might want to get proper tax advise if you're unsure, but generally if you are a NZ tax payer, you can only use the partial imputation credit in your tax return.

* it makes zero difference if you hold on the ASX or NZX :)

[dabsman]

Thanks mate - I've got an appointment with my accountant to go over everything so this will be added into the mix

[huxley]

Kind of old news, but ANZ returning capital from recent asset sales via share buy back program. Looks to be the best option from a NZ tax perspective, rather than say a special dividend where you would not get full imputation.

https://thewest.com.au/business/banking/china-bank-sale-to-fund-15b-anz-share-buyback-ng-b88693605z

[winner69]

I think it could be ahead of schedule. I am waiting to buy when it does hit $28 :)

...probably waiting until its $25 now

[lawson]

Not waiting for any price now. Not looking to buy at the moment. I'm doing the part of the Hokey-kokey where you put your left foot out - so mostly out now of most things :)

[Snoopy]

Can't find a 'prospectus 70' that details the performance of UDC over FY2016.

It also seems that the previous links to past year prospectuses that I have given have been wiped by the company. However, some relevant financial statements may be found here:

https://www.udc.co.nz/investing/important-documents

Looking at

https://www.udc.co.nz/pdf/Full-Financial-Statements-2016.pdf

The 'profit before tax' is listed as $81.417m (p3). But this includes a provision for credit impairment of $7.418m which I would remove to get the picture of ongoing operational performance. So I get EBT of $88.835m.

Now go to note 3 (p10) on interest expense. There is underlying interest over and above what is due to debenture holders of $18.398m.

So total underlying EBIT = $88.835m + $18.398m = $107.233m (near flat, slightly down on FY2015)

Now turn to page 12 (note 6) and you will see total net loans and advances of: $2,573.030m (nearly a 10% rise on FY2015). Yet despite the big rise in business, underlying operating profit has actually decreased.

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

$107.233m/$2,573.030m = 4.17%

Put in context, the operating margin over the last few years has gone like this:



FY20164.17%


FY20154.63%


FY20144.41%


FY20134.02%


FY20123.87%



I am always suspicious of companies that try to obliterate their financial history. In this instance you can see why. The long trend of increasing margins has ended. It isn't surprising that UDC management don't want this fact widely broadcast to their existing debenture holders. The 8th December 2016 news release from UDC trumpeted the 'record FY2016 profit' only and made no mention of the shrinking operating margins.

With a likely sale of UDC from under the ANZ umbrella, S&P have reduced UDC's long term credit rating by three notches from AA- to A-. This is still better than the likes of Heartland Bank. But I think it is fair to say that UDC have lost their long held 'premium' over other finance company players in the NZ finance market. Something to reflect on for long term UDC debenture holders?


The following information can be found in UDC's FY2017 annual report.

The 'profit before tax' is listed as $85.710m (p3). But this includes a provision for credit impairment of $5.929m which I would remove to get the picture of ongoing operational performance. So I get EBT of $91.639m.

Now go to note 3 (p11) on interest expense. There is underlying interest over and above what is due to debenture holders of $38.655m.

So total underlying EBIT = $91.639m + $38.655m = $130.294m (+22% on FY2016)

Now turn to page 12 (note 6) and you will see total net loans and advances of: $2,911.594m (a 13% rise on FY2016).

The operating margin ( EBIT/'Total Net Loans and Advances' ) based on the end of year loan balance book is:

$130.294m/$2,911.594m = 4.48%

Put in context, the operating margin over the last few years has gone like this:



Operating Margin


FY20174.48%


FY20164.17%


FY20154.63%


FY20144.41%


FY20134.02%


FY20123.87%



To Summarize: Operating Profit (EBIT) for FY2017 is up strongly, but this is largely due to the much higher interest bill being paid, outside of the the interest due to debenture holders. If you look at note 8, you will see that UDC debenture holders have pulled over $500m out of the company over FY2017. I see this as a significant loss of confidence by the investing public in UDC. This loss of confidence was perhaps precipitated by an announced sale to HNA of China, before that deal was pulled. The credit rating of UDC is now BBB (as assessed by Standard and Poor's) with a negative outlook. This is a very large fall from the AA- rating the company had just one year prior!

The loss of debenture support has been more than made up by the ANZ bank doubling its own capital support for UDC. In November 2007 this facility was further increased to $2,700m by UDC's owner the ANZ bank. At this level, all the remaining UDC debenture holders could be repaid! Since the company is now largely dependent on the ANZ bank to obtain borrowing capital for survival, it is not clear to me that a potential full 'sale' of UDC to another outside buyer by ANZ remains a meaningful proposition.

SNOOPY

[Scrunch]

UDC is dependent on commercial banks providing finance. The commercial bank doing this at the moment is ANZ bank. This could be substituted for another single commercial bank (If they were happy with this level of exposure to a single entity or were the trade buyer) or a group of banks. The key assets are the existing lending book, UDC's name and systems which keep the lending book at this size or growing. This is what you sell.

[Snoopy]

UDC is dependent on commercial banks providing finance. The commercial bank doing this at the moment is ANZ bank. This could be substituted for another single commercial bank (If they were happy with this level of exposure to a single entity or were the trade buyer) or a group of banks. The key assets are the existing lending book, UDC's name and systems which keep the lending book at this size or growing. This is what you sell.

I take your point Scrunch. The point I was trying to make was that the commercial bank funding facility available over the last five years has looked like this



'As Announced' End of Financial YearCommercial Bank Funding Facility availableCommercial Bank Funding Facility usedDebenture Funding


2014$800m$395m (49%)$1,569m


2015$1,000m$280m (28%)$1,736m


2016$1,800m$595m (33%)$1,592m


2017$2,700m$1,385m (51%)[$1,039m



Apparently the downstream effect of the pending (now cancelled) HNA sale (coupled with the UDC credit downgrade) caused a large reduction in the rate of renewal of debentures. The ANZ stepped in and has propped UDC up by supplying any extra credit required. But the mere fact that more bank backup is required would suggest to me the extra cost of the commercial bank funding now required would reduce the value of the UDC as a sales prospect.

If the new buyer (or buyers if UDC ends up being floated) keeps the ANZ as the back up commercial financer, that means the ANZ still retains a substantial exposure to the loan book. So I am not sure if 'selling' UDC would achieve much from an ANZ perspective in this instance.

SNOOPY

[Snoopy]

UDCHeartland


EBTLoan BookEBT/Loan BookEBTLoan BookEBT/Loan Book


FY2009$34.024m$1,829.156m1.86%


FY2010$45.012m$1,968.771m2.29%


FY2011$46.382m$1,948.552m2.38%


FY2012$58.476m$2,014.473m2.90%$29.377m$2,078.276m1 .41%


FY2013$66.787m$2,065.117m3.23%$36.540m$2,010.376m1 .82%


FY2014$83.501m$2,272.081m3.68%$57.416m$2,607.393m2 .20%


FY2015$89.750m$2,347.163m3.82%$76.304m$2,862.070m2 .67%


FY2016$88.835m$2,573.030m3.45%$87.689m$3,113.957m2 .82%



Note:

1/ UDC data for FY2016 is drawn from the 'UDC Finance Annual Report 2016' 'Statement of Comprehensive Income' (EBT) and 'Balance Sheet' (Loan Book Balance).
2/ Heartland Bank data for FY2016 'Statement of Comprehensive Income' (EBT) and 'Statement of Financial Position' (Loan Book Balance).
3/ All EBT figures are before 'credit and impairment charge'.

Note that the absolute figures year to year are not comparable between UDC and Heartland. This is because Heartland has a physical branch structure whereas UDC works out of ANZ bank branches. The inter company year on year trend is interesting though. For the first time we see Heartland's earnings to loan book ratio rising, as the equivalent UDC metric is falling. For all previous comparative periods this measure has been moving in the same direction for both UDC and Heartland.




UDCHeartland


EBTLoan BookEBT/Loan BookEBTLoan BookEBT/Loan Book


FY2009$34.024m$1,829.156m1.86%


FY2010$45.012m$1,968.771m2.29%


FY2011$46.382m$1,948.552m2.38%


FY2012$58.476m$2,014.473m2.90%$29.377m$2,078.276m1 .41%


FY2013$66.787m$2,065.117m3.23%$36.540m$2,010.376m1 .82%


FY2014$83.501m$2,272.081m3.68%$57.416m$2,607.393m2 .20%


FY2015$89.750m$2,347.163m3.82%$76.304m$2,862.070m2 .67%


FY2016$88.835m$2,573.030m3.45%$87.689m$3,113.957m2 .82%


FY2017$91.639m$2,911.514m3.15%$99.568m$3,545.897m2 .81%



Note:

1/ UDC data for FY2017 is drawn from the 'UDC Finance Annual Report 2017' 'Statement of Comprehensive Income' (EBT) and 'Balance Sheet' (Loan Book Balance).
2/ Heartland Bank data for FY2017 'Statement of Comprehensive Income' (EBT) and 'Statement of Financial Position' (Loan Book Balance).
3/ All EBT figures are before 'credit and impairment charge'.

Note that the absolute figures year to year are not comparable between UDC and Heartland. This is because Heartland has a physical branch structure whereas UDC works out of ANZ bank branches. The underlying cost structures of both protagonists are not the same.

The individual company year on year trend is interesting though. The EBT Margin for UDC continues to decline, even as the previously improving Heartland EBT margin stabilises. Is the unusually large increase in the loan book size ('growth any any cost' to pump up a potential company sale price?) at UDC compromising the profitability for UDC going forwards?

SNOOPY

[Snoopy]

Time to normalise the UDC figures for 2016 so they can be compared more directly with the likes of Heartland Bank.

Heartland in FY2016 had selling and administration expenses of $69.872m (Heartland FY2016 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $31.623m (UDC Financial Statement 2016, note 4). That is a difference of $38.249m. The two are comparable in that they have a similarly sized loan book (UDC:$2,573.030m, Heartland $3,133.957m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin on assets?

FY2016: ($107.233-$38.249+ $10.011)/$2,573.030 = 3.07%

Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $10.011m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $38.249m 'extra operating expenses (calculated above, using figures from Financial Statements 2016, note 4). The $10.011m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $10.011m which largely reflects a 'branch network allowance payment' must be removed from my comparison.

This recent year trend in the underlying margin at UDC is



FY2016 3.07%


FY2015 3.53%


FY2014 3.37%


FY2013 2.58%





Time to normalise the UDC figures for 2017 so they can be compared more directly with the likes of Heartland Bank.

Heartland in FY2017 had selling and administration expenses of $71.684m (Heartland FY2017 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $32.427m (UDC Financial Statement 2017, note 4). That is a difference of $39.257m. The two are comparable in that they have a similarly sized loan book (UDC:$2,911.514m, Heartland $3,545.897m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin (EBIT where 'I' is the credit facility interest only) on assets?

FY2017: ($130.294-$39.257+ $9.002)/$2,911.514 = 3.44%

Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $9.002m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $39.257m 'extra operating expenses' (calculated above, using figures from Financial Statements 2017, note 4). The $9.002m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $9.002m which largely reflects a 'branch network allowance payment' must be removed from my comparison.

For Heartland over FY2017 the equivalent calculation of EBIT (where 'I' represents interest paid not connected to debenture holders, and E represents the earnings before write downs) is as follows:

($99.568m+$25.714m) / $3,909.945m = 3,20%

This recent year trend in the underlying margin at UDC and Heartland is compared below:




EBIT Margin UDCEBIT Margin Heartland


FY2017
3.44% 3.20%


FY2016 3.07% 3.48%


FY2015 3.53% 3.71%

FY2014 3.37% 3.00%


FY2013 2.58% 2.65%



In this context, FY2016 looks like a negative aberration for UDC. But the EBIT margin for Heartland is showing a declining pattern over the last three years. With UDC up for sale, could the earnings figures for UDC have been manipulated upwards over FY2017 in what is in reality a softer market? 'Earnings' in this context is a special kind of EBIT in which I have eliminated impairment charges. So I have removed the ability to reclassify assets as problem assets, and the ability to manipulate the company's bank loan structure to influence this earnings result. The principal driver of this EBIT is therefore revenue and this is almost impossible to manipulate. Consequently I don't believe the UDC figures are subject to manipulation.

SNOOPY

[Snoopy]

HNZ (FY2016)UDC (FY2016)


Agriculture Forestry & Fishing: $680.680m (19.7%) $494.192m (18.6%)


Mining: $14.912m (0.4%) $11.428m (0.4%)


Manufacturing: $88.412m (2.7%) $66.429m (2.5%)


Finance & Insurance: $339.646m (9.8%) $88.535m (3.3%)


Retail & Wholesale Trade: $296.550m (8.6%) $342.734m (12.9%)


Households: $1,498.261m (43.3%) $640.521m (24.1%)


Property & Business Services $405.469m (11.7%)$133.353m (5.0%)


Transport & Storage: $26.715m (0.8%)$460.450m (17.3%)


Other Services: $110.747m (3.2%) $418.199m (15.7%)



Total for Heartland $3,461.4m (100%) , with the collectively impaired assets yet to be adjusted for. This equates to a loan book YOY growth of 6.5%.

Total for UDC $2,655.8m (100%), with credit impairment already adjusted for. This equates to a loan book YOY growth of 9.3%.

My question is, can any of the underperformance of UDC in 'underlying earnings terms' be explained by the markets both UDC and Heartland are lending into?

Looking at the year on year figures, comparing each company to itself one year earlier, I am struck by the following observations:

1/ Heartland's rural loan book grew by 19% YOY. UDC's rural loan book only grew by 8% YOY. One explanation is that Heartland was more generous in rolling over marginal rural loans. This was confirmed on p7 of Heartland AR2016

"Despite the difficult circumstances facing the dairy industry, Heartland continues to support existing clients – which was the primary reason for the growth."

Some might see that as a high risk strategy, as this rollover growth decreased cashflow. Recent dairy price recovery in particular suggests that if a high risk gamble was made, it has paid off.

2/ Heartland's 'finance & insurance' book shrunk by 10% YOY. UDC's 'finance & insurance' book grew by 2% YOY. In big picture terms, finance and insurance is far more important to Heartland (nearly 10% of all business vs only just over 3% for UDC). Curiously the shrinkage of 'finance and insurance' at Heartland came in the year that Heartland acquired the 50% of Marac Insurance (general insurance and income protection) they did not own for $2.3m (a small fish acquisition?). So it must be the 'finance' bit of 'finance & insurance' that did most of Heartland's sector shrinking. Reading through the Heartland annual report, I can't find a mention of any business unit shrinking. So I am mystified as to where the shrinkage in the 'finance & insurance' book at Heartland came from. Given the evidence is that this shrinkage probably did Heartland more good than harm I am interested in solving this riddle. Any ideas? Did Heartland wind up some less profitable loans to large businesses during the year? (refer to p26 of Annual Results 2016 presentation).

3/ UDC are very up front that financing construction is part of their business mix. Heartland do not report 'construction' as a separate business category. So I have combined UDC's 'Construction' figures into the broad 'other services' basket.

UDC construction loans totalled $355.757m at EOFY2016, up from $344.072m at EOFY2015, and a not insignificant 13% of the total loan book. This construction increase of 3% YOY, is well below the average 9.3% YOY growth for the whole of UDC. One explanation for this modest growth is that some construction projects have become problematic. Developer margins have shrunk and UDC margins on these developments have shrunk consummately. Many fortunes have been made on property over the years. But less well advertised is that many have been lost through risky property development. I have heard anecdotal evidence that property developments around Auckland have been shelved. Are UDC feeling the construction pain?




HNZ (FY2017)UDC (FY2017)


Agriculture Forestry & Fishing: $836.977m (21.3%) $547.780m (18.4%)


Mining: $19.006m (0.5%) $15.091m (0.5%)


Manufacturing: $76.445m (1.9%) $59.203m (2.0%)


Finance & Insurance: $395.804m (10.1%) $70.125m (2.4%)


Retail & Wholesale Trade: $188.941m (4.8%) $367.256m (12.3%)


Households: $1,717.407m (43.7%) $820.382m (27.5%)


Property & Business Services $347.776m (8.8%)$171.163m (5.8%)


Transport & Storage: $179.016m (4.6%)$442.523m (14.9%)


Other Services: $169.867m (4.3%) $482.258m (16.2%)


Total $3,931.239m (100%) $2,975.781m (100%)



Note:

1/ Heartland loans pre impaired asset adjustment. UDC loans post impaired asset adjustment.

The Heartland loan book has grown by 14% over FY2017 (ended 30-06-2017) , compared to a 12% growth over at the UDC loan book over the nearest equivalent period (FY2017 ended 30-09-2017).

At UDC, the press release highlights were motor vehicle lending increasing by $261 million (+28%), commercial lending growing by $51 million (+4%) and equipment dealer lending was up $12 million (+7%). Curiously those categories do not equate to the category loan disclosure made in the UDC annual report. Yes 'Household Lending' was up by $180m but Transport and Storage was actually down $18m. So I would guess that most of the increase in motor vehicle loans were made via retail car yards. The largest dollar increase in any category was $53.5m for 'Agriculture Fishing and Forestry' (up 11%). Curiously UDC chose not to highlight this.

At Heartland, the proportion of Rural Loans continues to increase, now 21.3% of the total up from 19.7% in FY2016, 17.6% in FY2015 and 16.1% in FY2014. Of the current 21.3% of rural loans, 8 percentage points of those relate to dairy (up from 7 percentage points in 2015). So Heartland offers the most financial exposure to 'rural' of any listed entity on the NZX, and it is getting bigger both in real and percentage terms! 'Household' which encompasses Consumer, Reverse Mortgage and Residential Mortgage saw the Consumer subset of loans grow 14% (+$112m), the majority of that growth seeming to be Motor Vehicle loans ( +$72m). However, we then learn that there has not been a consummate rise in earnings due to 'lower earnings rates on Motor Vehicles and Personal Loans'. Reverse mortgage growth has been significant, +12% ( $42.5m) in NZ and +19% ($83.6m ) in Australia. Ironically strong growth in reverse mortgages will continue to put a capital strain on Heartland because it means this subset of the operation remains cash flow negative.

There are early signs that the strategy of doing more business across all sectors 'on line' will be good for Heartland profitability going forwards.

SNOOPY

[dabsman]

Is there any easy way to move my ANZ holdings from NZX to ASX? Would rather not have to pay fees both ways if I can. Reason is I want them to sit with all the other ASX shares - and more liquidity too if I ever need to sell

[BlackPeter]

Is there any easy way to move my ANZ holdings from NZX to ASX? Would rather not have to pay fees both ways if I can. Reason is I want them to sit with all the other ASX shares - and more liquidity too if I ever need to sell

Just talk with your friendly broker. Last time I moved some NZX shares to the ASX it meant to fill out some forms (which the broker will provide) and it did take a handful of days, but it didn't cost money.

[dabsman]

Just talk with your friendly broker. Last time I moved some NZX shares to the ASX it meant to fill out some forms (which the broker will provide) and it did take a handful of days, but it didn't cost money.

Will call tomorrow - thank you

[peat]

Is there any easy way to move my ANZ holdings from NZX to ASX? Would rather not have to pay fees both ways if I can. Reason is I want them to sit with all the other ASX shares - and more liquidity too if I ever need to sell
I'd suggest dealing with the registry directly.

[dabsman]

I'd suggest dealing with the registry directly.

Gold star for you Peat - ASB told me to contact the registry directly and they will "shunt" the shares...

Anyone see any reason not to do this?

[percy]

Check to see whether the dividends are imputated in NZ.
If you are a NZ resident, Australian franking credits are of no use to you.

[Joshuatree]

If you are with Craigs they will shunt(shift) them ,no charge.

[lissica]

Check to see whether the dividends are imputated in NZ.
If you are a NZ resident, Australian franking credits are of no use to you.

We've held them on both NZX and ASX.

ASX holdings also have NZ imputation credits available on the dividend statement.

[Snoopy]

Check to see whether the dividends are imputated in NZ.


ANZ dividends are partially imputed for NZ Shareholders.



If you are a NZ resident, Australian franking credits are of no use to you.


Correct. But it makes no difference as an NZ shareholder if you hold ANZ shares on the NZX or ASX. You still get to claim the NZ imputation credits and you can't use the Aussie franking credits no matter what market you choose to hold your ANZ shares on.

Also just because you hold ANZ shares on the NZX do not assume that the advice ANZ give you about what to do with your shares is NZX friendly. To get around the Australian capital gains tax, some Australian companies offer so called tax effective buybacks which are a disaster for NZ based shareholders. Not only are NZ shareholders not eligible for the attached Australian franking credits. The shares bought back are classed as a dividend for NZ purposes which means that any capital returns using this method end up being fully taxable in NZ shareholders hands. But Australian companies have no obligation to point this out to NZ shareholders and generally they don't.

SNOOPY

[dabsman]

OK so from all these comments I take the following: Makes no difference except ASX has more liquidity for these stocks?

[macduffy]

OK so from all these comments I take the following: Makes no difference except ASX has more liquidity for these stocks?

Yes, I'd agree with that. A possible further advantage would be the ready availability, if needed, of AUD funds should one decide to sell. If NZD settlement is preferred NZ brokers are more than happy to make the sale on the ASX and pay up in NZD.

[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:

1/ Slightly rearrange the ANZ (NZ) categories (ANZ September 30th 2016 Bank Disclosure Statement, p29) so that they correspond to those listed in the UDC FY2016 Financial Statements. THEN
2/ I need to subtract the UDC equivalent figures (page 17, UDC FY2016 Financial Statements) to get the underlying ANZ bank figure.

(Note: Receivables for UDC in industry groups are listed after provisions for credit impairment are taken into account. OTOH, receivables for ANZ.NZ industry groups are listed before allowances for credit impairment are taken into account. This means the UDC figures are lower than they would be on a 'like for like' comparative figure basis. However the error is only 1.1% overall, not enough to undo the validity of this exercise in my judgment)

The results are below:




All ANZ.NZUDCUnderlying ANZ.NZ


Agriculture forestry, fishing and mining:$21,420m(11.8%)
$506m(19.0%)
$20,914m(11.4%)



Business and property services:$14,275m(7.7%)
$133m(5.0%)
$14,142m(7.7%)



Construction:$2,367m(1.3%)
$356m(13.4%)
$1,136m(1.1%)



Entertainment, leisure and tourism:$1,744m(0.9%)
$8m(0.3%)
$1,736m(0.9%)



Finance and insurance:$31,956m(17.2%)
$89m(3.3%)
$31,867m(17.4%)



Government and local authority:$12,373m(6.6%)
$0.5m(0.0%)
$12,373m(6.7%)



Manufacturing:$5,651m(3.0%)
$66m(2.5%)
$5,585m(3.0%)



Personal & Other lending:$87,719m(47.1%)
$694m(26.1%)
$87,025m(47.4%)



Retail and Wholesale:
$6,177m(3.3%)
$343m(12.9%)
$5,834m(3.2%)



Transport and storage:$2,584m(1.4%)
$460m(17.3%)
$3,124m(1.2%)



Total:$186,266m(100%)$2,655m(100%)$183,611m(100%)



The following inter-year table shows how UDC is funded by its 100% owner ANZ



FY2014FY2015FY2016


UDC Shareholder Capital$341.412m$365.462m$423.247m


ANZ Committed Credit Facility$280.000m$395.000m$595.000m


Debenture Investments From Public$1,569.247m$1,736.026m$1,591.711m





Time for my annual 'disentanglement' of ANZ.NZ from its UDC subsidiary. The information I need about the ANZ bank in New Zealand can be found here:

https://www.anz.co.nz/about-us/media-centre/investor-information/

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:

1/ Slightly rearrange the ANZ (NZ) categories (ANZ September 30th 2017 Bank Disclosure Statement, p30) so that they link up to those listed in the UDC FY2017 Financial Statements. THEN
2/ I need to subtract the UDC equivalent figures (page 18, UDC FY2017 Financial Statements) to get the underlying ANZ bank figure.

(Note: Receivables for UDC in industry groups are listed after provisions for credit impairment are taken into account. OTOH, receivables for ANZ.NZ industry groups are listed before allowances for credit impairment are taken into account. This means the UDC figures are lower than they would be on a 'like for like' comparative figure basis. However the error is only 1.0% overall, not enough to undo the validity of this exercise in my judgement)

The results are below:




All ANZ.NZ=UDC+Underlying ANZ.NZ


Agriculture forestry, fishing and mining:$20,727m(11.6%)
$563m(18.9%)
$20,164m(11.4%)



Business and property services:$34,614m(19.3%)
$171m(5.8%)
$34,443m(19.6%)



Construction:$2,772m(1.6%)
$409m(13.8%)
$2,363m(1.3%)



Electricity Gas Water & Waste:$3,581m(2.0%)
$12m(0.3%)
$3,569m(2,0%)



Finance and insurance:$20,834m(11.6%)
$70m(3.3%)
$20,764m(11.8%)



Government and local authority:$11,201m(6.3%)
$0.6m(0.4%)
$11,200m(6.4%)



Manufacturing:$4,696m(2.6%)
$59m(2.0%)
$4,637m(2,6%)



Personal & Other lending:$71,031m(39.7%)
$858m(28.8%)
$70,173m(39.8%)



Retail and Wholesale:
$7,260m(4.1%)
$390m(13.1%)
$6,870m(3.9%)



Transport and storage:$2,403m(1.3%)
$443m(14.9%)
$1,960m(1.1%)



Total:$179,119m(100%)$2,975m(100%)$176,144m(100%)



As was the case last year, notwithstanding the shuffling of disclosure with the reclassification of the ANZ.NZ loan categories, the loan allocation of ANZ.NZ with UDC removed, is little different the loan allocation of the whole of ANZ.NZ. This is no surprise. The whole of the UDC loan book is only 1.6% of the ANZ.NZ loan book. And ANZ.NZ itself (which you cannot invest in directly) is only a fraction of the whole ANZ operation which is the ANZ vehicle listed on the NZX. However, the converse is not true.

UDC is very different from ANZ.NZ. In percentage terms:

1/ the Agricultural exposure of UDC is double,
2/ 'Construction' and 'Transport and Storage' exposure are up by nearly a factor of 10, AND
3/ 'Retail and Wholesale' exposure are higher by a factor of 4.

The volatility of these 'industry groupings' is testament to UDC being a much greater investment risk than any investment in ANZ itself.

The following inter-year table shows how UDC is funded by its 100% owner ANZ



UDC: Backing For LoansFY2014FY2015FY2016FY2017


UDC Shareholder Capital$341.412m (15.6%)$365.462m (14.6%)
$423.247m (16.2%)$485.645m (16.7%)


ANZ Committed Credit Facility (Note 8)$280.000m (12.8%)$395.000m (15.8%)
$595.000m (22.8%)$1,385,027m (47.6%)


Debenture Investments From Public (Note 8)$1,569.247m (71.6%)$1,736.026m (69.5%)$1,591.711m (61.0%)$1,039.133m (35,7%)UDC Backing



There is a very significant change happening with the role of debenture holders in funding UDC much reduced as the ANZ parent seemingly looks to take over that role. Debenture holders no longer have any guarantee that their debentures will not be repaid early - a big negative for some debenture investors.

SNOOPY

[Snoopy]

ANZ have re-jigged their breakdown of loan categories for FY2017. These do not exactly line up with the loan categories for ANZ's subsidiary UDC. So some rearrangement of categories is required to line them up. Below is my take on how to do it.



ANZ.NZUDC


Category 1AgricultureAgriculture Forestry & Fishing


Forestry Fishing & Agricultural Services


Mining


Category 2ManufacturingManufacturing


Category 3Electricity, Gas, Water & Waste ServicesElectricity, Gas & Water


Category 4ConstructionConstruction


Category 5Wholesale TradeRetail & Wholesale


Retail Trade & AccommodationAccommodation, Cafes & Restaurants


Entertainment, Leisure & Tourism


Category 6Transport, Postal & WarehousingTransport & Storage


Category 7Finance & Insurance ServicesFinance, Investment & Insurance



Category 8Public Administration & SafetyGovernment Administration & Defence



Professioinal NZ Services



Category 9Rental Hiring & Real Estate ServicesProperty & Business Services


Category 10HouseholdsPersonal & Other Services



All Others



Education


Communications


Health & Community Services



SNOOPY

PS Now I can use this categorization to finish my previous post!

[Snoopy]

HNZ (FY2016)UDC (FY2016)


Agriculture Forestry & Fishing: $680.680m (19.7%) $494.192m (18.6%)


Mining: $14.912m (0.4%) $11.428m (0.4%)


Manufacturing: $88.412m (2.7%) $66.429m (2.5%)


Finance & Insurance: $339.646m (9.8%) $88.535m (3.3%)


Retail & Wholesale Trade: $296.550m (8.6%) $342.734m (12.9%)


Households: $1,498.261m (43.3%) $640.521m (24.1%)


Property & Business Services $405.469m (11.7%)$133.353m (5.0%)


Transport & Storage: $26.715m (0.8%)$460.450m (17.3%)


Other Services: $110.747m (3.2%) $418.199m (15.7%)



Total for Heartland $3,461.4m (100%) , with the collectively impaired assets yet to be adjusted for. This equates to a loan book YOY growth of 6.5%.

Total for UDC $2,655.8m (100%), with credit impairment already adjusted for. This equates to a loan book YOY growth of 9.3%.

My question is, can any of the underperformance of UDC in 'underlying earnings terms' be explained by the markets both UDC and Heartland are lending into?

Looking at the year on year figures, comparing each company to itself one year earlier, I am struck by the following observations:

1/ Heartland's rural loan book grew by 19% YOY. UDC's rural loan book only grew by 8% YOY. One explanation is that Heartland was more generous in rolling over marginal rural loans. This was confirmed on p7 of Heartland AR2016

"Despite the difficult circumstances facing the dairy industry, Heartland continues to support existing clients – which was the primary reason for the growth."

Some might see that as a high risk strategy, as this rollover growth decreased cashflow. Recent dairy price recovery in particular suggests that if a high risk gamble was made, it has paid off.

2/ Heartland's 'finance & insurance' book shrunk by 10% YOY. UDC's 'finance & insurance' book grew by 2% YOY. In big picture terms, finance and insurance is far more important to Heartland (nearly 10% of all business vs only just over 3% for UDC). Curiously the shrinkage of 'finance and insurance' at Heartland came in the year that Heartland acquired the 50% of Marac Insurance (general insurance and income protection) they did not own for $2.3m (a small fish acquisition?). So it must be the 'finance' bit of 'finance & insurance' that did most of Heartland's sector shrinking. Reading through the Heartland annual report, I can't find a mention of any business unit shrinking. So I am mystified as to where the shrinkage in the 'finance & insurance' book at Heartland came from. Given the evidence is that this shrinkage probably did Heartland more good than harm I am interested in solving this riddle. Any ideas? Did Heartland wind up some less profitable loans to large businesses during the year? (refer to p26 of Annual Results 2016 presentation).

3/ UDC are very up front that financing construction is part of their business mix. Heartland do not report 'construction' as a separate business category. So I have combined UDC's 'Construction' figures into the broad 'other services' basket.

UDC construction loans totalled $355.757m at EOFY2016, up from $344.072m at EOFY2015, and a not insignificant 13% of the total loan book. This construction increase of 3% YOY, is well below the average 9.3% YOY growth for the whole of %.UDC. One explanation for this modest growth is that some construction projects have become problematic. Developer margins have shrunk and UDC margins on these developments have shrunk consummately. Many fortunes have been made on property over the years. But less well advertised is that many have been lost through risky property development. I have heard anecdotal evidence that property developments around Auckland have been shelved. Are UDC feeling the construction pain?




HNZ (FY2017)UDC (FY2017)


Agriculture Forestry & Fishing: $836.977m (21.3%) $547.780m (18.4%)


Mining: $19.006m (0.5%) $15.091m (0.5%)


Manufacturing: $76.445m (1.9%) $59.203m (2.0%)


Finance & Insurance: $395.804m (10.1%) $70.125m (2,4%)


Retail & Wholesale Trade: $189.141m (4.8%) $367.356m (12.3%)


Households: $1,717.407m (43.7%) $820.382m (27.6%)


Property & Business Services $347.776m (8.8%)$171.163m (5.8%)


Transport & Storage: $179.006m (4.6%)$442.523m (14.9%)


Other Services: $110.747m (3.2%) $482.158m (16.2%)



Total for Heartland $3,931.2m (100%) , with the collectively impaired assets yet to be adjusted for. This equates to a loan book YOY growth of 14.3%.

Total for UDC $2,975.8m (100%), with credit impairment already adjusted for. This equates to a loan book YOY growth of 12.1%.

Looking at the year on year figures, comparing each company to itself one year earlier, I am struck by the following observations:

1/ Heartland's rural loan book grew by 23% YOY. UDC's rural loan book only grew by 11% YOY. Are Heartland continuing to be more generous in rolling over marginal rural loans? Provisioning in rural was much reduced (from $3m to just $0.3m). .

2/ Heartland's 'finance & insurance' book grew by 17% YOY, more than wiping out last years reduction.. UDC's 'finance & insurance' book fell by 20% YOY. In big picture terms, finance and insurance is far more important to Heartland (10% of all business vs only just 2.4% for UDC).

3/ UDC are very up front that financing construction is part of their business mix. Heartland do not report 'construction' as a separate business category. So I have combined UDC's 'Construction' figures into the broad 'other services' basket.

UDC construction loans totalled $408.987m at EOFY2017, up from $355.757m at EOFY2016, and represent a not insignificant 14% of the total loan book. This construction increase of 15% YOY in dollar terms, is now ahead of the average 12.1% YOY growth for the whole of UDC, - partially making up for the PCP slide. If UDC is representative, this indicates a much for favourable year of construction in the year ended 30th September 2017. Will this continue post the election of the Labour lead government?

To conclude this comparison, 'the raw table data' would suggest to me that UDC would be less exposed to an economic downturn, because the proportion of loans to 'Households' is lower. However, add back the $178m difference 'Retail and Wholesale' and the $409m in 'Construction' (with no separate Construction disclosure for this at Heartland) ,totalling $584m, (Retail and Construction are both fast responders to a Consumer downturn), and there may not be much difference, The enduring difference between the two is the much greater difference between 'Transport and Storage' in favour of UDC (17.4% of all loans verses 4.6% for Heartland) . This, despite Heartland increasing their exposure fivefold to this sector over the FY2017 financial year.

SNOOPY

[macduffy]

A question, Snoooy. Are you using UDC's "Agriculture, Fishing and Forestry" numbers in arriving at an 11% YOY growth rate for UDC's rural loan book? If so, I would suggest that their lending to this sector is heavily weighted towards the Forestry part. UDC have "traditionally" had a major share of the business of financing forestry machinery/loggers and such. On the other side of the category, I suspect that their involvement in other parts of the rural sector are comparatively modest, being left largely to their bank parent.

[Snoopy]

A question, Snoooy. Are you using UDC's "Agriculture, Fishing and Forestry" numbers in arriving at an 11% YOY growth rate for UDC's rural loan book?


Yes. I am not aware of any publicly declared information that breaks down 'Agriculture Fishing and Forestry' for UDC further.



If so, I would suggest that their lending to this sector is heavily weighted towards the Forestry part. UDC have "traditionally" had a major share of the business of financing forestry machinery/loggers and such. On the other side of the category, I suspect that their involvement in other parts of the rural sector are comparatively modest, being left largely to their bank parent.


Thanks for that insight. Forestry is still cyclical, albeit with a longer time frame between 'planting' and 'harvest' compared with a farmed animal. Forestry machinery / loggers would be likely purchased by contractors rather than forest owners. I guess that forest owners could postpone their harvesting by a couple of years if the price of logs really tanked. But whether the forestry contractors could or would adjust their equipment purchasing behaviour because of that is a question that I don't know the answer to.

SNOOPY

[Snoopy]

Updating the actual bad debt write offs in relation to the size of the loan book at the end of FY2016. Section 7 in the UDC 2016 Financial Statements is named "Provision for Credit Impairment". Bad debts actually written off are compared against the 'provision for loan impairment' stated on page 3, the 'Statement of Comprehensive Income'.



UDCBad Debt Write OffNew Bad Debt Provision


FY2010$17.343m


FY2011$4.891m


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



Actual write offs look to be in a range of $10m to $12m, excluding the spike from FY2014

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%
FY2015: $12.162m/$2,347.163m = 0.518%
FY2016: $11.055m/$2,573.030m = 0.430%

For FY2016, UDC has the lowest percentage of write offs for the last five years.

For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. Note 6 (AR2016) to work out the latest details of 'impaired asset expense' as follows:

FY2012: $5.642m
FY2013: $22.527m
FY2014: $5.895m
FY2015: $12.105m
FY2016: $13.501m

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%
FY2015: $12.105m/ $2862.1m = 0.423%
FY2016: $13.501m/ $3114.0m = 0.434%

The nomalised write offs for UDC and Heartland have very curiously converged to close agreement!



UDC Debt Write OffHeartland Debt Write Off


FY20120.505%0.271%


FY20130.600%1.12%


FY20140.820%0.226%


FY20150.518%0.423%


FY20160.430%0.434%





Updating the actual bad debt write offs in relation to the size of the loan book at the end of FY2017. Section 7 in the UDC 2017 Financial Statements is named "Provision for Credit Impairment". Bad debts actually written off are compared against the 'provision for loan impairment' stated on page 3, the 'Statement of Comprehensive Income'.



UDCBad Debt Write Off (Note 7: Provision for Credit Impairment)New Annual Bad Debt Provision (Income Statement)


FY2010$17.343m


FY2011$4.891m


FY2012$10.164m$6.031m


FY2013$12.399m$7.123m


FY2014$3,300m +$18.633m = $21.933m$11.733m


FY2015-$0.659m + $12.162m= $11.503m$10.427m


FY2016$1.297m + $11.055m = $12.352m$7.418m


FY2017-$2.860m + $7.698m = $4.838m$5.929m



Actual write offs look to be in a range of $10m to $12m, excluding the spike from FY2014 and the unusually low figure in FY2017.

Putting these 'actual write offs' as a percentage of the end of year loan book gives them better context Note that:

1/ the 'actual write offs' are found in the annual change of the holding provision for bad debts and do not directly correspond to the top up expenses for this provision that may be found in each annual income statement.
2/ the denominator is the 'carrying value' of the Net Loans and Advances, This has already been adjusted for the provision for credit impairment, unearned income and deferred fee revenue and expenses.

FY2012: $10.164m/$2,014.473m = 0.505%
FY2013: $12.399m/$2,065.117m = 0.600%
FY2014: $21.933m/$2,272.081m = 0.965%
FY2015: $11.503m/$2,347.163m = 0.518%
FY2016: $12.352m/$2,573.030m = 0.490%
FY2017: $4.838m/$2,911.514m = 0.166%

For FY2017, UDC has easily the lowest percentage of write offs for the last five years.

For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. See Note 6 (AR2017) to work out the latest details of 'impaired asset expense' as follows:

FY2012: $5.642m
FY2013: $22.527m
FY2014: $5.895m
FY2015: $12.105m
FY2016: $13.501m
FY2017: $15.015m

Note that unlike UDC, Heartland writes off uncollectible debts or part debts directly from each annual profit result. I will now normalize these against the 'total finance receivables'. 'Total finance receivables' are already adjusted for any provision for impairment and the present value estimate of future losses (AR2017, Note 11).

FY2012: $5.642m/ $2078.3m = 0.271%
FY2013: $22.527m/ $2010.4m = 1.12%
FY2014: $5.895m/ $2607.4m = 0.226%
FY2015: $12.105m/ $2862.1m = 0.423%
FY2016: $13.501m/ $3114.0m = 0.434%
FY2017: $15.015m/ $3546.0m = 0.423%

Summarizing and comparing the above information:



UDC Debt Write OffHeartland Debt Write Off
,

FY20120.505%0.271%


FY20130.600%1.12%
,

FY20140.820%0.226%


FY20150.518%0.423%



FY20160.430%0.434%


FY20170.166%0.423%



The question that rears its ugly dead from the above data table is as follows:

Why is the impairment percentage so much lower for UDC in FY2017 compared with UDC's past year results? Perhaps we had a really low impairment year? But if that was true, we might expect a similar reduction in impaired loans over the same time period from the closely comparative Heartland. This didn't happen. I do note that UDC was put up for sale over the FY2017 financial year and it would have been helpful to show the accounts in their best possible light leading up to any sale. So were the impairments at UDC for FY2017 really that much lower? Or has some 'window dressing' gone on here?

That is a point to ponder for potential investors, if UDC is floated on the sharemarket soon!

SNOOPY

[Snoopy]

UDC construction loans totalled $408.987m at EOFY2017, up from $355.757m at EOFY2016, and represent a not insignificant 14% of the total loan book. This construction increase of 15% YOY in dollar terms, is now ahead of the average 12.1% YOY growth for the whole of UDC, - partially making up for the PCP slide. If UDC is representative, this indicates a much for favourable year of construction in the year ended 30th September 2017. Will this continue post the election of the Labour lead government?


Further to Macduffy's enlightening post on Agricultural Financing, I had assumed UDC 'Construction' referred to maximising the returns on loans on some undercapitalised Auckland property developers who had been turned down at bank shop front level, but shunted across to UDC as a 'safety net' to avoid them becoming the prey of mezzanine financiers. However on reflection (and because I have never heard of UDC financing a property development) I now think it is far more likely that UDC is financing concrete mixers, bulldozers, dump trucks and scrapers in their 'Construction' loan segment.

SNOOPY

[macduffy]

Yes, I would think that there would be a fair bit of machinery/equipment financing in the Construction number but, going back a long time now, it wasn't unknown for finance companies such as UDC to be financing property development. Given the paucity of such competitors these days, I would expect that UDC would be able to be very selective in choosing to finance good projects.

[Snoopy]

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


JudgementTotal


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


BehaviouralJudgementTotal


ArrangementNon Performing RepossessionRecoveryGrade 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:



UDCHeartland


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$1,111.892m3.46%$2,141,780m1.79%$8.032 m$287.118m2.80%$2,086.303m0.785%


2013$37.460m$1,265.765m2.95%$2,198,653m1.70%$15.96 1m$278.051m5.74%$2,026.337m0.788%


2014$31.805m$938,899m3.38%$2,375.936m1.34%$14.999m $159.338m9.41%$2,622.392m0.571%


2015$31.529m$1,018,134m3.10%$2,461.224m1.28%$16.43 3m$149.011m11.0%$2,878.513m0.571%



2016$28.909m$1,242.061m2.33%$2,684.750m1.08%$21.24 6m$204.029m10.4%$3,135.203m0.678%




Note 10d (page 18 UDC Financial Statements for FY2017), 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


JudgementTotal


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


2017$1,201.747m +$133.791m +$11.618m$1,347.156m



The grade 6 and 'more risky' categories for EOY2017 added up represents a fraction of the total loans outstanding as follows:

$1,347.156m / $3,005.059m = 44.8% of total loan assets.

The Credit impairment provision on the books, not yet removed from the above total, is noted as $29.278m (note 10d)

========

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:

$241.486m / $3,575.613m = 6.75% of total loan assets.

Some impairment ($25.865m) (Note 19e) has already been taken onto the book over the years. Add to this a reverse mortgage fair value adjustment of ($3.851m) This total impairment of $29.716m represents

$29.716m / $241.486m = 12.3% of the Grade 6 (monitor) and below grade assets.



Heartland Vulnerable Loans


BehaviouralJudgementTotal


ArrangementNon Performing RepossessionRecoveryGrade 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


2017$18.512m$4.956m$4.889m$166.155m +$27.669m +$16.749m +$2.556m$241.486m



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



UDCHeartland


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$1,111.892m3.46%$2,141,780m1.79%$27.42 6m$287.118m9.55%$2,105.702m1.30%


2013$37.460m$1,265.765m2.95%$2,198,653m1.70%$50.49 1m$278.051m18.24%$2,060.867m2.45%


2014$31.805m$938,899m3.38%$2,375.936m1.34%$24.381m $159.338m15.3%$2,651.754m0.919%303m


2015$31.529m$1,018,134m3.10%$2,461.224m1.28%$31.65 4m$149.011m21.2%$2,893.724m1.09%



2016$28.909m$1,242.061m2.33%$2,684.750m1.08%$26.14 8m$204.029m12.8%$3,140.106m0.833%



2017$29.278m$1,347.156m2.17%$3,005.059m0.974%$29.7 16m$241.486m12.3%$3,575.613m0.831%



SNOOPY

[percy]

Yes, I would think that there would be a fair bit of machinery/equipment financing in the Construction number but, going back a long time now, it wasn't unknown for finance companies such as UDC to be financing property development. Given the paucity of such competitors these days, I would expect that UDC would be able to be very selective in choosing to finance good projects.

I would be very surprised to hear UDC were financing property developments.
Machinery/equipment yes.
Forestry.Again a huge amount of machinery/equipment/trucks financed.

[Snoopy]

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$2,075.211m4.23%$12.138m+$1.685m$2 ,104.591m0.66%


EOFY2012$90.489m$2,078.276m4.35%$14.636m+$3.180m$2 ,105.702m0.85%


EOFY2013$48.975m$2,010.393m2.43%$6.679m+$1.961m$2, 060.867m0.42%


EOFY2014$41.354m$2,607.393m1.59%$35.258m+$3.260m$2 ,631.754m1.46%


EOFY2015$39.066m$2,862.070m1.36%$1.555m+$1.910m$2, 893.704m0.12%


EOFY2016$37.851m$3,113.957m1.21%$12.010m+$6.653m$3 ,135.203m0.60%



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 1-9 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'. I feel it is misleading because the previously defined total if 'Provision for Credit Impairment' has already been taken off the total.



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$2,007.012m6.29%$15.103m
$2,049.504m0.74%


EOFY2012$96.670m$2,102.299m4.60%$10.164m$2,141.780 m0.47%

The key point to note here is that the 'impaired loan expense' / 'write offs' (represented by letter 'W' in each case) only occur:
.
1/ when the impaired portion of the loan has gone through the whole loan review system'. AND
2/ when a loan repayment has been missed, or a non payment is imminent
EOFY2013$86.877m$2,161.193m4.02%$12.399m
$2,198.653m0.56%


EOFY2014$95.364m$2,344.131m4.07%$18.633m
$2,375.936m0.78%


EOFY2015$82.267m$2,429.695m3.39%$12.162m$2,461.224 m0.49%.


EOFY2016$85.475m$2,655.841m3.22%$11.055m$2,684.750 m0.41%



The key point to note here is that the 'impaired loan expense' / 'write offs' (represented by letter 'W' in each case) only occur:

1/ when that portion of the loan has gone through the whole loan review system and is 'done and dusted'. AND
2/ when a loan repayment has been missed, or a non payment is imminent

OTOH 'Stressed Loans' are very much a judgement call by management.

They may
1/ recover,
2/ stay stressed or
3/ have to be impaired, or worse, 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.


What is a 'Stressed Loan'? For the purpose of this discussion, I have a special definition.



Stressed Loan DefinitionUDCHeartland





1/ Take loan total from categories 7 and 8]a/ Take loans at least 90 days past due.


2/ add 'Default' loans]b/ add Loans individually impaired.


]c/ add Restructured assets. (*)


3/ less Provision for Credit Impairment ]d/ less Provision for Credit Impairment.'


4/ equals 'Total Stressed Loans' ]e/ equals 'Total Stressed Loans''



(*). (Note that from FY2017 ' Restructured Assets' are now not reported on by Heartland.)


A 'Stressed Loan' can be thought of as a kind of 'Vulnerable Loan', as previously described, but with the Impairment provision taken out. There is no overlap between a 'stressed loan', as defined here, and the amount of money written off each year in bad debts. But yes, '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 (owner of UDC) or Heartland:

1/ I would hope that management would have a robust process that identifies problem loans before they have to be written off.
2/ So as a shareholder, I would hope such loans were seen as 'stressed' before being classified as 'impaired' and certainly before an actual write off was declared.

How does one check that this is what happens in reality? One way could be to look at the 'stressed loans' for both companies on an annual trending basis and see how this compares with the equivalent annual trend in write offs.


Heartland

The column (W) lists the actual dollar amount in bad debts written off over that period, as detailed in AR2017 note 19e.

The key point to note here is that the 'impaired loan expense' / 'write offs' (represented by letter 'W' in each case) only occur:

1/ when the impaired portion of the loan has gone through the whole loan review system'. AND
2/ when a loan repayment has been missed, or a non payment is imminent



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$2,075.211m4.23%$12.138m+$1.685m$2 ,104.591m0.66%


EOFY2012$90.489m$2,078.276m4.35%$14.636m+$3.180m$2 ,105.702m0.85%


EOFY2013$48.975m$2,010.393m2.43%$6.679m+$1.961m$2, 060.867m0.42%


EOFY2014$41.354m$2,607.393m1.59%$35.258m+$3.260m$2 ,631.754m1.46%

.
EOFY2015$39.066m$2,862.070m1.36%$1.555m+$1.910m$2, 893.704m0.12%


EOFY2016$37.851m$3,113.957m1.21%$12.010m+$6.653m$3 ,135.203m0.60%


EOFY2017$38.341m$3,545.896m1.08%$2.140m+$9.531m$3, 567.191m0.33%Loan that


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


UDC

I have redefined the 'Total Financial Assets' as listed in note 10d to be 'Net Financial Receivables', because they have already had their 'Provision for Credit Impairment' deducted (netted off).



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$2,007.012m6.29%$15.103m
$2,049.504m0.74%


EOFY2012$96.670m$2,102.299m4.60%$10.164m.$2,141.78 0m0.47%


EOFY2013$86.877m$2,161.193m4.02%$12.399m
$2,198.653m0.56%


EOFY2014$95.364m$2,344.131m4.07%$21.933m
$2,375.936m0.92%.


EOFY2015$82.267m$2,429.695m3.39%$11.503m$2,461.224 m0.47%


EOFY2016$85.475m$2,655.841m3.22%$12.352m$2,684.750 m0.46%


EOFY2017$116.131m$2,975.781m3.90%$4.838m$3,005.059 m0.16%





Discussion

In the case of Heartland, the 'stressed loan' percentage is consistently going down. However, the actual write offs per year do not show an obvious correlation to the same year's 'stressed loan' figure. In FY2014, for example, the quantum of write offs are almost equal to the quantum of stressed loans. Yet one year later (FY2015) the write offs are only less than one tenth of the stressed loans. Will the case of FY2016 and FY2017, where stressed loans are two to three times the amount actually written off become the new norm?
.
In the case of UDC, the stressed loans look to float around at 4% of the total, much higher than the Heartland equivalents of recent years. For FY2017 only, the 'Impaired Asset Expense' to 'Gross Financial Receivables' is startlingly low, even as the stressed loans jumped up. A one year aberration? Despite making my own interpretation of how to define a 'stressed loan' at UDC - to bring the number more into line with what happens at Heartland - the stressed loan percentage at UDC remains stubbornly high in comparison. UDC loans are perhaps more heavily weighted towards 'working equipment' which may not have much 'fire sale' value during a business downturn. So could it just be in the nature of the UDC business that management need to keep a really close eye on a large portion of their loans? How they do this, while using a skeleton staff compared to Heartland, remains a mystery to me!

What would I like to see in these figures? If you accept that:

1/ When a loan is written off it is largely too late to fix it, AND
2/ The overall number of write offs can be contained (it is inevitable that in any lending organisation, some loans will have to be written off)

THEN I am interested in how management deals with 'stressed loans' before they get to that stage.

My concern is that the write offs at UDC over FY2017 are exceptionally low, and there is an unusual incentive for management to project the result like this (UDC is up for sale). Write offs are also down at Heartland over the comparable period (which could indicate a favourable market to lenders), but not by as much. The percentage of 'stressed loans' at UDC remains significantly comparatively higher than Heartland. There are a couple of ways to interpret that:

Either:

1/ UDC staff remain 'exceptionally diligent' in reviewing stressed loans (as assessed by UDC) and this policy is leading to lower and lower actual write offs.
2/ UDC are being exceptionally lenient in classifying some loans as stressed when really they should be wholly or partially impaired or maybe even written off.

I would have expected more 'exceptional diligence' from Heartland, simply because they have more staff. The Heartland pattern of reducing 'write offs' coupled with reducing 'stressed loans' does make a plausible narrative. But I am concerned that some of those UDC stressed loans may be a little more stressed than UDC management are letting on. It is hard to be definitive about one year's results. In the meantime I would be cautious in assessing the UDC write off picture.

SNOOPY

[Snoopy]

The annual provision for loan impairment at UDC (page 3 UDC Finance Annual Report 2016) is: $7.418mm down 29% on the high previous year figure $10.427m from FY2015 .

From note 6 (Net Loans & Advances) the resultant provisions on the books without bad debts already written off, with reference to the whole EOFY2016 loan book is:

$28.909m /($2,573.030m+$28.909m+$139.730m+$8.950m) = 1.05% of gross value loans on issue

------

The figures for ANZ New Zealand, suitably disentangled from UDC are (using note 13: 'Net Loans and Advances' based on ANZ New Zealand's September 30th 2016 update to the Reserve Bank)

($622m-$28.909m)/ ($114,623m -$2,573m)= 0.53%

-------

Compare that to Heartland (HNZ AR2016, Note 11 'Finance Receivables' )

($21.161m+$4.987m)/ $3,140.105m = 0.83% of gross value of loans on issue.

-------

Multi year trends of the above statistics are in the table below



FY2013FY2014FY2015FY2016


UDC: Loans Impaired/Gross Value of Loans1.55%1.31%1.25%1.05%


ANZ.NZ excluding UDC: Loans Impaired/Gross Value of Loans0.88%0.67%0.56%0.53%


Heartland Bank: Loans Impaired/Gross Value of Loans2.45%0.93%1.09%0.83%

%



From note 6 (Net Loans & Advances) the resultant UDC provisions on the books with reference to the whole EOFY2017 loan book is:

$29.278m /($2,911.594m+$29.278m+$169.965m+$6.486m) = 0.94% of gross value loans on issue

(As an aside, the annual provision for loan impairment at UDC (page 3 UDC Finance Annual Report 2017) is $5.929m. This is down 20% on the high previous year figure of $7.419m from FY2016.)


------

The figures for ANZ New Zealand, suitably disentangled from UDC are (using note 13: 'Net Loans and Advances' based on ANZ New Zealand's September 30th 2017 update to the Reserve Bank are (link to reference below).

https://www.anz.co.nz/resources/9/0/902b57b7-24e0-4af3-9a74-8fbc074a3b83/ANZB+DS+Sep17.pdf?MOD=AJPERES

($579m-$29.978m)/ ($120,539m -$2,912m)= 0.47%

-------

Compare that to Heartland (HBL AR2017, Note 11 'Finance Receivables' )

($25.865m+$3.852m)/ $3,575.613m = 0.83% of gross value of loans on issue.

-------

Multi year trends of the above statistics are in the table below



FY2013FY2014FY2015FY2016FY2017


UDC: Loans Impaired/Gross Value of Loans1.55%1.31%1.25%1.05%0.94%


ANZ.NZ excluding UDC: Loans Impaired/Gross Value of Loans0.88%0.67%0.56%0.53%0.47%


Heartland Bank: Loans Impaired/Gross Value of Loans2.45%0.93%1.09%0.83%0.83%



The above table shows the significant impaired asset divergence between a mainstream bank, like ANZ, and second tier lenders - like UDC and Heartland - is significant and ongoing. There is an interesting correlation apparent between the ANZ parent bank and its subsidiary UDC. The UDC verses ANZ impaired loan percentage looks to be tracing a path that maintains a 2:1 difference between the relative preponderance of impaired loans, with UDC having the higher number. But both are downtrending over the last five years. The level of Heartland impaired loans looks to have plateaued, albeit at a slightly lower level than UDC.

SNOOPY

[Snoopy]

One year on and we look at the chances of default for ANZ.NZ mortgages and ANZ.NZ other retail loans.

http://www.anz.co.nz/about-us/media-centre/investor-information/

(The following tables are updated from page 53 of the ANZ NZ September 30th 2016 Reserve Bank disclosure).



For retail mortgages: 30-09-2012For retail mortgages: 30-09-2013For retail mortgages: 30-09-2014For retail mortgages: 30-09-2015For retail mortgages: 30-09-2016


Grades 0-3:0.2%0.2%0.2% 0.2%0.2%


Grades 4: 0.46% 0.46% 0.46% 0.46% 0.46%


Grade 5: 0.93% 0.93% 0.93% 0.92% 0.92%


Grade 6: 2.12% 2.11% 2.04% 2.02% 2.00%


Grade 7,8: 5.35% 5.40% 5.24% 5.27% 5.13%





For other retail: 30-09-2012For other retail: 30-09-2013For other retail: 30-09-2014For other retail: 30-09-2015For other retail: 30-09-2016


Grades 0-2: 0.1% 0.1% 0.1% 0.1% 0.1%


Grades 3-4:0.29%0.29%0.30%0.26%0.26%


Grade 5:1.10%1.12%1.13%1.00%0.99%


Grade 6:2.50%2.67%2.60%2.39%2.11%


Grade 7,8:10.07%11.25%9.56%8.79%7.86%



Overall observation? A continuing small risk reduction from year to year in the higher risk categories (mostly Grade 6 and above). Yet despite the reserve bank telling us of the risks of an inflated housing market, ANZ are seeing less risk in their retail mortgages than last year. I find that a bit strange.


One year on and we look at the chances of default for ANZ.NZ mortgages and ANZ.NZ other retail loans.

http://www.anz.co.nz/about-us/media-centre/investor-information/

(The following tables are updated from page 54 of the ANZ NZ September 30th 2017 Reserve Bank disclosure, and the percentage numbers represent the probability of default).



For retail mortgages: 30-09-2012For retail mortgages: 30-09-2013For retail mortgages: 30-09-2014For retail mortgages: 30-09-2015For retail mortgages: 30-09-2016For retail mortgages: 30-09-2017


Grades 0-3:0.2%0.2%0.2% 0.2%0.2%0.2%


Grades 4: 0.46% 0.46% 0.46% 0.46% 0.46%0.46%


Grade 5: 0.93% 0.93% 0.93% 0.92% 0.92%0.92%


Grade 6: 2.12% 2.11% 2.04% 2.02% 2.00%1.98%


Grade 7,8: 5.35% 5.40% 5.24% 5.27% 5.13%5.02%






For other retail: 30-09-2012For other retail: 30-09-2013For other retail: 30-09-2014For other retail: 30-09-2015
For other retail: 30-09-2016For other retail: 30-09-2017


Grades 0-2: 0.1% 0.1% 0.1% 0.1%
0.1% 0.1%


Grades 3-4:0.29%0.29%0.30%0.26%0.26% 0.26%


Grade 5:1.10%1.12%1.13%1.00%0.99%
1.01%


Grade 6:2.50%2.67%2.60%2.39%2.11% 2.18%


Grade 7,8:10.07%11.25%9.56%8.79%7.86% 8.06%



This is a very general assessment of risk in the New Zealand loan market, as seen by the ANZ bank. Of most interest is how these figures change 'year to year', and the simple answer to that is 'not much'. Yet retail mortgages are edging down to be less and less likely to default at the hight risk grade level. Is this just a product of a flat interest rate outlook, with interest rates sitting at all time lows?

For 'other retail' there is a slight uptick in default risk Is that a hint that the good times for business cannot continue forever?

Another observation: The really good quality 'loans for stuff' are less likely to default than the very good quality loans for houses. I wonder what the explanation could be for that?

SNOOPY

[percy]

Simple.
People need a car to get to work.No work,no pay.No pay,no anything.
Told you that years ago on HBL thread.
Or you can't dig without your digger,or carry logs without your truck,etc.

[Snoopy]

Snoopy wrote: "Another observation: The really good quality 'loans for stuff' are less likely to default than the very good quality loans for houses. I wonder what the explanation could be for that? "

Simple.
People need a car to get to work.No work,no pay.No pay,no anything.
Told you that years ago on HBL thread.
Or you can't dig without your digger,or carry logs without your truck,etc.


That might just be the answer Percy. Or if we go back to the old wild west days the equivalent would be:

"You can drive a man off his land, but don't you dare try to take that horse from under him!"

OR considering we are talking about the 'top of the credit ratings' here:

"You can drive a good man off his land, but don't you dare try to take that good horse from under him!"

Going back to that ANZ default loan table, once the credit ratings go south, the 'house' becomes more valuable than the 'car' again. So the expression becomes.

"Get that bad man off the land and whip that donkey out from under him!"

I am not sure what happens if our 'bad' cowboy has 'bad land' but still has a 'good horse' though. I have a feeling it might be the job of the other sheriff to deal with that guy.....

SNOOPY

[percy]

You are on to it..!!
Was thinking about you and NIM...
Not sure whether it is so true today, but a few years ago there were a huge number of people who had money with banks ,in no interest accounts.Cheque accounts etc.A large number had between half a million dollars and one million dollars in them.It was about the time Trust Bank floated,and I think you got priority if you were a large depositor with Trust Bank.
What sort of NIM would you achieve should you lend at 6% and pay 0% for funds,.???????
Magic.
Love to know if the above is still true today.

[Snoopy]

Today I want to update the ANZ New Zealand banking covenants for September 30th 2016 quarter (corresponding to the EOFY). ANZ New Zealand includes their wholly owned subsidiary UDC finance.

The document I am referencing is the:

"ANZ bank New Zealand Limited Annual Report and Disclosure Statement for the year ended 30th September 2016, Number 83 issued November 2016"

Page 49, note 29 contains the information on capital adequacy.

The information supplied is as follows:

Common Equity Tier 1 ratio: 10.0% (vs RBNZ minimum of 4.5% + 2.5% buffer)
Total Tier 1 ratio: 13.2% (vs RBNZ minimum of 6.0% + 2.5% buffer)
Total Tier 1 & 2 ratio: 13.7% (vs RBNZ minimum of 8.0% + 2.5% buffer)

The ANZ.NZ Tier 1 capital ratio has gone down slightly again in New Zealand over the year, and no new share capital injection initiative is apparent from the accounts. Total equity has increased to $12,710m, an increase of 2% due to an increase retained earnings.

From Note 17 on Subordinated Debt, The ANZ New Zealand operation has been shored up by the issue of a new tranche of ANZ convertible notes, dubbed "ANZ New Zealand Internal Capital Notes 2."

• On 15 June 2016, the Bank issued 9.38m million convertible notes (ANZ NZ ICN2) to the NZ Branch at NZ$100 each, raising NZ$938 million.

This issue is structured as additional Tier 1 capital for ANZ.NZ.

Page 50 contains detailed notes on just how the ANZ NZ capital is made up. If you use that information and use it to calculate the above ratios, based on a loan book with net loans and advances of $114,623m (from the balance sheet) I calculate the above ratios as follows (total net loans and advances of broken down under Note 13 'Net Loans & Advances'):

Common Equity Tier 1 ratio: $8,725m/$114,623m = 7.6%
Total Tier 1 ratio: $11,505m/$114,623m = 10.0%
Total Tier 1 & 2 ratio: $11,973m/$114,623m = 10.4%

Those figures are a different to those precedingly calculated. That is because the Tier 1 and Tier 2 capital figures have been 'risk adjusted' before they went into my first calculation. The risk adjustment is done because the expected capital recovery from loans -should they go bad- is different among the different classes of loans (corporate, sovereign, bank, retail mortgages and other retail)

SNOOPY

PS Tabulated version of above results



30/09/2016 (risk adj)30/09/2016 (book value)RBNZ Required


Common Equity Tier 1 Ratio10.07.64.5+2.5


Total Tier 1 Ratio13.210.06.0+2.5


Total Tier 1&2 Ratio13.710.48.0+2.5



A multi year picture of capital adequacy is shown below:



FY2012FY2013FY2014FY2015FY2016


Quoted Common Equity Tier 1 RatioN/A10.4%10.7%10.5%10.0%


Quoted Total Equity Tier 1 Ratio10.8%10.8%11.1%12.7%13.2%


Quoted Total Equity Tier 1 & 2 Ratio12.5%12.4%12.3%13.6%13.7%



It is interesting that although the Common Tier 1 equity has been weakening, other tier 1 (including preference shares) and tier 2 capital has been issued to strengthen the balance sheet.


Today I want to update the ANZ New Zealand banking covenants for September 30th 2016 quarter (corresponding to the EOFY). ANZ New Zealand includes their wholly owned subsidiary UDC finance.

The document I am referencing is the:

"ANZ bank New Zealand Limited Annual Report and Disclosure Statement for the year ended 30th September 2017, Number 87 issued November 2017"

Page 50, note 26 contains the information on capital adequacy.

The information supplied is as follows:

Common Equity Tier 1 ratio: 10.7% (vs RBNZ minimum of 4.5% + 2.5% buffer)
Total Tier 1 ratio: 14.1% (vs RBNZ minimum of 6.0% + 2.5% buffer)
Total Tier 1 & 2 ratio: 14.4% (vs RBNZ minimum of 8.0% + 2.5% buffer)

The ANZ.NZ Tier 1 capital ratio has increased in New Zealand over the year, back up to historic recent highs.and no new share capital injection initiative is apparent from the accounts. Total equity has increased to $12,781m, an increase of 0.6% due to an increase retained earnings.

From Note 17 on Subordinated Debt, The ANZ New Zealand operation remains steady with no new notes issued, nor old notes redeemed during the year. Each of the three ANZ New Zealand Capital Notes issues are structured as additional Tier 1 capital for ANZ.NZ.

Page 51 contains detailed notes on just how the ANZ NZ capital is made up. If you use that information and use it to calculate the above ratios, based on a loan book with net loans and advances of $120,529m (from the balance sheet) I calculate the above ratios as follows (total net loans and advances of broken down under Note 13 'Net Loans & Advances'):

Common Equity Tier 1 ratio: $8,727m/$120,529m = 7.2%
Total Tier 1 ratio: $11,505m/$120,529m = 9.5%
Total Tier 1 & 2 ratio: $11,709m/$120,529m = 9.7%

Those figures are a different to those precedingly calculated. That is because the Tier 1 and Tier 2 capital figures have been 'risk adjusted' before they went into my first calculation. The risk adjustment is done because the expected capital recovery from loans -should they go bad- is different among the different classes of loans (corporate, sovereign, bank, retail mortgages and other retail)

SNOOPY

PS Tabulated version of above results



30/09/2017 (risk adj)30/09/2017 (book value)RBNZ Required


Common Equity Tier 1 Ratio10.77.24.5+2.5


Total Tier 1 Ratio14.19.56.0+2.5


Total Tier 1&2 Ratio14.49.78.0+2.5



A multi year picture of capital adequacy is shown below:



FY2012FY2013FY2014FY2015FY2016FY2017


Quoted Common Equity Tier 1 RatioN/A10.4%10.7%10.5%
10.0%10.7%


Quoted Total Equity Tier 1 Ratio10.8%10.8%11.1%12.7%
13.2%14.1%


Quoted Total Equity Tier 1 & 2 Ratio12.5%12.4%12.3%13.6%
13.7%14.4%



The decline Common Tier 1 equity has been reversed, while other tier 1 (including preference shares) and tier 2 capital continues to strengthen. A response to regulatory authorities to shore up the capital position of the balance sheet?

Under note 25 on capital adequacy:

"Certain instruments issued by the Bank qualify as tier 2 capital instruments subject to phase-out under RBNZ Basel III transition arrangements. Fixing the base at the nominal amount of such instruments outstanding at 31 December 2012, their recognition is capped at 20% of that base from 1 January 2017; and from 1 January 2018 onwards these instruments will not be included in regulatory capital."

So possibly the ANZ in New Zealand is building up its Tier 1 capital in anticipation of losing any 'backing ability' its Tier 2 capital now has?

SNOOPY

[Snoopy]

Just in case the message has been lost. It is not possible to invest in ANZ (New Zealand) or UDC from a direct equity perspective. It is possible to invest in the ultimate parent though, and this ANZ in Australia. For convenience of NZ investors, ANZ (Australia) is listed on the NZX.

All FY2016 numbers quoted below are from the FY2016 ANZ Annual Report



FY2014FY2015FY2016Reference


Normalised Profit (A)$7,117m$7,216m$5,889mp5 (Financial Highlights)


Shareholder Equity 'Tier 1 Capital' (B)$49,284m$57,353m$57,924mp64 (Balance Sheet)


Return on Equity (A)/(B)14.4%12.6%10.2%calculated


Additional 'Tier 1 Capital' (C)$6,004m$7,423m$9,493mp104 (Subordinated Debt)


Total 'Tier 1 Capital' (B)+(C)$55,288m$64,776m$67,390mcalculated


'Tier 2 Capital' Perpetual Subordinated Notes (D)$1,087m$1,188m$1,190mp104 (Subordinated Debt)


'Tier 2 Capital' Dated Subordinated Notes (E)$6,516m$8,398m$11,281mp104 (Subordinated Debt)


'Tier 2 Capital' Discount for near dated 2019 notes (F)$0m-$271m-$245m2019 notes calculated at 20%


'Tier 2 Capital' Total (D)+(E)+(F)$7,603m$9,315m$12,226mcalculated


Total Capital (Tier+Tier2) (G)$62,891m$74,091m$79,616mcalculated


Return on Total Capital (Tier+Tier2) (A)/(G)11.3%9.7%7.4%calculated



That last line in the table is not one you will find in any ANZ report. Yet it is an interesting measure of how much 'equity', in the widest sense of that word, that ANZ management regard as prudent. Since EOFY2014 ANZ capital of all kinds has increased by nearly 25%!

If, for a comparative example, you take the equivalent ROTC ('Return On Total Capital') for New Zealand's own 'Heartland Bank': Net Profit $54.164m (excluding other comprehensive income) Shareholder Equity $498.341m (for Heartland ROTC = ROE, because Heartland as yet has no subordinated bond type capital)

Then ROTC = $54.164m / $498.341m = 10.9%


It is not possible to invest in ANZ (New Zealand) or UDC from a direct equity perspective. It is possible to invest in the ultimate parent though, and this ANZ in Australia. For convenience of NZ investors, ANZ (Australia) is listed on the NZX. FY2015 is a good base year for comparative purposes. This is because there was a significant cash issue during FY2015 to fix a perceived shortage of capital.

All FY2017 numbers quoted below are from the FY2017 ANZ Annual Report



FY2014FY2015FY2016FY2017Reference


Normalised Profit (A)$7,117m$7,216m$5,889m$6,938m
p23 (Financial Highlights)


Shareholder Equity 'Tier 1 Capital' (B)$49,284m$57,353m$57,927m$59,075mp69 (Balance Sheet)


Return on Equity (A)/(B)14.4%12.6%10.2%11.7%
calculated


Additional 'Tier 1 Capital' (C)$6,004m$7,423m$9,493m$8,452m
Summed p98-100 (Subordinated Debt)


Total 'Tier 1 Capital' (B)+(C)$55,288m$64,776m$67,390m$67,427mcalculated


'Tier 2 Capital' Perpetual Subordinated Notes (D)$1,087m$1,188m$1,190m$1,150mp101 (summed)


'Tier 2 Capital' Dated Subordinated Notes (E)$6,516m$8,398m
$11,281m$8,108m
p101 (summed)


'Tier 2 Capital' Discount for near dated 2019 notes (F)$0m-$271m
-$245m-$241m2019 notes calculated at 20%


'Tier 2 Capital' Total (D)+(E)+(F)$7,603m$9,315m
$12,226m$9,017m
calculated


Total Capital (Tier+Tier2) (G)$62,891m$74,091m$79,616m$76,444m
calculated


Return on Total Capital (Tier+Tier2) (A)/(G)11.3%9.7%7.4%9.1%
calculated



That last line in the table is not one you will find in any ANZ report. Yet it is an interesting measure of how much 'equity', in the widest sense of that word, that ANZ management regard as prudent.

If, for a comparative example, you take the equivalent ROTC ('Return On Total Capital') for New Zealand's own 'Heartland Bank': Net Profit $60.808m (excluding other comprehensive income)

Shareholder Equity at EOFY2017 was $569.595m. Tier 2 capital (the sum of the subordinated bonds and notes on issue) totals $14.975m

Then ROTC = $60.808m / ($569.595m + $14.975m) = 10.4%

SNOOPY

[macduffy]

Solid result from ANZ Group.

http://news.iguana2.com/macquaries/ASX/ANZ/504566

Well received by the market, so far. Probably an element of relief, considering the on-going Australian angst with banks!

[Bobdn]

Yeah, good result and a great relief. I hold far too much as a result of being in the DRP for years. Need to sell some to get some balance back.

[Snoopy]

The following information can be found in UDC's FY2017 annual report.

The 'profit before tax' is listed as $85.710m (p3). But this includes a provision for credit impairment of $5.929m which I would remove to get the picture of ongoing operational performance. So I get EBT of $91.639m.

Now go to note 3 (p11) on interest expense. There is underlying interest over and above what is due to debenture holders of $38.655m.

So total underlying EBIT = $91.639m + $38.655m = $130.294m (+22% on FY2016)

Now turn to page 12 (note 6) and you will see total net loans and advances of: $2,911.594m (a 13% rise on FY2016).

The operating margin ( EBIT/'Total Net Loans and Advances' ) based on the end of year loan balance book is:

$130.294m/$2,911.594m = 4.48%

Put in context, the operating margin over the last few years has gone like this:



Operating Margin


FY20174.48%


FY20164.17%


FY20154.63%


FY20144.41%


FY20134.02%


FY20123.87%



To Summarize: Operating Profit (EBIT) for FY2017 is up strongly, but this is largely due to the much higher interest bill being paid, outside of the the interest due to debenture holders. If you look at note 8, you will see that UDC debenture holders have pulled over $500m out of the company over FY2017. I see this as a significant loss of confidence by the investing public in UDC. This loss of confidence was perhaps precipitated by an announced sale to HNA of China, before that deal was pulled. The credit rating of UDC is now BBB (as assessed by Standard and Poor's) with a negative outlook. This is a very large fall from the AA- rating the company in September 2016!

The loss of debenture support has been more than made up by the ANZ bank doubling its own capital support for UDC. In November 2007 this facility was further increased to $2,700m by UDC's owner the ANZ bank. At this level, all the remaining UDC debenture holders could be repaid! Since the company is now largely dependent on the ANZ bank to obtain borrowing capital for survival, it is not clear to me that a potential full 'sale' of UDC to another outside buyer by ANZ remains a meaningful proposition.


The following information can be found in UDC's FY2018 annual report.

The 'profit before tax' is listed as $90.779m (p3). But this includes a provision for credit impairment of $10.885m which I would remove to get the picture of ongoing operational performance. So I get EBT of $101.664m.

Now go to note 3 (p11) on interest expense. There is underlying interest over and above what is due to debenture holders of $58.737m.

So total underlying EBIT = $101.664m + $58,737m = $160.401m (+23% on FY2017)

Now turn to page 12 (note 6) and you will see total net loans and advances of: $3,222.430m (an 11% rise on FY2017).

The operating margin ( EBIT/'Total Net Loans and Advances' ) based on the end of year loan balance book is:

$160.401m / $3,222.430m = 4.98%

Put in context, the operating margin over the last few years has gone like this:



Operating Margin


FY20184.98%


FY20174.48%


FY20164.17%


FY20154.63%


FY20144.41%


FY20134.02%


FY20123.87%



To Summarize: Operating Profit (EBIT) for FY2018 is up strongly, but this is largely due to the much higher interest bill being paid to the ANZ bank, outside of the the interest due to debenture holders. If you look at note 8, you will see that UDC debenture holders have pulled a further $100m out of the company over FY2018 to add to the $500m taken out of the company over FY2017. I see this as a significant loss of confidence by the investing public in UDC continuing. This loss of confidence was perhaps precipitated by an announced sale of UDC to HNA of China, before that deal was pulled because of HNA's opaque ownership. During the year, whike ANZ was waiting for Overseas Investment Office approval for the deal, rating agency Standard & Poor’s downgraded HNA Group’s rating to “B”. This is effectively a “junk” rating, indicating a company faces major ongoing uncertainties about its ability to meet its financial commitments. Since a subsidiary cannot have a higher credit rating than its parent, UDC may have gone into receivership had the HNA takeover gone through.

The credit rating of UDC is now BBB (as assessed by Standard and Poor's) but the negative outlook has now been removed. Nevertheless, this is a very large fall from the AA- rating the company had back in September 2016!

The loss of debenture support has been more than made up by the ANZ bank doubling its own capital support for UDC. In November 2007 this facility was further increased to $2,700m by UDC's owner the ANZ bank, where it remains in September 2018. So ANZ retains the capacity to pay out all the remaining UDC debenture holders! The company is even more dependent on the ANZ bank to obtain borrowing capital for survival (65% of capital backing UDC comes directly from ANZ). UDC has been taken off the 'for sale' list for now.

SNOOPY

[macduffy]

Good work, Snoopy, but all a bit redundant now that UDC (ANZ) has announced that it intends to repay all outstanding debentures later this year in favour of "alternative financing". Probably means hat ANZ will increase its support.

[Snoopy]

Good work, Snoopy, but all a bit redundant now that UDC (ANZ) has announced that it intends to repay all outstanding debentures later this year in favour of "alternative financing". Probably means hat ANZ will increase its support
.

Thanks for the update Macduffy. I hadn't seen the 16th Jan 2019 press release you refer to and so went straight to the UDC website.. They have certainly closed the shop door to new customer debentures and given notice that existing customers with will have their debentures redeemed. The door is still a tiny bit open though (my bold):

"If a final decision is made to repay all existing Secured Investments, ..."

And it seems the call account survives.....for now. I presume the 'call account' is secured?

I still think it is worth following UDC though, because they are probably the closest finance company to forum favourite 'Heartland' and it is always useful to have a measuring stick. But if no public money is to be taken in, then UDC becomes a fully contained subsidiary of the ANZ bank. So I guess public reporting will stop, and they will sack the board,

SNOOPY

[percy]

You are correct in stating UDC is a useful measuring stick for HGH.
I hope ANZ taking it in house does not weaken it.
My thoughts are mixed.I would have liked it to merge with HGH or retained [semi] independant from ANZ.
Being listed would have worked.I am sure NZders would have continued to fund it,but without the ANZ support it was always going to be difficult finding "fair" or "true" value for it.

[Snoopy]

UDCHeartland


EBTLoan BookEBT/Loan BookEBTLoan BookEBT/Loan Book


FY2009$34.024m$1,829.156m1.86%


FY2010$45.012m$1,968.771m2.29%


FY2011$46.382m$1,948.552m2.38%


FY2012$58.476m$2,014.473m2.90%$29.377m$2,078.276m1 .41%


FY2013$66.787m$2,065.117m3.23%$36.540m$2,010.376m1 .82%


FY2014$83.501m$2,272.081m3.68%$57.416m$2,607.393m2 .20%


FY2015$89.750m$2,347.163m3.82%$76.304m$2,862.070m2 .67%


FY2016$88.835m$2,573.030m3.45%$87.689m$3,113.957m2 .82%


FY2017$91.639m$2,911.514m3.15%$99.568m$3,545.897m2 .81%



Note:

1/ UDC data for FY2017 is drawn from the 'UDC Finance Annual Report 2017' 'Statement of Comprehensive Income' (EBT) and 'Balance Sheet' (Loan Book Balance).
2/ Heartland Bank data for FY2017 'Statement of Comprehensive Income' (EBT) and 'Statement of Financial Position' (Loan Book Balance).
3/ All EBT figures are before 'credit and impairment charge'.

Note that the absolute figures year to year are not comparable between UDC and Heartland. This is because Heartland has a physical branch structure whereas UDC works out of ANZ bank branches. The underlying cost structures of both protagonists are not the same.

The individual company year on year trend is interesting though. The EBT Margin for UDC continues to decline, even as the previously improving Heartland EBT margin es. Is the unusually large increase in the loan book size ('growth any any cost' to pump up a potential company sale price?) at UDC compromising the profitability for UDC going forwards?




UDCHeartland


EBTLoan BookEBT/Loan BookEBTLoan BookEBT/Loan Book


FY2009$34.024m$1,829.156m1.86%


FY2010$45.012m$1,968.771m2.29%


FY2011$46.382m$1,948.552m2.38%


FY2012$58.476m$2,014.473m2.90%$29.377m$2,078.276m1 .41%


FY2013$66.787m$2,065.117m3.23%$36.540m$2,010.376m1 .82%


FY2014$83.501m$2,272.081m3.68%$57.416m$2,607.393m2 .20%


FY2015$89.750m$2,347.163m3.82%$76.304m$2,862.070m2 .67%


FY2016$88.835m$2,573.030m3.45%$87.689m$3,113.957m2 .82%


FY2017$91.639m$2,911.514m3.15%$99.568m$3,545.897m2 .81%


FY2018$101.664m$3,222.430m3.15%$116.361m +($1.3-$4.8-$0.6)m$3,984.941m2.82%



Note:

1/ UDC data for FY2018 is drawn from the 'UDC Finance Annual Report 2018' 'Statement of Comprehensive Income' (EBT) and 'Balance Sheet' (Loan Book Balance).
2/ Heartland Bank data for FY2018 'Statement of Comprehensive Income' (EBT) and 'Statement of Financial Position' (Loan Book Balance).
3/ All EBT figures are before 'credit and impairment charge'.
4/ FY2018 Heartland result adjusted to reflect the before tax effect of a $4.8m gain from a formerly written off property now sold, a $0.6m gain from the sale of the bank invoice finance business and $1.3m in one off adjustment for internal system reintergation costs.

Note that the absolute figures year to year are not comparable between UDC and Heartland. This is because Heartland has a physical branch structure whereas UDC works out of ANZ bank branches. The underlying cost structures of both protagonists are not the same. Furthermore Heartland's balance sheet income earning base is more than just the receivables. The Heartland banking group has investment assets, there is goodwill on the books from high earning acquisitions, there are vehicles owned in lease out deals and rent from investment properties. That sums to 10% more income earning assets than just the receivables. Yet the increasingly higher earnings rate at Heartland now belies the higher cost structure that Heartland must have - impressive for Heartland?

The individual company year on year trend is interesting though. The EBT Margin for UDC continues to decline, even as the Heartland EBT margin continues to increase. After many years they are both converging towards the same value! Is the unusually large increase in the loan book size ('growth any any cost' to pump up a potential company sale price?) at UDC compromising the profitability for UDC going forwards? Given profitability for FY2018 has remained at previous year's lower levels, that could suggest the answer is 'yes'!

SNOOPY

[Snoopy]

Time to normalise the UDC figures for 2017 so they can be compared more directly with the likes of Heartland Bank.

Heartland in FY2017 had selling and administration expenses of $71.684m (Heartland FY2017 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $32.427m (UDC Financial Statement 2017, note 4). That is a difference of $39.257m. The two are comparable in that they have a similarly sized loan book (UDC:$2,911.514m, Heartland $3,545.897m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin (EBIT where 'I' is the credit facility interest only) on assets?

FY2017: ($130.294-$39.257+ $9.002)/$2,911.514 = 3.44%

Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $9.002m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $39.257m 'extra operating expenses' (calculated above, using figures from Financial Statements 2017, note 4). The $9.002m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $9.002m which largely reflects a 'branch network allowance payment' must be removed from my comparison.

For Heartland over FY2017 the equivalent calculation of EBIT (where 'I' represents interest paid not connected to debenture holders, and E represents the earnings before write downs) is as follows:

($99.568m+$25.714m) / $3,933.685m = 3,18%

A 'margin' figure is then calculated by taking an 'earnings' figure and dividing that by the revenue needed to generate those earnings.
This recent year trends in the 'underlying EBIT margin' at UDC and Heartland are compared below:




EBIT Margin UDCEBIT Margin Heartland


FY2017 3.44% 3.18%


FY2016 3.07% 3.48%


FY2015 3.53% 3.71%

FY2014 3.37% 3.00%


FY2013 2.58% 2.65%



In this context, FY2016 looks like a negative aberration for UDC. But the EBIT margin for Heartland is showing a declining pattern over the last three years. With UDC up for sale, could the earnings figures for UDC have been manipulated upwards over FY2017 in what is in reality a softer market? 'Earnings' in this context is a special kind of EBIT in which I have eliminated impairment charges. So I have removed the ability to reclassify assets as problem assets, and the ability to manipulate the company's bank loan structure to influence this earnings result. The principal driver of this EBIT is therefore revenue and this is almost impossible to manipulate. Consequently I don't believe the UDC figures are subject to manipulation.


Time to normalise the UDC figures for 2018 so they can be compared more directly with the likes of Heartland Bank. Heartland in FY2018 had selling and administration expenses of $80.433m (Heartland FY2018 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $34.838m (UDC Financial Statement 2018, note 4). That is a difference of $45.595m. The two are comparable in that they have a similarly sized loan book (UDC:$3,222.430m, Heartland $3,984.941m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin (EBIT where 'I' is the credit facility interest only) on assets?

FY2018: ($160.401 - $45.595 + $6.592) / $3,222.430 = 3.77%

Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $6.592m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $45.595m 'extra operating expenses' (calculated above, using figures from Financial Statements 2018 note 4). The $6.592m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $6.592m which largely reflects a 'branch network allowance payment' must be removed from my comparison.

For Heartland over FY2018 the equivalent calculation of EBIT (where 'I' represents interest paid not connected to debenture holders, and E represents the earnings before write downs) is as follows:

($116.361m+($1.3-$4.8-$0.6)m+$25.380m) / $4,397.350m = 3.13%

This recent year trend in the underlying margin at UDC and Heartland is compared below:




UDC underlying EBIT MarginHeartland underlying EBIT Margin


FY2018 3.77% 3.13%


FY2017 3.44% 3.18%


FY2016 3.07% 3.47%


FY2015 3.53% 3.57%

FY2014 3.37% 2.66%


FY2013 2.58% 2.32%



(Note: I have recalculated the figures from Heartland in relation to past years. This is because I have changed my mind about what Heartland assets on the balance sheet are 'income earning', and produce those Heartland earnings)

In this context, FY2016 looks like a negative aberration for UDC. But the EBIT margin for Heartland is showing a declining pattern over the last four years. When UDC was put up for sale in FY2017, could the earnings figures for UDC have been manipulated upwards over FY2017 in what was in reality a softer market? Just to make UDC's sale prospects look better? 'Earnings' in this context is a special kind of EBIT in which I have eliminated impairment charges. So I have removed the ability to reclassify assets as 'problem assets' in the current year. Although I should note that wouldn't stop UDC taking on more assets (loans) as a whole,- and they might include more problem assets. Even if they were not classified in that way - yet! That will only come out by inspecting the asset provisioning in subsequent years. Yet the ability to manipulate UDC's re-balancing of bank loan to debenture structure remains as an influence this EBIT result. As debenture loans from people on the street are replaced by ANZ in house bank loans, then EBIT goes higher. Because extra interest charges due to ANZ replace what was formerly an 'in house cost'. It is therefore the increasing mismatch between 'in house loans' and 'in house money used to support those loans' (because this implies more bank funding to bridge the gap) that is driving the underlying EBIT for UDC higher in 2017 and 2018.

It strikes me that what I have just shown here is that if you can disregard your external borrowing costs, then your underlying earnings will go up. Well, duh, yeah! Such an edict is so obvious it doesn't need proving. So maybe this post is just a waste of time? Sorry you had to read it! Subsequent to starting this post, I have found out that UDC owner ANZ is paying out all UDC debenture holders this year. As this will increase EBIT, perhaps the moral of the story is that those finance companies that take deposits from the public as less valuable than those that simply use parent bank financing. OTOH such finance companies can only exist on the whim of a parent funding bank. So perhaps the moral is: "Do not use EBIT as a valuation multiple for finance companies!"

SNOOPY

[Snoopy]

HNZ (FY2017)UDC (FY2017)


Agriculture Forestry & Fishing: $836.977m (21.3%) $547.780m (18.4%)


Mining: $19.006m (0.5%) $15.091m (0.5%)


Manufacturing: $76.445m (1.9%) $59.203m (2.0%)


Finance & Insurance: $395.804m (10.1%) $70.125m (2.4%)


Retail & Wholesale Trade: $188.941m (4.8%) $367.256m (12.3%)

A
Households: $1,717.407m (43.7%) $820.382m (27.5%)


Property & Business Services $347.776m (8.8%)$171.163m (5.8%)


Transport & Storage: $179.016m (4.6%)$442.523m (14.9%)


Other Services: $169.867m (4.3%) $482.258m (16.2%)


Total $3,931.239m (100%) $2,975.781m (100%)



Note:

1/ Heartland loans pre impaired asset adjustment. UDC loans post impaired asset adjustment.

The Heartland loan book has grown by 14% over FY2017 (ended 30-06-2017) , compared to a 12% growth over at the UDC loan book over the nearest equivalent period (FY2017 ended 30-09-2017).

At UDC, the press release result highlights were motor vehicle lending increasing by $261 million (+28%), commercial lending growing by $51 million (+4%) and equipment dealer lending was up $12 million (+7%). Curiously those categories do not equate to the category loan disclosure made in the UDC annual report. Yes 'Household Lending' was up by $180m but Transport and Storage was actually down $18m. So I would guess that most of the increase in motor vehicle loans were made via retail car yards. The largest dollar increase in any category was $53.5m for 'Agriculture Fishing and Forestry' (up 11%). Curiously UDC chose not to highlight this.

At Heartland, the proportion of Rural Loans continues to increase, now 21.3% of the total up from 19.7% in FY2016, 17.6% in FY2015 and 16.1% in FY2014. Of the current 21.3% of rural loans, 8 percentage points of those relate to dairy (up from 7 percentage points in 2015). So Heartland offers the most financial exposure to 'rural' of any listed entity on the NZX, and it is getting bigger both in real and percentage terms! 'Household' which encompasses Consumer, Reverse Mortgage and Residential Mortgage saw the Consumer subset of loans grow 14% (+$112m), the majority of that growth seeming to be Motor Vehicle loans ( +$72m). However, we then learn that there has not been a consummate rise in earnings due to 'lower earnings rates on Motor Vehicles and Personal Loans'. Reverse mortgage growth has been significant, +12% ( $42.5m) in NZ and +19% ($83.6m ) in Australia. Ironically strong growth in reverse mortgages will continue to put a capital strain on Heartland because it means this subset of the operation remains cash flow negative.

There are early signs that the strategy of doing more business across all sectors 'on line' will be good for Heartland profitability going forwards.





HLB (FY2018)UDC (FY2018)


Agriculture Forestry & Fishing: $808.452m (18.9%) $573.893m (17.5%)


Mining: $19.222m (0.4%) $19.976m (0.6%)


Manufacturing: $70.822m (1.6%) $60.655m (1.8%)


Finance & Insurance: $337.241m (7.7%) $66.999m (2.0%)


Retail & Wholesale Trade: $238.064m (5.4%) $419.054m (12.8%)


Households: $2,105.231m (48.0%) $965.008m (29.4%)


Property & Business Services $399..973m (9.1%)$183.128m (5.6%)


Transport & Storage: $206.592m (4.7%)$437.710m (13.3%)


Other Services: $184.826m (4.2%) $558.206m (17.0%)


Total $4,390.423m (100%) $3,293.630m (100%)



Note:

1/ Heartland loans pre impaired asset adjustment. UDC loans post impaired asset adjustment.

The Heartland loan book has grown by 11.6% over FY2018 (ended 30-06-2018), compared to a 10.7% growth over at the UDC loan book over the nearest equivalent period (FY2018 ended 30-09-2018).


Discussion UDC

At UDC, the press release of full year results highlights were:

1/ Motor vehicle lending increasing by $217 million (+18% to $1,200m),
2/ Commercial lending growing by $50 million (+4% to $1,300m) and
3/ Equipment dealer lending was up $12 million (+6% to $200m).

These were the same three category increases that UDC chose to highlight in FY2017, even if the motor vehicle increase was much more modest in percentage terms than FY2017. Curiously those categories do not equate to the category loan disclosures made in the UDC annual report. Yes 'Household Lending' was up by $144m. But Transport and Storage was actually down (again), this time by $5m. So once again, I would guess that most of the increase in motor vehicle loans were made via retail sales at car dealers. The largest dollar increase in any category was for 'Households' , the $144m gain being up 17.6%. 'Household receivables' include private car sales. UDC noted the automotive sector was 'slowing down' and business confidence was lower, a striking juxtaposition to UDC's own experience of motor vehicle loans growing strongly:

1/ A sign of UDC's growing market share in motor vehicle finance?
2/ Or a comment on a slow down in business in the second half of CY2018?

In FY2018 UDC make a big deal of 'construction lending', while Heartland doesn't even give construction a lending category. Construction lending at UDC increased to $451.173m (+10.3%) up from $408.967m. Yet a similar sized increase of $52m (much greater in percentage terms, +14%) happened in 'retail and wholesale'. And this was not mentioned in UDC's press release of results commentary.

Discussion Heartland

Meanwhile at Heartland, on-line lending is highlighted as growing fastest. Heartland's share of the Harmony platform was up 61% to $152m, albeit off a small base. Whether this is indicative of the wider incremental uptake of digital loans via other Heartland digital platforms I am not sure. The much trumpeted wider digital platform achievements of:

1/ helping more kiwis into franchises and
2/ to purchase plant and machinery,

are all subsumed inside wider lending categories. Yet Heartland did report small business lending via the digital base up from $45.4m to $89.9m: a 98% increase (but still only making up 2% of the total overall Heartland business). Of course that 98% increase may include some business loans that would have happened anyway, but were redirected from what would have been paper loan applications.

The proportion of Rural Loans decreased for the first time in five years, now 18.9% of the total - down from 21.3% in FY2017. This is useful in de-risking the Heartland loan book going forwards. And it is consistent with Heartland's announced strategy of moving away from 'larger business and rural relationship lending', to shorter term seasonal lending, like livestock finance. This kind of targeted rural lending will remain a cornerstone of Heartland's business going forwards, along with reverse mortgages (+23% to $1,130m), motor vehicle loans (+16% to $955m) and small business loans (+7% to $1,066m). In contrast to UDC, Heartland see further growth in motor vehicle loans. Heartland also see no impact on their Australian reverse mortgage business from the Australian Federal government starting a domestic reverse mortgage scheme for income supplementation. Yet 20% of existing Heartland reverse mortgages are used to generate extra income! I do hope for shareholders sakes that Heartland are not 'seeing only what they want to see'.

Heartland has, post results, restructured their business to allow the reverse mortgage business in Australia to keep growing outside of its' Heartland Bank company cousin in New Zealand. 'Household Loans' as a whole category grew by 23%, matching the growth of reverse mortgages that now make up more than 50% of 'household loans' category. That is important, as it shows that reverse mortgage growth is being matched by other household loan growth, This largest category growth rate is ahead of what UDC are achieving. UDC grew their household loan book by a still impressive 17% YOY without offering reverse mortgages. The worst performing loan category for Heartland was 'manufacturing' with gross dollar loans falling by 7.5%, compared to a small increase at UDC. In both cases we are talking about less than 2% of all receivables - not material to either companies' annual result. Evidence that New Zealand is progressing further down the path of a 'post manufacturing' era?

Risk Concentration Assessment

My overall impression of comparing these two protagonists are that they are becoming more alike. The stand out differences of UDC highlighting $450m worth of 'construction lending' and having $200m more invested in both the 'transport and storage' and 'retail and wholesale', while Heartland has a fast growing platform of $1.1billion in equity release loans, notwithstanding. The greatest risk aggregation for both protagonists is in the 'household'/'personal and other services' category. But these loans are geographically diverse and cover a multitude of needs. The largest sub category in this is 'Australian Reverse Mortgages' at Heartland, which totalled $NZ677m at balance date. That is just over 15% of Heartland's loan book. But those loans are spread all over Australia, the largest concentrations being 25% in Sydney and 18% in Melbourne. The Sydney HER market represents just 4% of Heartland's total loan book, not enough to cause concern. My main area of concern at Heartland last year, of excessive lending on land to dairy farmers in particular, has been addressed.

SNOOPY

[percy]

PGW has the largest % exposure to rural.
Since 2017 HGH rural exposure has reduced from $679.1 mil to $660.5 mil in 2018,while their overall loan book has grown .
The average rural loan size has been reducing from $252,500 in 2013 to $174,400 in 2018.
The term of rural loans has reduced from 53 months in 2013, to 43 months in 2018.
A very different picture from the one you paint.

[Snoopy]

PGW has the largest % exposure to rural.


Since PGW is a rural servicing company, that statement is undoubtedly true. But what about rural financing? PGW would claim that they don't do that any more, having sold off PGG Wrightson finance to Heartland a few years ago. But we PGW shareholders know that the new 'Go Lamb' and 'Go Beef' finance schemes for livestock is PGW Finance recreated in all but name. The loan balance of 'Go Product' was $39.4m in aggregate at balance date. Compared to the PGW asset base of $537.1m, this is 7.3% of all assets.

That means in terms of farm lending, Heartland is still far more exposed than PGG Wrightson, by more than a factor of two.



Since 2017 HGH rural exposure has reduced from $679.1 mil to $660.5 mil in 2018,while their overall loan book has grown .
The average rural loan size has been reducing from $252,500 in 2013 to $174,400 in 2018.
The term of rural loans has reduced from 53 months in 2013, to 43 months in 2018.
A very different picture from the one you paint.


I did put a note in my post that it was a 'work in progress' when you read it Percy. But obviously it wasn't prominent enough. The text you are referring to relates to the previous year. And as you rightly say, things have now turned the corner for Heartland and those difficult rural loans. My offending post has now been rewritten!

SNOOPY

[Snoopy]

Updating the actual bad debt write offs in relation to the size of the loan book at the end of FY2017. Section 7 in the UDC 2017 Financial Statements is named "Provision for Credit Impairment". Bad debts actually written off are compared against the 'provision for loan impairment' stated on page 3, the 'Statement of Comprehensive Income'.



UDCBad Debt Write Off (Note 7: Provision for Credit Impairment)New Annual Bad Debt Provision (Income Statement)


FY2010$17.343m


FY2011$4.891m


FY2012$10.164m$6.031m


FY2013$12.399m$7.123m


FY2014$3,300m +$18.633m = $21.933m$11.733m


FY2015-$0.659m + $12.162m= $11.503m$10.427m


FY2016$1.297m + $11.055m = $12.352m$7.418m


FY2017-$2.860m + $7.698m = $4.838m$5.929m



Actual write offs look to be in a range of $10m to $12m. excluding the spike from FY2014 and the unusually low figures in FY2017 and FY2018.

Putting these 'actual write offs' as a percentage of the end of year loan book gives them better context Note that:

1/ the 'actual write offs' are found in the annual change of the holding provision for bad debts (AR2018 Note 7: Provision for Bad Debts) and do not directly correspond to the top up expenses for this provision that may be found in each annual income statement. Note that the 'Collective Provision' actual write offs are taken straight to the income statement. However, individual provision write offs are not. So to obtain each years actual write offs, you have to add the 'Collective Charge to the Statement of Comprehensive Income' to the Individual 'Bad Debts Written Off.

2/ the denominator is the 'carrying value' of the Net Loans and Advances, This has already been adjusted for the provision for credit impairment, unearned income and deferred fee revenue and expenses.

FY2012: $10.164m/$2,014.473m = 0.505%
FY2013: $12.399m/$2,065.117m = 0.600%
FY2014: $21.933m/$2,272.081m = 0.965%
FY2015: $11.503m/$2,347.163m = 0.518%
FY2016: $12.352m/$2,573.030m = 0.490%
FY2017: $4.838m/$2,911.514m = 0.166%

For FY2017, UDC has easily the lowest percentage of write offs for the last five years.

For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. See Note 6 (AR2017) to work out the latest details of 'impaired asset expense' as follows:

FY2012: $5.642m
FY2013: $22.527m
FY2014: $5.895m
FY2015: $12.105m
FY2016: $13.501m
FY2017: $15.015m

Note that unlike UDC, Heartland writes off uncollectible debts or part debts directly from each annual profit result. I will now normalize these against the 'total finance receivables'. 'Total finance receivables' are already adjusted for any provision for impairment and the present value estimate of future losses (AR2017, Note 11).

FY2012: $5.642m/ $2078.3m = 0.271%
FY2013: $22.527m/ $2010.4m = 1.12%
FY2014: $5.895m/ $2607.4m = 0.226%
FY2015: $12.105m/ $2862.1m = 0.423%
FY2016: $13.501m/ $3114.0m = 0.434%
FY2017: $15.015m/ $3546.0m = 0.423%

Summarizing and comparing the above information:



UDC Debt Write OffHeartland Debt Write Off


FY20120.505%0.271%


FY20130.600%1,12%


FY20140.965%0.226%


FY20150.518%0.423%



FY20160.490%0.434%


FY20170.166%0.423%



The question that rears its ugly head from the above data table is as follows:

Why is the impairment percentage so much lower for UDC in FY2017 compared with UDC's past year results? Perhaps we had a really low impairment year? But if that was true, we might expect a similar reduction in impaired loans over the same time period from the closely comparative Heartland. This didn't happen. I do note that UDC was put up for sale over the FY2017 financial year and it would have been helpful to show the accounts in their best possible light leading up to any sale. So were the impairments at UDC for FY2017 really that much lower? Or has some 'window dressing' gone on here?

That is a point to ponder for potential investors, if UDC is floated on the sharemarket soon!


Updating the actual bad debt write offs in relation to the size of the loan book at the end of FY2019. Section 7 in the UDC 2018 Financial Statements is named "Provision for Credit Impairment". Below, bad debts actually written off are compared against the 'provision for loan impairment' stated on page 3, the 'Statement of Comprehensive Income'.



UDCBad Debt Write Off (Note 7: Provision for Credit Impairment)New Annual Bad Debt Provision (Income Statement)


FY2014 -$3,300m +$18.633m = $15.333m$11.733m


FY2015-$0.659m + $12.162m= $11.503m$10.427m


FY2016 -$1.297m + $11.055m = $9.753m$7.418m


FY2017 $2.860m + $7.698m = $10.558m$5.929m


FY2018 $2.196m + $6.679m = $8.875m$10.885m



Actual write offs look to be in a range of $10m to $12m,

UDC Write Offs

Putting these 'actual write offs' as a percentage of the end of year loan book gives them better context Note that:

1/ the 'actual write offs' are found in the annual change of the holding provision for bad debts (note 7 'Provision for Credit Impairment' AR2018) and do not directly correspond to the top up expenses for this provision that may be found in each annual income statement.
2/ the denominator in the following calculation is the 'carrying value' of the Net Loans and Advances, This has already been adjusted for the provision for credit impairment, unearned income and deferred fee revenue and expenses.

FY2014: $15.133m/$2,272.081m = 0.666%
FY2015: $11.503m/$2,347.163m = 0.490%
FY2016: $9.753m/$2,573.030m = 0.379%
FY2017: $10.558m/$2,911.514m = 0.363%
FY2018: $8.875m/$3,222.430m = 0.275%

For FY2018 UDC the spectacularly low percentage of loan write offs continues.

Heartland Write Offs

For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. See Note 6 ('Impaired Asset Expense' AR2018) to see the current year 'asset expense' calculation. Note that unlike UDC, Heartland writes off uncollectible debts or part debts directly from each annual profit result. In the calculation below, I have normalized these against the 'total finance receivables'. 'Total finance receivables' are already adjusted for any provision for impairment and the present value estimate of future losses (AR2018, Note 11 'Finance Receivables').

FY2012: $5.642m/ $2,078.3m = 0.271%
FY2013: $22.527m/ $2,010.4m = 1.12%
FY2014: $5.895m/ $2,607.4m = 0.226%
FY2015: $12.105m/ $2,862.1m = 0.423%
FY2016: $13.501m/ $3,114.0m = 0.434%
FY2017: $15.015m/ $3,546.0m = 0.423%
FY2018: $22.067m/ $3,984.9m = 0.554%

Summarizing and comparing the above information:



UDC Debt Write OffHeartland Debt Write Off


FY20140.666%0.226%


FY20150.490%0.423%


FY20160.379%0.434%


FY20170.363%0.423%


FY20180.275%0.554%



The question that rears its ugly head from the above data table is as follows:

Why is the impairment percentage so much lower for UDC in FY2017/FY2018 compared with UDC's past year results? Perhaps we had two really low impairment years? But if that was true, might we not expect a similar reduction in impaired loans over the same time period from the closely comparative Heartland?

A Change in Standards

IFRS 9 is a a new accounting standard, not yet adopted by UDC nor Heartland when their respective FY2018 accounts were published. IFRS 9 requires impairment losses to be provisioned for loans as they are taken out, based on ECL (Expected Credit Loss) rates. A retrospective loss due to already embedded loans, bumping up the 'impaired loan' balance, will be taken on the balance sheet of each company as follows (best estimate published);




Higher Impairment Aggregate
EOFY Impairment Balance
Implied Increase
Increase in Deferred Tax Asset
Net Effect on Balance Sheet


UDC$11.4m$34.568m+33%
$3.2m$8.2m


Heartland$20m-$25m$32.495m+62%-77%
$6m-$7m$14m-$18m



From this, it looks like UDC really do believe their loan book is only half as risky as that of Heartland.

Skullduggery or not?

UDC was put up for sale over the FY2017 financial year (before FY2017 accounts were published) but withdrawn from sale in FY2018 (after financial accounts were published). It would have been helpful to show the accounts in their best possible light leading up to any sale. So were the impairments at UDC for FY2017/FY2018 really that much lower? Or has some 'window dressing' gone on here? The sale of UDC has been put on indefinite ice, from 31st October 2018 (after balance date). So it will take until the FY2019 result at best for any 'window dressing', should it exist, at UDC to unwind.

SNOOPY

[Snoopy]

Note 10d (page 18 UDC Financial Statements for FY2017), 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


JudgementTotal


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


2017$1,201.747m +$133.791m +$11.618m$1,347.156m



The grade 6 and 'more risky' categories for EOY2017 added up, represents a fraction of the total loans outstanding as follows:

$1,347.156m / $3,005.059m = 44.8% of total loan assets.

The Credit impairment provision on the books, not yet removed from the above total, is noted as $29.278m (note 10d)

========

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 bank staff should 'monitor'. 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 what I define as Heartland Vulnerable Loans'. 'Vulnerable Loans' represent a fraction of the total loans outstanding as follows:

$241.486m / $3,575.613m = 6.75% of total loan assets.

Some impairment ($25.865m) (Note 19e) has already been taken onto the book over the years. Add to this a reverse mortgage fair value adjustment of ($3.851m) This total impairment of $29.716m represents

$29.716m / $241.486m = 12.3% of the Grade 6 (monitor) and below grade assets.



Heartland Vulnerable Loans


BehaviouralJudgementTotal


ArrangementNon Performing RepossessionRecoveryGrade 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


2017$18.512m$4.956m$4.889m$166.155m +$27.669m +$16.749m +$2.556m$241.486m



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



UDCHeartland


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$1,111.892m3.46%$2,141,780m1.79%$27.42 6m$287.118m9.55%$2,105.702m1.30%


2013$37.460m$1,265.765m2.95%$2,198,653m1.70%$50.49 1m$278.051m18.24%$2,060.867m2.45%


2014$31.805m$938,899m3.38%$2,375.936m1.34%$24.381m $159.338m15.3%$2,651.754m0.919%303m


2015$31.529m$1,018,134m3.10%$2,461.224m1.28%$31.65 4m$149.011m21.2%$2,893.724m1.09%


2016$28.909m$1,242.061m2.33%$2,684.750m1.08%$26.14 8m$204.029m12.8%$3,140.106m0.833%


2017$29.278m$1,347.156m2.17%$3,005.059m0.974%$29.7 16m$241.486m12.3%$3,575.613m0.831%




In my previous post on this thread, I have looked at 'impairment expenses' and 'impairment provision expenses'. But now I wish to turn my attention to include that period before an impaired loan becomes that way, and the accumulated 'impairment provision' itself. This means, I will look at loans that are vulnerable -those in danger of becoming impaired. In an ideal world, there might be no point in doing this exercise. We might expect vulnerable loans to come and go exactly like impaired loans, as the loan climate waxes and wanes. But in this non-ideal world I feel that we might learn something from looking deeper. Let's see....

UDC Vuknerable Loans

Finance companies have their own internal way of grading loans on their books. Within UDC note 10d (page 18 UDC Financial Statements for FY2018), lists the 'internal risk grading' of the all the loan assets on the balance sheet on a scale of 0 to 9. On this scale, 0 is the 'lowest risk' while 9 means a 'default'. I have added together loan classes 6 and above, a collection of loans for which I have coined the term 'vulnerable'.



UDC Vulnerable Loans


JudgementTotal


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


2017$1,201.747m +$133.791m +$11.618m$1,347.156m


2018$1,221.379m +$111.290m +$16.780m$1,349.449m



The grade 6 and 'more risky' categories for EOY2018 added up represents a fraction of the total loans outstanding as follows:

$1,349.449m / $3,319.198m = 40.7% of total loan assets.

The offsetting accumulated 'impairment provision' on the books, not yet removed from the above total, is $34.568m (note 10d). This impairment provision represents:

$34.568m/$1,349.449m = 2.56% of UDC 'Vulnerable Assets'.


Heartland Vulnerable Loans

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

There exists a second box of Heartland loans termed 'Judgement Loans' which 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 bank staff management should 'monitor'. 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 what I define as Heartland 'Vulnerable Loans'.



Heartland Vulnerable Loans


BehaviouralJudgementTotal


ArrangementNon Performing RepossessionRecoveryGrade 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


2017$18.512m$4.956m$4.889m$166.155m +$27.669m +$16.749m +$2.556m$241.486m


2018$46.728m$5.670m$5.490m$145.706m +$22.958m +$23.920m +$6.515m$256.987m



'Vulnerable Loans' for FY2018 represent a fraction of the total loans outstanding as follows:

$256.987m / $3,984.981m = 7.14% of total loan assets.

Impairment $29.671m (AR2018, Note 20a) has already been taken onto the book over the years. Add to this a reverse mortgage fair value adjustment of $2.824m. This total impairment of $32.495m represents

$32.495m / $256.987m = 12.6% of 'Vulnerable Loans'..


Comparing the Protagonists

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



UDCHeartland


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$1,111.892m3.46%$2,141,780m1.79%$27.42 6m$287.118m9.55%$2,105.702m1.30%


2013$37.460m$1,265.765m2.95%$2,198,653m1.70%$50.49 1m$278.051m18.24%$2,060.867m2.45%


2014$31.805m$938,899m3.38%$2,375.936m1.34%$24.381m $159.338m15.3%$2,651.754m0.919%303m


2015$31.529m$1,018,134m3.10%$2,461.224m1.28%$31.65 4m$149.011m21.2%$2,893.724m1.09%


2016$28.909m$1,242.061m2.33%$2,684.750m1.08%$26.14 8m$204.029m12.8%$3,140.106m0.833%


2017$29.278m$1,347.156m2.17%$3,005.059m0.974%$29.7 16m$241.486m12.3%$3,575.613m0.831%


2018$34.568m$1,349.499m2.56%$3,318.198m1.04%$32.53 5m$256.987m12.7%$4,017.436m0.810%



Lot's of numbers here, so what does it all mean? I will start by defining the building blocks of my argument:

1/ 'Impaired Loans' is a judgement call on a portion of certain loans that have probably gone bad. 'Impaired Loans' is a provision in the accounts. When all hope of fully collecting such a loan is lost, then the appropriate 'impairment expense' is deducted from that provision and our financial institution moves on. 'Impaired Loans', which by definition are still on the books, must of necessity be measured by bank managers judgement. By contrast, an 'Impairment Expense' is a definitively measurable transaction.
2/ 'Vulnerable Loans' reflect those same bank managers judgments, even though most vulnerable loans are (as yet?) not impaired.. I feel it is fair to make a 'like with like' comparison between management's judgement at a transition level (Vulnerable Loans) with the same managers making a judgement of loans in a deeper level of distress (Impaired Loans).

The impaired loans as a percentage of total loans ( A/C in the table above ) appear similar for both protagonists, especially in more recent years. I would give a slight edge to Heartland here in having fewer impaired loans, although it might be a margin-of-error difference. However the subset of 'impaired loans' is a much smaller proportion of 'vulnerable loans' at UDC compared to Heartland. Could this be because UDC has a much smaller staff and so has to resort to a broader scattergun automated process in assessing how vulnerable their loans are? Whereas at Heartland there is more ongoing human contact with borrowers, so the loans that are vulnerable are easier to spot? If that is true of UDC, then marking more loans as vulnerable has not seen a comparative consummate reduction in the percentage of loans that become impaired. Is this a vindication of a more human interaction rich approach at Heartland? And if that is true will Heartland's move to more 'digital platform' lending see Heartland's percentage of impaired loans rise in the future? Perhaps the benefit of having a 'branch structure' throughout the country are not a 'last century' as some in Heartland management think?

In any event I feel that comparing numbers across columns is not the way to go. Differences across columns are just as likely to reflect inherent differences between two businesses, and not differences in performance. What we investors need to be looking at is consistency down the columns. And if consistency is not observed, then we need to figure out "Why not?" Looking down the A/B and A/C columns, I do see a trend of fewer impaired loans from vulnerable loans over the years. And fewer impaired loans out of all loans. That is a sign that both company's management are steadily getting better at doing their jobs. And that has to be good for both UDC debenture holders and Heartland shareholders.

SNOOPY

[Snoopy]

Time for my annual 'disentanglement' of ANZ.NZ from its UDC subsidiary. The information I need about the ANZ bank in New Zealand can be found here:

https://www.anz.co.nz/about-us/media-centre/investor-information/

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:

1/ Slightly rearrange the ANZ (NZ) categories (ANZ September 30th 2017 Bank Disclosure Statement, p30) so that they link up to those listed in the UDC FY2017 Financial Statements. THEN
2/ I need to subtract the UDC equivalent figures (page 18, UDC FY2017 Financial Statements) to get the underlying ANZ bank figure.

(Note: Receivables for UDC in industry groups are listed after provisions for credit impairment are taken into account. OTOH, receivables for ANZ.NZ industry groups are listed before allowances for credit impairment are taken into account. This means the UDC figures are lower than they would be on a 'like for like' comparative figure basis. However the error is only 1.0% overall, not enough to undo the validity of this exercise in my judgement)

The results are below:




All ANZ.NZ=UDC+Underlying ANZ.NZ


Agriculture forestry, fishing and mining:$20,727m(11.6%)
$563m(18.9%)
$20,164m(11.4%)



Business and property services:$34,614m(19.3%)
$171m(5.8%)
$34,443m(19.6%)



Construction:$2,772m(1.6%)
$409m(13.8%)
$2,363m(1.3%)



Electricity Gas Water & Waste:$3,581m(2.0%)
$12m(0.3%)
$3,569m(2,0%)



Finance and insurance:$20,834m(11.6%)
$70m(3.3%)
$20,764m(11.8%)



Government and local authority:$11,201m(6.3%)
$0.6m(0.4%)
$11,200m(6.4%)



Manufacturing:$4,696m(2.6%)
$59m(2.0%)
$4,637m(2,6%)



Personal & Other lending:$71,031m(39.7%)
$858m(28.8%)
$70,173m(39.8%)



Retail and Wholesale:
$7,260m(4.1%)
$390m(13.1%)
$6,870m(3.9%)



Transport and storage:$2,403m(1.3%)
$443m(14.9%)
$1,960m(1.1%)



Total:$179,119m(100%)$2,975m(100%)$176,144m(100%)



As was the case last year, notwithstanding the shuffling of disclosure with the reclassification of the ANZ.NZ loan categories, the loan allocation of ANZ.NZ with UDC removed, is little different the loan allocation of the whole of ANZ.NZ. This is no surprise. The whole of the UDC loan book is only 1.6% of the ANZ.NZ loan book. And ANZ.NZ itself (which you cannot invest in directly) is only a fraction of the whole ANZ operation which is the ANZ vehicle listed on the NZX. However, the converse is not true.

UDC is very different from ANZ.NZ. In percentage terms:

1/ the Agricultural exposure of UDC is double,
2/ 'Construction' and 'Transport and Storage' exposure are up by nearly a factor of 10, AND
3/ 'Retail and Wholesale' exposure are higher by a factor of 4.

The volatility of these 'industry groupings' is testament to UDC being a much greater investment risk than any investment in ANZ itself.

The following inter-year table shows how UDC is funded by its 100% owner ANZ



UDC: Backing For LoansFY2014FY2015FY2016FY2017


UDC Shareholder Capital$341.412m (15.6%)$365.462m (14.6%)
$423.247m (16.2%)$485.645m (16.7%)


ANZ Committed Credit Facility (Note 8)$280.000m (12.8%)$395.000m (15.8%)
$595.000m (22.8%)$1,385,027m (47.6%)


Debenture Investments From Public (Note 8)$1,569.247m (71.6%)$1,736.026m (69.5%)$1,591.711m (61.0%)$1,039.133m (35,7%)UDC Backing



There is a very significant change happening with the role of debenture holders in funding UDC much reduced as the ANZ parent seemingly looks to take over that role. Debenture holders no longer have any guarantee that their debentures will not be repaid early - a big negative for some debenture investors.


Time for my annual 'disentanglement' of ANZ.NZ from its UDC subsidiary. The ANZ.NZ is the largest bank in New Zealand. That means the way the bank behaves has significant implications for all investors in NZ, not just ANZ group shareholders and UDC debenture holders.

The information I need about the ANZ bank in New Zealand can be found here:

https://www.anz.co.nz/about-us/media-centre/investor-information/

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:

1/ Slightly rearrange the ANZ (NZ) categories (ANZ September 30th 2018 Bank Disclosure Statement, p32) so that they link up to those listed in the UDC FY2018 Financial Statements. THEN
2/ I need to subtract the UDC equivalent figures (page 18, UDC FY2018 Financial Statements) to get the underlying ANZ bank figure.

(Note: Receivables for UDC in industry groups are listed after provisions for credit impairment are taken into account. OTOH, receivables for ANZ.NZ industry groups are listed before allowances for credit impairment are taken into account. This means the UDC figures are lower than they would be on a 'like for like' comparative figure basis. However the error is only 1.0% overall, not enough to undo the validity of this exercise in my judgement)

The results are below:




All ANZ.NZ=UDC+Underlying ANZ.NZ



Agriculture forestry, fishing and mining:$20,936m(11.3%)
$594m(18.1%)
$20,342m(11.2%)



Business and property services:$35,501m(19.2%)
$183m(5.6%)
$35,318m(19.5%)



Construction:$3,092m(1.7%)
$451m(13.7%)
$2,641m(1.5%)



Electricity Gas Water & Waste:$3,309m(1.8%)
$15m(0.5%)
$3,294m(1.8%)



Finance and insurance:$19,324m(10.5%)
$67m(2.0%)
$19,257m(10.6%)



Government and local authority:$12,868m(7.0%)
$0.377m(0.0%)
$12,868m(7.1%)



Manufacturing:$4,764m(2.6%)
$61m(1.9%)
$4,703m(2,6%)

7

Personal & Other lending:$75.796m(41.0%)
$1,055m(32.1%)
$74,741(41.2%)



Retail and Wholesale:
$7,195m(3.9%)
$419m(12.8%)
$6,776m(3.7%)



Transport and storage:$2,126m(1.1%)
$438m(13.3%)
$1,688m(0.9%)



Total:$184,911m(100%)$3,293m(100%)$181,628m(100%)



As was the case last year, the loan allocation of ANZ.NZ with UDC removed, is little different the loan allocation of the whole of ANZ.NZ. This is no surprise. The whole of the UDC loan book is only 1.8% of the ANZ.NZ loan book. And ANZ.NZ itself (which you cannot invest in directly) is only a fraction of the whole ANZ operation, which is the ANZ vehicle listed on the NZX. However, the converse is not true.

UDC is very different from ANZ.NZ. In sector allocation percentage terms:

1/ the Agricultural exposure of UDC is 60% higher,
2/ 'Construction' and 'Transport and Storage' exposure are up by a multiple of 8, AND
3/ 'Retail and Wholesale' exposure are higher by a factor of 3.

The volatility of these three 'industry groupings' is testament to UDC being a much greater investment risk than any investment in ANZ itself.

The following inter-year table shows how UDC is funded by its 100% owner ANZ



UDC: Backing For LoansFY2014FY2015FY2016FY2017FY2018


UDC Shareholder Capital$341.412m (15.6%)$365.462m (14.6%)
$423.247m (16.2%)
$485.645m (16.7%)
$550.944m (17.0%)


ANZ Committed Credit Facility (Note 8)$280.000m (12.8%)$395.000m (15.8%)
$595.000m (22.8%)
$1,385,027m (47.6%)
$1,762.003m (54.3%)


Debenture Investments From Public (Note 8)$1,569.247m (71.6%)$1,736.026m (69.5%)$1,591.711m (61.0%)$1,039.133m (35.7%)$931,280m (28.7%)



There is a very significant change happening over the last two years, with the role of debenture holders in funding UDC much reduced as the ANZ parent seemingly looks to take over that role. It was confirmed in January 2019 that ANZ plans to pay out all UDC debenture holders over 2019.

SNOOPY

[Snoopy]

FY2015All ANZ.NZUDCUnderlying ANZ.NZ


Agriculture forestry, fishing and mining:$21,731m(12.2%)
$465m(19.5%)
$21,266m(12.1%)



Business and property services:$13,681m(7.7%)
$130m(5.4%)
$13,551m(7.7%)



Construction:$2,170m(1.2%)
$344m(14.2%)
$1,826m(1.0%)



Entertainment, leisure and tourism:$1,386m(0.8%)
$8m(0.3%)
$1,378m(7.8%)



Finance and insurance:$27,569m(15.5%)
$87m(3.6%)
$27,482m(15.6%)



Government and local authority:$12,229m(6.9%)
$0.5m(0.0%)
$12,229m(7.0%)



Manufacturing:$5,925m(3.3%)
$78m(3.2%)
$5,847m(3.3%)



Personal & Other lending:$85,202m(47.6%)
$597m(24.6%)
$84,605m(48.2%)



Retail and Wholesale:
$5,785m(3.2%)
$293m(12.0%)
$5,492m(3.1%)



Transport and storage:$2,264m(1.4%)
$425m(17.5%)
$1,851m(1.2%)



Total:$178,148m(100%)$2,430m(100%)$175,718m(100%)










FY2018All ANZ.NZ=UDC+Underlying ANZ.NZ



Agriculture forestry, fishing and mining:$20,936m(11.3%)
$594m(18.1%)
$20,342m(11.2%)



Business and property services:$35,501m(19.2%)
$183m(5.6%)
$35,318m(19.5%)



Construction:$3,092m(1.7%)
$451m(13.7%)
$2,641m(1.5%)



Electricity Gas Water & Waste:$3,309m(1.8%)
$15m(0.5%)
$3,294m(1.8%)



Finance and insurance:$19,324m(10.5%)
$67m(2.0%)
$19,257m(10.6%)



Government and local authority:$12,868m(7.0%)
$0.377m(0.0%)
$12,868m(7.1%)



Manufacturing:$4,764m(2.6%)
$61m(1.9%)
$4,703m(2,6%)

7

Personal & Other lending:$75.796m(41.0%)
$1,055m(32.1%)
$74,741(41.2%)



Retail and Wholesale:
$7,195m(3.9%)
$419m(12.8%)
$6,776m(3.7%)



Transport and storage:$2,126m(1.1%)
$438m(13.3%)
$1,688m(0.9%)



Total:$184,911m(100%)$3,293m(100%)$181,628m(100%)





At the end of FY2015, UDC dined out on a glossy prospectus as the iconic provider of equipment across all New Zealand industry sectors. But shortly after this, the owner, ANZ Bank, decided to trim its corporate branches. UDC was one branch ear marked for the chop. The FY2018 UDC annual report was reduced to a comment less rough looking black and white e-document, designed to repel future investors, while still meeting legal requirements. I think it is fair comment to say that the failed sales process for UDC has become an embarrassment for the ANZ Bank. The solution seems to be to take UDC completely 'in house', stop the charade of UDC being seen as 'independent', while hoping the public forgets about the whole failed disposal, Yet this outcome was unknown if we wind the clock back to 2015. With pressure on the ANZ to improve its capital ratio, there was a real chance that ANZ could unload some of their risky account receivables by selling UDC. So how did ANZ plan to rejig the 'account receivable' balance so that the ANZ parent could get maximum benefit from a UDC sale?

Year to year, we don't see much difference. But this comparison, across three years, does highlight some significant changes. The UDC loan book has grown by 35%, well up on the ANZ.NZ parent growth of just 3.9%. Have ANZ taken the opportunity to guide some of their less desirable loans into the UDC disposal bin? In gross dollar terms, all significant sectors at UDC are higher, except for Finance & Insurance and Manufacturing. Could the fact that ANZ have seen fit to keep more of 'Finance & Insurance' and 'Manufacturing' 'in parent house' mean that this is where the ANZ sees the best growth opportunities for NZ, and itself, going forwards? Returning to the UDC rubbish bin theory, by far the biggest increase in the UDC portfolio was 'personal loans and other lending'. 'Personal loans and other lending' is a very large catch all bucket. I guess a lot of that could relate to small business lending, where proprietors put up their own home as collateral. I wonder if ANZ see this lending as relatively unprofitable and/or difficult to administer? If you look down the 'All ANZ.NZ' column they are now doing $10b less of it.

SNOOPY

[Snoopy]

What is a 'Stressed Loan'? For the purpose of this discussion, I have a special definition.



Stressed Loan DefinitionUDCHeartland





1/ Take loan total from categories 7 and 8]a/ Take loans at least 90 days past due.


2/ add 'Default' loans]b/ add Loans individually impaired.


]c/ add Restructured assets. (*)


3/ less Provision for Credit Impairment ]d/ less Provision for Credit Impairment.'


4/ equals 'Total Stressed Loans' ]e/ equals 'Total Stressed Loans''



(*). (Note that from FY2017 ' Restructured Assets' are now not reported on by Heartland.)


A 'Stressed Loan' can be thought of as a kind of 'Vulnerable Loan', as previously described, but with the Impairment provision taken out. There is no overlap between a 'stressed loan', as defined here, and the amount of money written off each year in bad debts. But yes, '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 (owner of UDC) or Heartland:

1/ I would hope that management would have a robust process that identifies problem loans before they have to be written off.
2/ So as a shareholder, I would hope such loans were seen as 'stressed' before being classified as 'impaired' and certainly before an actual write off was declared.

How does one check that this is what happens in reality? One way could be to look at the 'stressed loans' for both companies on an annual trending basis and see how this compares with the equivalent annual trend in write offs.


Heartland

The column (W) lists the actual dollar amount in bad debts written off over that period, as detailed in AR2017 note 19e.

The key point to note here is that the 'impaired loan expense' / 'write offs' (represented by letter 'W' in each case) only occur:

1/ when the impaired portion of the loan has gone through the whole loan review system'. AND
2/ when a loan repayment has been missed, or a non payment is imminent



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$2,075.211m4.23%$12.138m+$1.685m$2 ,104.591m0.66%


EOFY2012$90.489m$2,078.276m4.35%$14.636m+$3.180m$2 ,105.702m0.85%


EOFY2013$48.975m$2,010.393m2.43%$6.679m+$1.961m$2, 060.867m0.42%


EOFY2014$41.354m$2,607.393m1.59%$35.258m+$3.260m$2 ,631.754m1.46%

.
EOFY2015$39.066m$2,862.070m1.36%$1.555m+$1.910m$2, 893.704m0.12%


EOFY2016$37.851m$3,113.957m1.21%$12.010m+$6.653m$3 ,135.203m0.60%


EOFY2017$38.341m$3,545.896m1.08%$2.140m+$9.531m$3, 567.191m0.33%Loan that


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


UDC

I have redefined the 'Total Financial Assets' as listed in note 10d to be 'Net Financial Receivables', because they have already had their 'Provision for Credit Impairment' deducted (netted off).



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$2,007.012m6.29%$15.103m
$2,049.504m0.74%


EOFY2012$96.670m$2,102.299m4.60%$10.164m.$2,141.78 0m0.47%


EOFY2013$86.877m$2,161.193m4.02%$12.399m
$2,198.653m0.56%


EOFY2014$95.364m$2,344.131m4.07%$21.933m
$2,375.936m0.92%.
Impairment [/

EOFY2015$82.267m$2,429.695m3.39%$11.503m$2,461.224 m0.47%


EOFY2016$85.475m$2,655.841m3.22%$12.352m$2,684.750 m0.46%


EOFY2017$116.131m$2,975.781m3.90%$4.838m$3,005.059 m0.16%





Discussion

In the case of Heartland, the 'stressed loan' percentage is consistently going down. However, the actual write offs per year do not show an obvious correlation to the same year's 'stressed loan' figure. In FY2014, for example, the quantum of write offs are almost equal to the quantum of stressed loans. Yet one year later (FY2015) the write offs are only less than one tenth of the stressed loans. Will the case of FY2016 and FY2017, where stressed loans are two to three times the amount actually written off become the new norm?
.
In the case of UDC, the stressed loans look to float around at 4% of the total, much higher than the Heartland equivalents of recent years. For FY2017 only, the 'Impaired Asset Expense' to 'Gross Financial Receivables' is startlingly low, even as the stressed loans jumped up. A one year aberration? Despite making my own interpretation of how to define a 'stressed loan' at UDC - to bring the number more into line with what happens at Heartland - the stressed loan percentage at UDC remains stubbornly high in comparison. UDC loans are perhaps more heavily weighted towards 'working equipment' which may not have much 'fire sale' value during a business downturn. So could it just be in the nature of the UDC business that management need to keep a really close eye on a large portion of their loans? How they do this, while using a skeleton staff compared to Heartland, remains a mystery to me!

What would I like to see in these figures? If you accept that:

1/ When a loan is written off it is largely too late to fix it, AND
2/ The overall number of write offs can be contained (it is inevitable that in any lending organisation, some loans will have to be written off)
EOFY2014$43.354m$2,607.393m1.66%$35.258m+$3.260m$2 ,631.754m1.46%


THEN I am interested in how management deals with 'stressed loans' before they get to that stage.

My concern is that the write offs at UDC over FY2017 are exceptionally low, and there is an unusual incentive for management to project the result like this (UDC is up for sale). Write offs are also down at Heartland over the comparable period (which could indicate a favourable market to lenders), but not by as much. The percentage of 'stressed loans' at UDC remains significantly comparatively higher than Heartland. There are a couple of ways to interpret that:

Either:

1/ UDC staff remain 'exceptionally diligent' in reviewing stressed loans (as assessed by UDC) and this policy is leading to lower and lower actual write offs.
2/ UDC are being exceptionally lenient in classifying some loans as stressed when really they should be wholly or partially impaired or maybe even written off.

I would have expected more 'exceptional diligence' from Heartland, simply because they have more staff. The Heartland pattern of reducing 'write offs' coupled with reducing 'stressed loans' does make a plausible narrative. But I am concerned that some of those UDC stressed loans may be a little more stressed than UDC management are letting on. It is hard to be definitive about one year's results. In the meantime I would be cautious in assessing the UDC write off picture.




What is a 'Stressed Loan'? For the purpose of this discussion, I have a special definition.



Stressed Loan DefinitionUDCHeartland





1/ Take loan total from categories 7 and 8]a/ Take loans at least 90 days past due.


2/ add 'Default' loans]b/ add Loans individually impaired.


]c/ add Restructured assets. (*)


3/ less Provision(s) for Credit Impairment{s) ]d/ less Provision(s) for Credit Impairment(s)


4/ equals 'Total Stressed Loans' ]e/ equals 'Total Stressed Loans''



(*). (Note that from FY2017 ' Restructured Assets' are now not reported on separately by Heartland.)


A 'Stressed Loan' can be thought of as a kind of 'Vulnerable Loan', as previously described (my post 352), but with the Impairment provision taken out. There is no overlap between a 'stressed loan', as defined here, and the amount of money written off each year in bad debts. But yes, 'Stressed Loans' are very much a judgement call by management.

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

As a shareholder in either ANZ (owner of UDC) or Heartland:

1/ I would hope that management would have a robust process that identifies problem loans before they have to be written off.
2/ So as a shareholder, I would hope such loans were seen as 'stressed' before being classified as 'impaired' and certainly before an actual write off was declared.

How does one check that this is what happens in reality? One way could be to look at the 'stressed loans' for both companies on an annual trending basis and see how this compares with the equivalent annual trend in write offs.


Heartland

The column (W) lists the actual dollar amount in bad debts written off over that period, as detailed in AR2018 note 20e.

The key point to note here is that the 'impaired loan expense' / 'write offs' (represented by letter 'W' in each case) only occur:

1/ when the impaired portion of the loan has gone through the whole loan review system'. AND
2/ when a loan repayment has been missed, or a non payment is imminent



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)


EOFY2013$48.074m$2,010.376m2.39%$6.679m+$1.081m$2, 060.867m0.377%


EOFY2014$43.354m$2,607.393m1.66%$35.258m+$3.260m$2 ,631.754m1.46%

.
EOFY2015$32.824m$2,862.070m1.15%$1.555m+$1.910m$2, 893.724m0.120%


EOFY2016$32.894m$3,113.957m1.06%$12.010m+$6.653m$3 ,140.105m0.594%


EOFY2017$34.490m$3,545.896m0.973%$2.140m+$9.531m$3 ,575.613m0.327%Loan that


EOFY2018$43.278m$3,984.941m1.06%$4.546m+$14.924m$4 ,017.436m0.485%Loan that



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


UDC

I have redefined the 'Total Financial Assets' as listed in note 10d to be 'Net Financial Receivables', because they have already had their 'Provision for Credit Impairment' deducted (netted off).



UDC

.Impairment [/
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)


EOFY2014$95.364m$2,344.131m4.07%$15.333m
$2,375.936m0.645%.


EOFY2015$82.267m$2,429.695m3.39%$11.503m$2,461.224 m0.467%


EOFY2016$85.475m$2,655.841m3.22%$9.753m$2,684.750m 0.363%


EOFY2017$116.131m$2,975.781m3.90%$10.558m$3,005.05 9m0.351%


EOFY2018$93.502m$3,283.630m2.85%$8.875m$3,318.198m 0.268%



Note: The 'impaired asset expense' in the table above is NOT the same as the 'credit provision charge' in the UDC income statement. The former is the cash taken off the books in a calendar year because certain impaired assets have been completely or partially written off. The credit provision charge is an annual adjustment to the 'provision for impairment'.

Discussion

I will preface this discussion by saying that, in previous years, I have made a bit of a hash of things in my tabulated calculations above. Some of this hash was because I have now changed my mind on what ingredients made up the final number. But my major mistake was made looking at UDC There I added "Collective Provision charge to the Statement of Comprehensive Income" (effectively a cash charge as I see it now) to the 'Individual provision bad debts written off' (also a cash charge) without changing the sign of the latter. The latter had a negative sign in front of it - because it was shown in the 'Provision of Credit Impairment' Note as reducing a provision. Absolutely correct, nothing wrong with that presentation. But I wanted to use that figure in a different context of 'cash movement'. 'Individual provision bad debts written off' represents cash out during the year and so does any charge made to the 'Statement of Comprehensive Income' for the year. I should have added these two 'cash out' numbers together, and now I have done just that, I should conclude by saying that, despite these errors, the general thrust of my previous argument has not been affected.

I ended last year's discussion expressing my doubts about the ever decreasing write-off rate at UDC, while the 'stressed loans' did not show such a trend. We are now at the end of FY2018 and the write off rate has dropped again, although this time the stressed loan count is down as well. We mammals like to look for correlations. But I am going to put forward an alternative explanation as to why the 'stressed loans' and 'write offs' should not be correlated. Suppose, as the owner of UDC, you wanted to sell it and were keen for the business to be marketed in the best possible light. Would it not be sensible to really cast your eye more closely that usual over the stressed loan portfolio? That way you could bring about more early interventions to make sure not as many 'stressed' loans became 'distressed'. The counter argument to that is: Why would you wait for a whole of business sale to implement a best practice policy? And isn't it equally important to focus on stopping the unstressed part of the loan book becoming stressed at any time? Wouldn't any decent manager do all this anyway? The UDC sale, in one form or another, was very much on the table during FY2018. So I think it is still too early to say if the lower write off expenses at UDC can be sustained. My critical eye remains on UDC in this regard.

In the case of Heartland, the 'stressed loan' percentage went down with a thump as Heartland extracted itself from its legacy property problems over FY2013 and FY2014.. Stressed loans have reached a plateau of about 1%. The actual write offs at Heartland were very high in FY2014, and that year should be seen as an outlier. There is a pattern of up and down years (highs and lows correcting each other over time?) averaging some 0.45%. This contrasts with the monotonic decline at UDC

The UDC stressed loans look floats around at 4% of the total. This is much higher than Heartland. But this could be due to the nature of the business rather than management incompetence. UDC loans are perhaps more heavily weighted towards 'working equipment' which may not have much 'fire sale' value during a business downturn. Yet I would have expected more diligence from Heartland, simply because they have more staff. The Heartland pattern of reducing 'write offs' coupled with reducing 'stressed loans' does make a more plausible narrative than what is happening at UDC.

SNOOPY

[winner69]

Big day for Aussie banks today with the Royal Commission Report coming out

Some say the shorters of banking stocks could get hurt

[peat]

And yet , from the AFR

Opinion
Shorting the big four banks: widow-maker no more?
https://www.afr.com/news/economy/shorting-the-big-four-banks-widowmaker-no-more-20190203-h1asf7 (only the first paragraph for free)

[Joshuatree]

Shares jump in relief rally as banking royal commission report tabled (https://www.abc.net.au/news/2018-09-28/banking-royal-commission-shares-jump-in-relief-rally/10317834)

https://www.abc.net.au/news/2019-02-04/royal-commission-banking-report-as-its-delivered/10777142

[Joshuatree]

PURSUIT OF POSSIBLE MISCONDACT:

Hayne referses cases to APRA and ASIC
CBA - "Conflicted remuneration"
AMP - For outsourcing services on insurance
IIML (IOOF) - Failed best interest of members
Suncorp -- (didnt see)
FREEDOM - Unsconsciounable conduct
YOUi - Breaching duty of good faith
Allianz - 3x for Misleading deceptive conduct
NAB - CEO + Chair critices

[winner69]

Will probably affect NZ in due course .....like getting credit will be tougher as responsible lending regime really kicks in

[Bobdn]

Yes. The responsible lending regime will make it harder for average borrowers. Some people were complaining to the Commission that banks were irresponsible for lending them money. So at least there'll be fewer complaints.

Lots of things to like in the Hayne report. I never understood what mortgage brokers did and why people didn't just deal directly with the bank. Looks like Hayne's recommendations will likely push all this business back the banks' way.

[macduffy]

Lots of things to like in the Hayne report

Well done! I'm barely past the introduction of the 560 page report!

;)

[Bobdn]

Well done! I'm barely past the introduction of the 560 page report!

;)

Yeah, I'm strictly a headline sort of guy. I read "Unions Unhappy" and "Brokers unhappy" which made me happy.

[Lewylewylewy]

Easy debt has been used to prop up a big part of the economy. I wonder if there will be another gfc on the horizon

[Bobdn]

Unsettling story of a person, with part time work, borrowing to fund a holiday to Europe. Makes for uncomfortable reading...

https://www.smh.com.au/business/banking-and-finance/i-m-amazed-they-approved-me-cba-lashed-for-lending-to-the-naive-20190203-p50vfw.html

[Scrunch]

Will probably affect NZ in due course .....like getting credit will be tougher as responsible lending regime really kicks in

Based on my experience it already is. 20 months ago the bank i'm with provided a pre-approval. It lapsed and the bank would then only agree to $170k less. Same main job and higher equity, and the wife working an extra day a week and they won't lend to their original pre-approval value. They are trying to get total lending down based on income concerns when there is a heap of equity (not just 20%).

[huxley]

[QUOTE=Scrunch;746153]Based on my experience it already is. 20 months ago the bank i'm with provided a pre-approval. It lapsed and the bank would then only agree to $170k less. Same main job and higher equity, and the wife working an extra day a week and they won't lend to their original pre-approval value. They are trying to get total lending down based on income concerns when there is a heap of equity (not just 20%)

https://www.consumerprotection.govt.nz/general-help/consumer-laws/credit-contracts-and-consumer-finance-act/

Yeah, I’m finding the same thing, there’s definitely more focus on serviceability rather than equity at the moment

[Bobdn]

Yeah, but the Government is trying to protect us all. The Government is like our mother and father and we're like its children. So even if no one can actually get a loan and the economy screeches to a halt, if it stops just one person taking on debt for say that Honda 125 scooter that they can't repay easily (because life shouldn't be about struggle) then it will be worth it.

Making people jump through hoops; regulating voluntary transactions and then putting more regulation on that regulation (and maybe some more after that) makes me sleep better at night...

F-yeah! ANZ up 4%. ANZ is my last chunky overweight investment that got out of hand because of years in the DRP. DRPs get out of control after awhile like triffids. I was feeling "nervous" before the Hayne report came out.

[Sideshow Bob]

Lots of things to like in the Hayne report. I never understood what mortgage brokers did and why people didn't just deal directly with the bank. Looks like Hayne's recommendations will likely push all this business back the banks' way.

I've never really understood brokers - and how a whole industry appeared out of almost nowhere in the past 10-15 years.

Having said that we used a broker recently and ironically ended up with ANZ, who I bank with. Broker was pretty useless/slow and took numerous emails to get anything done, including fix rates, while having a couple of months paying floating. But apart from the 4% 1yr deal recently, what we got was much better than being advertised. The question being could I have got those myself...…

Oh and the other question......how much are the trailing commissions...…..?? :confused:

[macduffy]

I think you've answered the first point yourself, Bob. Perhaps people use mortgage brokers because they think the broker will get a better deal than they could obtain themselves. Or, just to save the hassle!

:)

[peat]

Y if it stops just one person taking on debt for say that Honda 125 scooter that they can't repay easily (because life shouldn't be about struggle) then it will be worth it.

'cept that Honda 125 allowed them to get a job in some slightly further away place which meant they could repay easily and pay tax on their earnings.
Its their risk and by that I mean the bankers and the borrowers let them do it if they want to.

Quite frankly that story I saw recently about the couple suing the bank because they loaned them money which subsequently became too much, just sickens me. They completed the loan application and if they said they only needed so much to live then the bank should be able to rely on that.
I'm not saying bankers are perfect and in fact they tend to lend you an umbrella on a sunny day and want it back when it rains but it is private commerce!!

[peat]

I think you've answered the first point yourself, Bob. Perhaps people use mortgage brokers because they think the broker will get a better deal than they could obtain themselves. Or, just to save the hassle!

:)

indeed MacDuff! I too have never used one but am doing some consulting work for an Aussie mortgage broker now and they get bloody good deals for their clients

[Bobdn]

'cept that Honda 125 allowed them to get a job in some slightly further away place which meant they could repay easily and pay tax on their earnings.
Its their risk and by that I mean the bankers and the borrowers let them do it if they want to.

Quite frankly that story I saw recently about the couple suing the bank because they loaned them money which subsequently became too much, just sickens me. They completed the loan application and if they said they only needed so much to live then the bank should be able to rely on that.
I'm not saying bankers are perfect and in fact they tend to lend you an umbrella on a sunny day and want it back when it rains but it is private commerce!!

Yes of course. It's astounding how banks have been vilified. It's pure political populism - and every investor across Australia and New Zealand should be wary. It might be banks today but the Eye of Sauron can turn on what you thought was a safe little investment at any moment. "Nice little investment in the [Oil and Gas sector; Retirement Industry; Electricity Sector; etc etc] you have there, shame if anything was to happen to it".

[Sideshow Bob]

I think you've answered the first point yourself, Bob. Perhaps people use mortgage brokers because they think the broker will get a better deal than they could obtain themselves. Or, just to save the hassle!

:)

Yes, I posted and then realized that! ;)

[huxley]

I’ve never used a mortgage broker before, I find if you want the best rate you just need to get a pre-approval with at least two lenders. Then you just email for a bit, back and forth saying ‘bank x will offer this rate, can you beat it?’

[macduffy]

Now, that really is a relief rally! ANZ up over 7%, WBC 8%. Even AMP scored +10%!

Classic case of selling the rumour and buying the fact - or at least, buying back a bit of the damaged stock!

;)

[winner69]

Now, that really is a relief rally! ANZ up over 7%, WBC 8%. Even AMP scored +10%!

Classic case of selling the rumour and buying the fact - or at least, buying back a bit of the damaged stock!

;)

...and Heartland starting to follow suit ....seems their shareprice follows the sentiment

[percy]

...and Heartland starting to follow suit ....seems their shareprice follows the sentiment

No surprises there.!
Dairy prices up tonight.?...lol.

[Marilyn Munroe]

Will probably affect NZ in due course .....like getting credit will be tougher as responsible lending regime really kicks in

I have no doubt if the banks are forced into a responsible lending regime they will punish us.

Applying for a small loan will require filling in a multiple page questionnaire including a compulsory field which asks which brand of tooth paste you use and supplying your great grandfathers birth certificate.

Boop boop de do
Marilyn

[Bobdn]

Well that was a good day. What next? Oh, just the possibility of bizarre and extreme Reserve Bank capital requirements and a declining Australian and New Zealand housing market.

Still, I'll worry about that another day. Tonight I'll celebrate with a glass or two of Cleanskin Merlot from Countdown ($7 a bottle and tastes fine - it's medicinal ;) and some lamb chops.

[moka]

Martin North has read the Banking Royal Commission Special Report and summarises it here. He says profitability will be under pressure because estimated value of remediation could be $6-7bn.
https://www.youtube.com/watch?v=sto_p6puBI8

[winner69]

NAB in trading halt .....head honcho getting the boot?

Wonder how many zillions he will get for leaving ...got a family and elderly parents you know

So morally corrupt these bankers betcha he'll hold out for heaps and not feel one pang of remorse

[Bobdn]

I just sold 2000 shares or 1/3rd of my holding. I'm probably going to keep the rest I think and tough it out. I think this will be painful over the next couple of years - the NZ Reserve Bank/NZ Govt worries me most (the sad state of being an investor in NZ). I enjoy bad policy and unintended consequences as much as the next person - but only when I'm not directly affected.

Anyway I've done enough (I hope) pruning and trimming across my entire portfolio and have more cash in term deposits (ANZ of course) than I have had in the last 20 years or more. I even have some American Silver Eagles in case of complete financial collapse (I do but I'm seriously not expecting to have to exchange these for food -I'm not a complete nut;)

[moka]

I’m surprised how little reaction there is to the Banking Royal Commission. Corruption in the essential banking sector is practically ignored. I don’t follow Australian politics so I was interested to look at the history. It was difficult to get the politicians to admit there was a problem.
Just getting a banking royal commission started was a formidable task. The vested interests against it were as powerful as they come in Australia: the "big four" banks. But that was more like a speed hump compared with an almost insurmountable barrier; the major political parties, which were fiercely opposed to the idea.

Three determined people took up the challenge and, in concert, forced the inquiry against very improbable odds. Jeff Morris became a whistleblower to ASIC. It was a courageous and non-career enhancing move. Fairfax published a series of stories on rogue financial planners in June 2013. Within days Senator Williams won cross-party support to hold a senate inquiry into the CBA and ASIC.

The senate inquiry into CBA's financial planning scandal and ASIC's response wrapped up in June 2014 with the recommendation a royal commission was needed to get to the bottom of a fraud that left customers millions of dollars out of pocket.
That recommendation was slapped down pretty quickly by the Abbott Government and its senior finance ministers Joe Hockey and Mathias Cormann. It was a position the Government would grimly hang on to for another three years. In the meantime, scandal after scandal emerged with depressing regularity.

The next blockbuster instalment in banking malfeasance dropped in March 2016 through a joint Four Corners/Fairfax investigation into CBA's life insurance business CommInsure. "Within a couple of weeks, [Opposition leader] Bill Shorten said 'enough is enough' and called for a royal commission," Ms Ferguson said.

The four big bank bosses wrote to Treasurer Scott Morrison suggesting a royal commission wasn't such a bad idea. While the banks couched their capitulation in terms of being "in the national interest for the political uncertainty to end", there seemed an obvious and less altruistic rationale.
It would far less painful to get an inquiry set up under the terms set by a government that had always resisted the idea, rather than "rogue" backbenchers or, worse still, Labor and the Greens, who had much broader ambitions and thousands of furious constituents queuing up to testify.

Jeff Morris said "It was a quick and dirty inquiry and you have to remember it was called by a Government that didn't want it in the first place and was deliberately starved of resources. Banks have succeeded into spinning it into a series of unfortunate accidents. I know it was deliberate theft from clients — you don't just accidently steal $1 million.”
https://www.abc.net.au/news/2019-02-01/how-the-banking-royal-commission-was-born/10758404

[Bobdn]

ANZ is continuing to hoover up shares. Another 12,000,000 shares canceled at what looks to be a very good price thanks in part possibly to the noise surrounding the RC :)

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANZ/330249/294496.pdf

I know the bank had $3B to spend on the buybacks, I wonder how much they have left?

[macduffy]

ANZ is continuing to hoover up shares. Another 12,000,000 shares canceled at what looks to be a very good price thanks in part possibly to the noise surrounding the RC :)

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANZ/330249/294496.pdf

I know the bank had $3B to spend on the buybacks, I wonder how much they have left?

Which leads one to the conclusion that either ANZ doesn't expect the RBNZ's talk of higher capital requirements to be followed through or that the bank is confident of meeting any such demands. ANZ NZ is of course only around 15-20% of ANZ Group.

[Bobdn]

Ok, my portfolio has been completely rebalanced now - I did a few final touches and will leave well enough alone. I sold a few more ANZ today, still hold some but had gathered too many over the years and needed to diversify, including bolstering my cash. Honestly, in December I thought I had missed the opportunity and we were heading for a crash. It will happen of course sooner or later but I'm in better shape now I hope. I'm still invested but I took Alan's Greenspan's advice to "run for cover" (a little bit at least).

https://www.cnbc.com/2018/12/18/alan-greenspan-has-a-new-warning-for-investors-when-markets-turn-run-for-cover.html

The article below did not fill me with confidence. NZ banks are already semi-nationalized. There is already so much Government regulation and direction about what they can and can't do and it looks like there's bound to be more constraints to come. Gee, I hope banks won't be blamed when GDP drops and credit dries up. That would be so unfair.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12206198

[minimoke]

Pretty poor - especially when led by an ex PM (theres a theme there)
https://www.stuff.co.nz/business/112033446/reserve-bank-censures-anz

[boysy]

This will impact repricing a lot of insto/commercial/property finance loans on their current book - will be interesting to see the long term impact ....

[stoploss]

Talk about shooting yourself in the foot the week the consultation papers on the bank capital review are due in :ohmy:

[winner69]

The ANZ problem been known for a while. They told their commercial and ag customers a month or so ago ....and expect tighter lending and probably higher costs

All banks (not just the big four) run ‘dodgy’ models to assess risk and equity ratios. All ‘fine tuned’ to give the ‘answer’ they want.

All banks take too much risk and/or too leveraged if current ROEs are anything to go by. No wonder the RBNZ is doing the right thing and getting it sorted.


Hypothetical question: What would you say if someone offered you an investment with a promised pre-tax return of close to say 20% pa over many years?.

You mighty say: “How much can I buy?” or like most sensible people: “What is the catch?”

Think about it

[macduffy]

The ANZ problem been known for a while. They told their commercial and ag customers a month or so ago ....and expect tighter lending and probably higher costs


Did they say that, ie that they had been miscalculating their adherence to current capital rules - or did they warn that tighter lending and probably higher costs would follow the RBNZ's proposed higher capital requirements?

[pg0220]

Hypothetical question: What would you say if someone offered you an investment with a promised pre-tax return of close to say 20% pa over many years?.

You mighty say: “How much can I buy?” or like most sensible people: “What is the catch?”

I have been looking for my first home to buy and that's exactly I am getting a lot! Cheap? there is always a catch to it...

[winner69]

Did they say that, ie that they had been miscalculating their adherence to current capital rules - or did they warn that tighter lending and probably higher costs would follow the RBNZ's proposed higher capital requirements?

They admitted that their ‘model’ wasn’t liked by the RBNZ

One main point they noted was that their calculation re Agriculture loans was way out of kilter with what other banks (and banking industry experience) considered prudent.

[Bjauck]

I have been looking for my first home to buy and that's exactly I am getting a lot! Cheap? there is always a catch to it... It is tempting for first home buyers to take bigger risks to save for deposits that have grown in size over the years by far more than the after tax increase in incomes.

They are on the wrong side of the systemic lift in house prices that is the result of the shift to a low interest rates.

[macduffy]

ANZ sharing in the election effect this morning. Up $1.65 in Aussie!

[Grimy]

Certainly a nice swing back up from Friday-pleased I bought on the dip then.

[SilverBack]

"This increases the minimum capital ANZ must hold for operational risk by around 60 per cent, to $760 million, the Reserve Bank said."

60%, that is massive. If our main banks are prepared to act like this, how can the Reserve Bank say that there is no need for an investigation equivalent to the Royal Commission in Australia? Why, because the RB asked the banks if they were doing anything dodgy but they said no and the RB said OK, no inquiry necessary.
Sorry ordinary people, you are just here to be abused because these rules and regulations are in place to protect you and so by default, you are the ones being abused.

[macduffy]

For a bit of balance.

https://www.stuff.co.nz/business/112848875/anz-might-lend-2b-less-as-a-result-of-rbnz-sanction-but-thats-no-big-deal-says-banking-expert

[winner69]

Calls for Key and others to resign

Pretty slack governance

https://www.stuff.co.nz/business/113169105/former-bnz-chair-calls-for-sir-john-key-to-be-forced-to-resign-from-anz

[winner69]

NZ CEO shown the door

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANZ/336104/301740.pdf

“characterisation of the expenses” is an interesting term

[iceman]

NZ CEO shown the door

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANZ/336104/301740.pdf

“characterisation of the expenses” is an interesting term

The "Smiling Assassin" strikes again. Must be pretty serious with Hisco agreeing to forfeit $6.4 M in shares.

[Sideshow Bob]

The "Smiling Assassin" strikes again. Must be pretty serious with Hisco agreeing to forfeit $6.4 M in shares.

Indeed, as would imagine that his expenses (ordinarily) wouldn't have been looked at too closely and would have been reasonably hefty anyway, given CEO of a large bank.

Maybe he just built the deck before he had the shares to sell??

[Raz]

Indeed, as would imagine that his expenses (ordinarily) wouldn't have been looked at too closely and would have been reasonably hefty anyway, given CEO of a large bank.

Maybe he just built the deck before he had the shares to sell??

I suspect there will be more to it, when I was in my corporate career, want to exit an executive...look at their credit cards...always find something there to provide the final nudge.

[iceman]

Indeed, as would imagine that his expenses (ordinarily) wouldn't have been looked at too closely and would have been reasonably hefty anyway, given CEO of a large bank.

Maybe he just built the deck before he had the shares to sell??

The talk is of exaggerated expenditure on corporate cars and wine storage among others !!!

[RTM]

NZ CEO shown the door

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ANZ/336104/301740.pdf

“characterisation of the expenses” is an interesting term

Hard to believe its not related to this as well.
"Reserve Bank censures ANZ for 'persistent weakness in process'"
And Sir John ? Does he take any accountability ?

[Raz]

Hard to believe its not related to this as well.
"Reserve Bank censures ANZ for 'persistent weakness in process'"
And Sir John ? Does he take any accountability ?

do we think this is the key point....aha :)

[percy]

do we think this is the key point....aha :)

Kill two birds with one stone.!

[okay]

Indeed, as would imagine that his expenses (ordinarily) wouldn't have been looked at too closely and would have been reasonably hefty anyway, given CEO of a large bank.

Maybe he just built the deck before he had the shares to sell??

Looks like he did more than build a deck. Bought John Keys Omaha bach, last year. I see JK's old mate Ken Whitney ala the foreign trusts was mentioned in the article also.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12241168

[Sideshow Bob]

Looks like he did more than build a deck. Bought John Keys Omaha bach, last year. I see JK's old mate Ken Whitney ala the foreign trusts was mentioned in the article also.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12241168

Mainly grass out front....needs a deck.....

[winner69]

Looks like he did more than build a deck. Bought John Keys Omaha bach, last year. I see JK's old mate Ken Whitney ala the foreign trusts was mentioned in the article also.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12241168

And john’s Memory remains hazy ....

[whatsup]

Looks like he did more than build a deck. Bought John Keys Omaha bach, last year. I see JK's old mate Ken Whitney ala the foreign trusts was mentioned in the article also.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12241168


K W, is not J K;s " old mate " it is purely professional as he is his lawyer and Im picking a trustee of John blind trust that was in effect while John was P M and that relationship worked very well ( legally ) so would remain, NO SMOKE HERE !!

[Raz]

Kill two birds with one stone.!

Still think there is even more to it. More dead fish?

[percy]

Still think there is even more to it. More dead fish?

I think you are right.

[macduffy]

The Aussie banks are under a lot of scrutiny, both at home and here in NZ. What better way to demonstrate a change than to crack down on a NZ subsidiary?

[winner69]

Nothing has changed in banking circles, at the highest levels at least

ANZ issues and then we’ll never know why the newly appointed CFO for BNZ never turned up for work.

Then again most high flying execs probably root the system (at shareholders expense)

[peat]

Bought John Keys Omaha bach, last year.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12241168

Odd isn't it? Teflon John always seems to be making deals which are clean but somehow have a whiff of fish (probably flounder from Omaha), but nothing obviously illegal. I do suspect one day he will be smoked out.

[RTM]

Odd isn't it? Teflon John always seems to be making deals which are clean but somehow have a whiff of fish (probably flounder from Omaha), but nothing obviously illegal. I do suspect one day he will be smoked out.

Never had smoked flounder.....probably OK.

[IAK]

Odd isn't it? Teflon John always seems to be making deals which are clean but somehow have a whiff of fish (probably flounder from Omaha), but nothing obviously illegal. I do suspect one day he will be smoked out.

Maybe the teflon has worn off? https://www.newsroom.co.nz/2019/06/18/641391/the-smiling-assassin-returns-for-his-biggest-hit

[peat]

Maybe the teflon has worn off? https://www.newsroom.co.nz/2019/06/18/641391/the-smiling-assassin-returns-for-his-biggest-hit

that article doesn't really show that it has. not really any super hard questions being asked.
Maybe they should've sent Hisco on his way due to the reserve issue as well.
Looking forward to any developments <grabs popcorn>

[Jaa]

Nothing has changed in banking circles, at the highest levels at least

ANZ issues and then we’ll never know why the newly appointed CFO for BNZ never turned up for work.

We do know!

She was CFO for 6 years at Ambank (Malaysian bank then partially owned by ANZ) which was at the heart of the biggest corruption case in history, Malaysia's 1MDB. Former Prime Minister Najib's personal account at Ambank recieved $US681m in overseas funds. This she would have had to have known about.

https://www.freemalaysiatoday.com/category/nation/2019/04/29/najib-opened-ambank-account-to-get-big-money-from-overseas-court-told/

She could have and should have resigned, once she knew what was going on. Good on the RBNZ for blocking her appointment. We don't want yes people in charge of NZ banks.

https://i.stuff.co.nz/business/industries/110524164/the-disappearing-act-of-mandy-rutherford-bnzs-chief-financial-officer-that-never-was

[RTM]

We do know!

She was CFO for 6 years at Ambank (Malaysian bank then owned partially owned by ANZ) which was at the heart of the biggest corruption case in history, Malaysia's 1MDB. Former Prime Minister Najib's personal account at Ambank recieved $US681m in overseas funds. This she would have had to have known about.

https://www.freemalaysiatoday.com/category/nation/2019/04/29/najib-opened-ambank-account-to-get-big-money-from-overseas-court-told/

She could have and should have resigned, once she knew what was going on. Good on the RBNZ for blocking her appointment. We don't want yes people in charge of NZ banks.

https://i.stuff.co.nz/business/industries/110524164/the-disappearing-act-of-mandy-rutherford-bnzs-chief-financial-officer-that-never-was

Wow...thankyou !

[Sideshow Bob]

More slowly starting to come out

https://www.stuff.co.nz/business/113599166/anzs-former-boss-david-hisco-clocked-up-nearly-450k-a-year-in-expenses

[RupertBear]

More slowly starting to come out

https://www.stuff.co.nz/business/113599166/anzs-former-boss-david-hisco-clocked-up-nearly-450k-a-year-in-expenses

$450k a year in expenses! Holy S**t! Time for the real story to come out and why does he not have to pay any of it back?! WOW!

[Sideshow Bob]

$450k a year in expenses! Holy S**t! Time for the real story to come out and why does he not have to pay any of it back?! WOW!

Over $1,200 per day. Wonder how long that was going on for....

[BlackPeter]

Over $1,200 per day. Wonder how long that was going on for....

Apparently it was A$357000 in 2011 (expenses, this is ...) and it must have stayed on that level (or slightly grown).

More concerning than the greediness of the CEO is that ANZ does not seem to have systems to catch such wrong doing of their executives. Well, one could obviously argue - 8 years and roughly 3.2 million dollars later (extrapolating the stated expenses from 2011 and 2018) they noticed ... but still - are they the right bank we should trust to look after our money?

[RTM]

Apparently it was A$357000 in 2011 (expenses, this is ...) and it must have stayed on that level (or slightly grown).

More concerning than the greediness of the CEO is that ANZ does not seem to have systems to catch such wrong doing of their executives. Well, one could obviously argue - 8 years and roughly 3.2 million dollars later (extrapolating the stated expenses from 2011 and 2018) they noticed ... but still - are they the right bank we should trust to look after our money?

It’s really quite sad. It’s not as tho he was poorly paid. We can do with out that kind of greed in our top company executives.

[Baa_Baa]

It’s really quite sad. It’s not as tho he was poorly paid. We can do with out that kind of greed in our top company executives.

Put two & two together getting five, he was the highest sign-off authority for NZ expenses, so above the law, and had a 'verbal agreement' with the Aus bank boss, so he felt that he was protected from the protocols of 'actual and reasonable expenses' like every other corporate executive. And that was condoned for years by the Board.

It's been brushed over by the Board and diluted and opaque in statutory shareholder reporting for donkeys years so they've been covering him, but it fell apart only recently. So that's not the real reason he's been shafted, something else must've happened.

Oh, yes the bank has serially under reported risk exposure, for many years. Now that's the CEO's problem, not the Board but it's embarrassing, especially when currently fighting the RBNZ about risk coverage (and a backdrop of the Aus malfeasance reports).

It's probably something like this .. "Sorry Mr Hisco, despite having covered your butt for many years on expenses, you've embarrassed the bank with these revelations about risk exposure which is going to cost us (and the shareholders) a fortune to make right, so in order to save the Boards' arse and the banks reputation, we suggest you take a years salary, forfeit your options and resign. We'll look after it from here. All good with that?"

Hey John, go fix this mess with the media and for god's sakes don't let it get out of control with the media. Please make sure you deflect to Mr Hisco's misgivings and keep the bank's risk coverage and war with the RBNZ off the radar. There's a good chap.

[Airw0lf]

Put two & two together getting five, he was the highest sign-off authority for NZ expenses, so above the law, and had a 'verbal agreement' with the Aus bank boss, so he felt that he was protected from the protocols of 'actual and reasonable expenses' like every other corporate executive. And that was condoned for years by the Board.

It's been brushed over by the Board and diluted and opaque in statutory shareholder reporting for donkeys years so they've been covering him, but it fell apart only recently. So that's not the real reason he's been shafted, something else must've happened.


This is a ridiculous situation, I thought governance 101 was that the Board needed to keep their eye on the CEO's expense claims. This is almost by definition because no one else can really wield authority over the CE. Yes a complicating factor is that there is a group CEO and a NZ CEO. However the NZ board should have their eye on the ball with regard to their CEO, surely?


Oh, yes the bank has serially under reported risk exposure, for many years. Now that's the CEO's problem, not the Board but it's embarrassing, especially when currently fighting the RBNZ about risk coverage (and a backdrop of the Aus malfeasance reports).


Again back to governance 101 - Boards need to implement risk reporting and management protocols and ensure they are followed. That's a massive part of their oversight function. For a bank capital adequacy is a huge source of risk - there's no way on earth the board should be just delegating everything to the CEO and assuming he has it under control. They need to be aware of the risk exposure and be sure it's being calculated correctly. In listed firms I've worked at, for example, the risk officers (at the request of the board's risk committee) are normally required to get external risk audits performed and demonstrate compliance with these risk policies. The relevant risks differ from business to business, but the idea is that there is a risk register that the board is across and they ensure that these risks are managed, with the big hairy ones getting regular board airtime.

[Raz]

This is a ridiculous situation, I thought governance 101 was that the Board needed to keep their eye on the CEO's expense claims. This is almost by definition because no one else can really wield authority over the CE. Yes a complicating factor is that there is a group CEO and a NZ CEO. However the NZ board should have their eye on the ball with regard to their CEO, surely?



Again back to governance 101 - Boards need to implement risk reporting and management protocols and ensure they are followed. That's a massive part of their oversight function. For a bank capital adequacy is a huge source of risk - there's no way on earth the board should be just delegating everything to the CEO and assuming he has it under control. They need to be aware of the risk exposure and be sure it's being calculated correctly. In listed firms I've worked at, for example, the risk officers (at the request of the board's risk committee) are normally required to get external risk audits performed and demonstrate compliance with these risk policies. The relevant risks differ from business to business, but the idea is that there is a risk register that the board is across and they ensure that these risks are managed, with the big hairy ones getting regular board airtime.


They would have know, just time to use it...

[winner69]

Obviously dodgy as the ANZ ....but probably most banks are anyway

Managed to keep a lot of things out of the public / shareholders eyes eh

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12243118

[RTM]

Obviously dodgy as the ANZ ....but probably most banks are anyway

Managed to keep a lot of things out of the public / shareholders eyes eh

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12243118

I can remember many comments from contributors to the forum saying they avoid companies with ex-politicians on the Board of Directors.
Disc: Holding

[Sgt Pepper]

I can remember many comments from contributors to the forum saying they avoid companies with ex-politicians on the Board of Directors.
Disc: Holding

Listening to Road Oram discussing the ANZ on nine to noon while painting our kitchen. I could not believe what I was hearing. Surely John Keys position is untenable.

[Joshuatree]

Perfect storm for ANZ and key

[READ ON]. (https://sendy.tarawera.co.nz/l/QQMrKma8h6MjbHw96gBRew/dQmErsEVwTdn9BtBQWM1fQ/znvbblwP6k4sPKHobvjymg)

Read more » (https://sendy.tarawera.co.nz/l/QQMrKma8h6MjbHw96gBRew/ysiWqZNE6eITbDwLtMFSuA/znvbblwP6k4sPKHobvjymg)


Read more » (https://sendy.tarawera.co.nz/l/QQMrKma8h6MjbHw96gBRew/R3KweaI3qfRer92epTDJSA/znvbblwP6k4sPKHobvjymg)

Read more » (https://sendy.tarawera.co.nz/l/QQMrKma8h6MjbHw96gBRew/hncSZntMKUREZzdGbqUw9A/znvbblwP6k4sPKHobvjymg)

Read more » (https://sendy.tarawera.co.nz/l/QQMrKma8h6MjbHw96gBRew/R3KweaI3qfRer92epTDJSA/znvbblwP6k4sPKHobvjymg)

[Sideshow Bob]

Certainly untidy. However on the house, Hisco's wife bought it in July 17, Key became chairman October 17.

[RTM]

Listening to Road Oram discussing the ANZ on nine to noon while painting our kitchen. I could not believe what I was hearing. Surely John Keys position is untenable.

Thanks for posting.
Here is the link for those interested.
https://www.rnz.co.nz/national/programmes/ninetonoon/audio/2018701212/business-commentator-rod-oram-banking
Disc. Holding

[winner69]

ANZ might not be able to spot its own chief executive 'mis-characterising' his business expenses to the tune of half a million, but it can see a naughty netballer a mile off.

https://www.stuff.co.nz/sport/netball/silver-ferns/113787468/silver-fern-shooter-maria-folau-unlucky-scapegoat-for-anz-corporate-troubles

[peat]

ANZ might not be able to spot its own chief executive 'mis-characterising' his business expenses to the tune of half a million, but it can see a naughty netballer a mile off.

https://www.stuff.co.nz/sport/netball/silver-ferns/113787468/silver-fern-shooter-maria-folau-unlucky-scapegoat-for-anz-corporate-troubles

haha good one winner.

I'm offended though (because I don't want to be different from everyone else)

[iceman]

ANZ might not be able to spot its own chief executive 'mis-characterising' his business expenses to the tune of half a million, but it can see a naughty netballer a mile off.

https://www.stuff.co.nz/sport/netball/silver-ferns/113787468/silver-fern-shooter-maria-folau-unlucky-scapegoat-for-anz-corporate-troubles

This is pathetic from ANZ ? Maybe time to change my bank !

[macduffy]

Some kind soul should advise ANZ to stop digging that hole!

:mellow:

[Marilyn Munroe]

Current events are not going to be helpful for Sir John when he wants to move from the board room of ANZ NZ to the board room of Bank of America.

Boop boop do do
Marilyn

[bull....]

'ANZ threatens to 'review and reconsider' NZ operations if Reserve Bank pursues capital ratio changes'.
ANZ group chief executive Shayne Elliott has threatened to review the "size, nature and operations" of the New Zealand business if the Reserve Bank implements its proposed changes to capital ratios, according to his submission released publicly today.
The capital changes would see ANZ Group reduce investment and reallocate resources away from New Zealand to more profitable businesses, Elliott says.
"This may also lead the New Zealand business to reduce operational costs (including employee costs)."
It may also require ANZ Group to "dispose, or cease operation, of the relevant underperforming New Zealand assets or businesses"

from there submission. so does this mean they might float some of there business on the NZX that would be great. keep up the pressure

[Sideshow Bob]

'ANZ threatens to 'review and reconsider' NZ operations if Reserve Bank pursues capital ratio changes'.
ANZ group chief executive Shayne Elliott has threatened to review the "size, nature and operations" of the New Zealand business if the Reserve Bank implements its proposed changes to capital ratios, according to his submission released publicly today.
The capital changes would see ANZ Group reduce investment and reallocate resources away from New Zealand to more profitable businesses, Elliott says.
"This may also lead the New Zealand business to reduce operational costs (including employee costs)."
It may also require ANZ Group to "dispose, or cease operation, of the relevant underperforming New Zealand assets or businesses"

from there submission. so does this mean they might float some of there business on the NZX that would be great. keep up the pressure

Hahahahaha! :t_up: Too profitable for that marlarky!

Just milk your customers a little harder!!

[Jaa]

Oh how the banksters cry wolf!

Withdrawing from NZ would cost ANZ an expensive re-branding exercise :p

Something they may need anyway the way their corporate governance and culture is killing their brand.

[macduffy]

'ANZ threatens to 'review and reconsider' NZ operations if Reserve Bank pursues capital ratio changes'.
ANZ group chief executive Shayne Elliott has threatened to review the "size, nature and operations" of the New Zealand business if the Reserve Bank implements its proposed changes to capital ratios, according to his submission released publicly today.
The capital changes would see ANZ Group reduce investment and reallocate resources away from New Zealand to more profitable businesses, Elliott says.
"This may also lead the New Zealand business to reduce operational costs (including employee costs)."
It may also require ANZ Group to "dispose, or cease operation, of the relevant underperforming New Zealand assets or businesses"

from there submission. so does this mean they might float some of there business on the NZX that would be great. keep up the pressure

One thing's for sure. Higher capital ratios will result in lower lending in future as each new loan will require more capital to "protect" it. Personally, I think there's been a bit of bluster on the part of the RBNZ to date and that they will moderate their proposals somewhat. Let's not forget that all banks will be affected - tighter credit; a slower economy.

[Sgt Pepper]

One thing's for sure. Higher capital ratios will result in lower lending in future as each new loan will require more capital to "protect" it. Personally, I think there's been a bit of bluster on the part of the RBNZ to date and that they will moderate their proposals somewhat. Let's not forget that all banks will be affected - tighter credit; a slower economy.

So a partial share float is unlikely??

[macduffy]

So a partial share float is unlikely??

Unlikely? Yes, I think so. It would certainly take some heat out of the current situation - but ANZ have had some problems with partly owned investments over the years and now like to have full ownership - or none!

[bull....]

Big banks' rural lending threats are just bluff and diversion
https://www.stuff.co.nz/business/opinion-analysis/114834323/big-banks-rural-lending-threats-are-just-bluff-and-diversion

agree that a commission should be appointed in NZ the longer politicians ignore it the more faith is lost in banks as an insitution

[beetills]

Headline in .NBR behind paywall
WATCH THIS SPACE
Sir John Key drops hints at NZX soiree.......
Anybody able t give any clues as to what the hints concerned.
Thanks in advance.

[Tomtom]

ANZ has clearly been a victim of corporate excesses, poor governance and mismanagement from their ill conceived plan build a "super regional" bank by expanding in Asia to misselling products and not effectively handling regulators.


...So I've just bought in as a long term hold. If a bank can remain that insanely profitable despite directors and senior managers trying this ferociously to destroy shareholder value one can only imagine that one day, in the very distant future, someone only indifferent to shareholder value might come along and turn things around.

[GTM 3442]

ANZ has clearly been a victim of corporate excesses, poor governance and mismanagement from their ill conceived plan build a "super regional" bank by expanding in Asia to misselling products and not effectively handling regulators.


...So I've just bought in as a long term hold. If a bank can remain that insanely profitable despite directors and senior managers trying this ferociously to destroy shareholder value one can only imagine that one day, in the very distant future, someone only indifferent to shareholder value might come along and turn things around.

Personally, I'd be more inclined to look at a fund or ETF covering the Australian finance sector as a whole, rather than bet on a single company. My chosen vehicle is OZF.

[Beagle]

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12278644

[theace]

Why the 'halt'?

[King1212]

Capital revised review...RNBN

[winner69]

Why the 'halt'?

Awaiting capital requirements review from RBNZ

[macduffy]

The market seems to be accepting the verdict. Or perhaps, relieved?

[theace]

Have been considering buying a small holding, from a dividend and diversification perspective. SP looks low from a historical perspective. Rules on Westpac due to uncertainty around what fines they will get hit with, and impact on share price.

[macduffy]

Acting CEO confirmed in the role.

Wasn't she one of the directors of the subsidiary company that signed off on that infamous St Heliers property sale?

;)

[Airw0lf]

Acting CEO confirmed in the role.

Wasn't she one of the directors of the subsidiary company that signed off on that infamous St Heliers property sale?

;)

Yup, what a joke.

[Grimy]

Anyone got their dividend yet?

[Biscuit]

Anyone got their dividend yet?

yes, was in the bank today

[Grimy]

Hopefully mine will turn up soon. My bank is ANZ...……….

[Snoopy]

Hopefully mine will turn up soon. My bank is ANZ...……….

Interesting that your payment from ANZ to ANZ is tardy. I use different banks for different functions. I have found almost universally that payments between different banks are always faster to be processed than transferring money between accounts in the same bank!

SNOOPY

[BlackPeter]

Anyone got their dividend yet?

I am reinvesting via bonus shares ... and received the confirmation for that already 2 days ago.

[Grimy]

I looked into it a bit more this morning and I think it is my fault.
Although my holding, bank details and payment instructions are all correct in Computershare, it seems I need to also advise ANZ through their investor page. So I have done that and will see what happens.
Funnily enough I have some WBC as well and they paid me today without needing to do anything other than buy the shares.
Snoopy-I have often found the same! Can be a bit random.

[Snoopy]

Skullduggery or not?

UDC was put up for sale over the FY2017 financial year (before FY2017 accounts were published) but withdrawn from sale in FY2018 (after financial accounts were published). It would have been helpful to show the accounts in their best possible light leading up to any sale. So were the impairments at UDC for FY2017/FY2018 really that much lower? Or has some 'window dressing' gone on here? The sale of UDC has been put on indefinite ice, from 31st October 2018 (after balance date). So it will take until the FY2019 result at best for any 'window dressing', should it exist, at UDC to unwind.


Had a brief look for the UDC (https://www.udc.co.nz/investing/index) results from FY2019. But with all debenture holders repaid, and UDC 100% ANZ Bank owned (from October 2019), I guess there is no need to pubish UDC's results any more?

SNOOPY

[macduffy]

Had a brief look for the UDC (https://www.udc.co.nz/investing/index) results from FY2019. But with all debenture holders repaid, and UDC 100% ANZ Bank owned (from October 2019), I guess there is no need to pubish UDC's results any more?

SNOOPY

That's it, Snoopy. A pity, we now won't have any finance company to compare Heartland with!

;)

[BlackPeter]

Actually - I was not sure, whether I should include ANZ in my wee research job how good stockmarket analysts prediction are, but then - ANZ is NZX listed as well (even if I use A$ in my analysis) and researched by NZ analysts ... what could possibly go wrong?

Predicting banks should be relatively easy - right, and in this case it was the consensus of 15 analysts. So - how good have their predictions been over the last 12 months? Here is the 5th review in my little series ...

Stock: ANZ (using A$, though)
Prediction month: January 2019
Forecast month: January 2020



Peak share price during prediction month
A$26.19



Consensus forecast
$28.68



achieved peak shareprice in forecast month
$25.90
1% SP drop and 10% below forecast - but still - lets call this a pass, shall we?


consensus recommendation
outperform (8,2/10)



actual 12 month growth vs NZX50
underperformed NZX50 by 27%
PREDICTION FAIL



Rating of the analysts so far:

5 stocks checked (checking for each consensus and buy recommendation);
predictions correct: 2
predictions wrong: 8
analyst hitrate so far: 20%

Hmm ...

[Snoopy]

Actually - I was not sure, whether I should include ANZ in my wee research job how good stockmarket analysts prediction are, but then - ANZ is NZX listed as well (even if I use A$ in my analysis) and researched by NZ analysts ... what could possibly go wrong?

Predicting banks should be relatively easy - right, and in this case it was the consensus of 15 analysts. So - how good have their predictions been over the last 12 months? Here is the 5th review in my little series ...

Stock: ANZ (using A$, though)
Prediction month: January 2019
Forecast month: January 2020



Peak share price during prediction month
A$26.19



Consensus forecast
$28.68



achieved peak shareprice in forecast month
$25.90
1% SP drop and 10% below forecast - but still - lets call this a pass, shall we?
capital

consensus recommendation
outperform (8,2/10)



actual 12 month growth vs NZX50
underperformed NZX50 by 27%
PREDICTION FAIL





BP, I don't wish to defend brokers in general or any particular broker. And I am not saying that I would have done better myself betting where particular companies in the market would have gone over 2019 by stating my own position on January 1st 2019. But thinking back just over a year:

1/ I was fairly sure interest rates had bottomed (and that turned out to be wrong). Perhaps as a result, the property market was stronger than expected.
2/ I also note that in Australia, the Australian Government Royal Commission report into potential misconduct in Banking and Financial Institutions was published in February 2019.
3/ I also recall our own Reserve Bank Governor making announcements about the increased capital that NZ registered banks would be expected to hold in the future.

All of these things, I would have thought, would have made a great difference to a bank's capital allocations and interest margins during the year. Are you saying that the views of our analysts should have been able to correctly anticipate the timing and magnitude of these events? IIRC correctly most analysts were predicting a sombre 2019 with a recovery in 2020. It looks now as if the opposite might be happening. I guess what I am saying is, if the analysts got the underlying financial climate wrong, is it any surprise that their prediction for ANZ turned out to be wrong?

I am also unsure as to how you got your view that "Predicting banks should be relatively easy."

Finally why have you selected a one year time frame for your 'broker assessment' exercise when most broker recommend portfolios should surely be structured to operate over significantly a longer time frame than that, precisely for the reason that picking what happens to one share in one year is a very volatile exercise?

SNOOPY

[BlackPeter]

BP, I don't wish to defend brokers in general or any particular broker. And I am not saying that I would have done better myself betting where particular companies in the market would have gone over 2019 by stating my own position on January 1st 2019. But thinking back just over a year:

1/ I was fairly sure interest rates had bottomed (and that turned out to be wrong). Perhaps as a result, the property market was stronger than expected.
2/ I also note that in Australia, the Australian Government Royal Commission report into potential misconduct in Banking and Financial Institutions was published in February 2019.
3/ I also recall our own Reserve Bank Governor making announcements about the increased capital that NZ registered banks would be expected to hold in the future.

All of these things, I would have thought, would have made a great difference to a bank's capital allocations and interest margins during the year. Are you saying that the views of our analysts should have been able to correctly anticipate the timing and magnitude of these events? IIRC correctly most analysts were predicting a sombre 2019 with a recovery in 2020. It looks now as if the opposite might be happening. I guess what I am saying is, if the analysts got the underlying financial climate wrong, is it any surprise that their prediction for ANZ turned out to be wrong?

I am also unsure as to how you got your view that "Predicting banks should be relatively easy."

Finally why have you selected a one year time frame for your 'broker assessment' exercise when most broker recommend portfolios should surely be structured to operate over significantly a longer time frame than that, precisely for the reason that picking what happens to one share in one year is a very volatile exercise?

SNOOPY

Hi Snoopy, good questions.

BTW - ANZ is only one piece of the puzzle - here is my (hopefully growing) summary:
https://www.sharetrader.co.nz/showthread.php?11721-How-good-are-the-forecasts-of-stockmarket-analysts

My (not quite serious) comment that banks might be easier to forecast than some other companies ... well, they typically do have a long history and a known market. Makes it easier to predict their future path for analysts than e.g. trying to guess the consensus for ERD or GTK or any other so called growth company.

What I want to find out is whether there is any statistical relevance in analyst forecasts and recommendations. So far it looks like the correlation between forecast and outcome might be - if any - negative, but I only started.

I am sure we can find for each individual forecasts a bunch of excuses why they didn't eventuate, but if we need to do this for the majority of all forecasts, than what would be the point of looking at them anyway?

However - I don't want to jump the gun ... and of the 5 forecasts I looked into so far, ANZ for the last 12 months was actually one of the closest (most accurate). Might be the best it gets, but we will see. With most other stocks analysts had in January 2019 absolutely no clue what will happen with the stock in 12 months.

Time frame: 12 months makes sense because this is the "consensus "time frame" (share price in 12 months) - i.e. it is easy for me to get the numbers, but sure - I could use any other time frame, it just would make it for me more difficult to find out what the analysts predicted e.g. 5 or 10 years ago.

As well - the relevance of the quality of the forecasts is obviously dropping if we look at longer time frames. If we find out that analysts have been say 5, 10 or 20 years ago really good in predicting the long term performance of stocks (I doubt it), then how would that help us today? Historically interesting, but different stocks, different analysts and different methods.

Anyway - good to get some feedback - cheers.

[Scrunch]

As at 30 September 2019 ANZ had net assets of A$60,794m inclusive of A$4,861m of goodwill and intangibles or A$56 billion if intangibles and goodwill are excluded. This is basically the same as ANZ's closing market capitalisation on 11 March 2020 which was $56.6b (per directbroking's calculation).

Although ANZ got down to A$12 in Feb 2009 during the GFC, this was close to ANZ's net assets at the time.

Relative to ANZ's net tangible assets, the Australian market is therefore now pricing ANZ roughly the same way it was at the peak (bottom) of the GFC. Are the know and likely impacts of an oil price collapse and the virus really now on-par with the depths of the GFC crisis? If so why are only the banks pricing in this?

[Mr Slothbear]

As at 30 September 2019 ANZ had net assets of A$60,794m inclusive of A$4,861m of goodwill and intangibles or A$56 billion if intangibles and goodwill are excluded. This is basically the same as ANZ's closing market capitalisation on 11 March 2020 which was $56.6b (per directbroking's calculation).

Although ANZ got down to A$12 in Feb 2009 during the GFC, this was close to ANZ's net assets at the time.

Relative to ANZ's net tangible assets, the Australian market is therefore now pricing ANZ roughly the same way it was at the peak (bottom) of the GFC. Are the know and likely impacts of an oil price collapse and the virus really now on-par with the depths of the GFC crisis? If so why are only the banks pricing in this?

did think along similar lines while researching earlier today.

Certainly APRA and RBnZ have been very tough on them lately. Lots of new capital pumped in at higher prices than currently so a good bit of fat as protection in case its needed.

Trading at below NTA today so very tempting value but I never like these behemoth banks as I like to stick to my knitting with companies I feel can really understand well - always a lot of rabitholes when it comes to
understanding the various arms and limbs of the big banks.

[Grimy]

ANZ quite a bit under NTA today. I'm having to sit on my hands so I don't push the buy button...….

[BlackPeter]

ANZ quite a bit under NTA today. I'm having to sit on my hands so I don't push the buy button...….

Always difficult to pick bottoms, but I think the chances are you can buy them next week still cheaper ;);

[Grimy]

And possibly cheaper still the week after that!
Perhaps I should just go outside and mow the lawns. I've already done the housework and replaced a toilet seat and had an hour's walk.

[Mr Slothbear]

Both ANZ and Westpac are looking very undervalued. In a vacuum I would be jumping into both of these with both feet. The only issue is evaluating them relative to the opportunity cost when everything else is similarly dropping significantly and for some things undervalue territory

[BlackPeter]

Both ANZ and Westpac are looking very undervalued. In a vacuum I would be jumping into both of these with both feet. The only issue is evaluating them relative to the opportunity cost when everything else is similarly dropping significantly and for some things undervalue territory

Clearly - currently fear is controlling the stock exchanges, but not quite sure whether the drop of the banking industry as a whole is so surprising. Just think about the risks:

Tourism worldwide just fall of a cliff - it is now fair to assume that most of the industry is loosing now at least one full season. Many tourism operators might not have the financial headroom to survive and bite the dust. The banks who gave them money might not look that flash afterwards either.

Many highly indebted countries are currently pumping huge additional funds into some first aid of their economies. Some might be able to afford this additional debt, many will do it anyway and some will crumble, particularly considering that tax take will drop at the same time. Bankrupt companies don't pay taxes anymore. Just wondering whats happening with the banks holding large amount of bonds of the countries (some of the obvious might be e.g. Italy, Spain, Greece, Turkey) which won't make it financially.

Unemployment will rise worldwide. No need to employ waiters, maids, cleaning staff, chefs, airline staff and so on if nobody is travelling and hardly anybody going out. Unemployed people will have problems to repay their loans. Some might have enough financial headroom but most will not.

I am not saying this is the end of the world, but the value of our banks is currently dependent on a lot of things we can't really assess. While I think that ANZ is one of the stronger and less impacted banks ... only time will tell.

Pretty sure lower loan repay rates and higher unemployment will make life for ANZ and Westpac uncomfortable as well. Not sure about them holding sub prime bonds of indebted countries (but they well might - remember NZ Super fund loosing money in a Portuguese bond?).

I hold a small amount of ANZ shares, but I am not sure now is the best time to top up.

[Mr Slothbear]

Thanks for your reply BP.


Clearly - currently fear is controlling the stock exchanges, but not quite sure whether the drop of the banking industry as a whole is so surprising. Just think about the risks:

Tourism worldwide just fall of a cliff - it is now fair to assume that most of the industry is loosing now at least one full season. Many tourism operators might not have the financial headroom to survive and bite the dust. The banks who gave them money might not look that flash afterwards either.

Many highly indebted countries are currently pumping huge additional funds into some first aid of their economies. Some might be able to afford this additional debt, many will do it anyway and some will crumble, particularly considering that tax take will drop at the same time. Bankrupt companies don't pay taxes anymore. Just wondering whats happening with the banks holding large amount of bonds of the countries (some of the obvious might be e.g. Italy, Spain, Greece, Turkey) which won't make it financially.

Unemployment will rise worldwide. No need to employ waiters, maids, cleaning staff, chefs, airline staff and so on if nobody is travelling and hardly anybody going out. Unemployed people will have problems to repay their loans. Some might have enough financial headroom but most will not.

I am not saying this is the end of the world, but the value of our banks is currently dependent on a lot of things we can't really assess. While I think that ANZ is one of the stronger and less impacted banks ... only time will tell.

Pretty sure lower loan repay rates and higher unemployment will make life for ANZ and Westpac uncomfortable as well. Not sure about them holding sub prime bonds of indebted countries (but they well might - remember NZ Super fund loosing money in a Portuguese bond?).

I hold a small amount of ANZ shares, but I am not sure now is the best time to top up.


Loans to the tourism industry are certainly a potential risk. Quite a bit will depend on how much govt. support they are given to make sure the can see it through.

in terms of traditional home mortgage lending I really see this as very low risk. 35% minimum deposit for investors or 20% for most owner occupiers and 10% for a very small number with higher margins and strict criteria. Most would rather skip meals and cut other expenses than lose their house.

both ANZ and westpac are very well capitalised. ANZ having 11% of CET1 capital.

the biggest risk I see is the interest rate cut in Australia which will put pressure on margins but also most likely reduce stress on some loans.

I like ANZ divesting their non core businesses like the JV in cambodia and sticking to Aus and NZ

statutory profit for both companies was significantly negatively impacted in 2019 due to remediation costs so once we add that back in for fy20 I think things should be looking much rosier.

[stoploss]

Thanks for your reply BP.




Loans to the tourism industry are certainly a potential risk. Quite a bit will depend on how much govt. support they are given to make sure the can see it through.

in terms of traditional home mortgage lending I really see this as very low risk. 35% minimum deposit for investors or 20% for most owner occupiers and 10% for a very small number with higher margins and strict criteria. Most would rather skip meals and cut other expenses than lose their house.

both ANZ and westpac are very well capitalised. ANZ having 11% of CET1 capital.

the biggest risk I see is the interest rate cut in Australia which will put pressure on margins but also most likely reduce stress on some loans.

I like ANZ divesting their non core businesses like the JV in cambodia and sticking to Aus and NZ

statutory profit for both companies was significantly negatively impacted in 2019 due to remediation costs so once we add that back in for fy20 I think things should be looking much rosier.

30 % deposit for Investment properties currently

[macduffy]

30 % deposit for Investment properties currently

It's not recent/current lending that may be a problem. Rather, it's all those low deposit loans made in previous years.

[Entrep]

Look at that spread today - what the heck happened?

[Biscuit]

Market seems reasonably comfortable with the interim, despite the rather large fall in cash profit, dividend decision deferred, and provisions.

[macduffy]

Market seems reasonably comfortable with the interim, despite the rather large fall in cash profit, dividend decision deferred, and provisions.

The real action is, of course, on the parent's exchange, the ASX, where ANZ's shareprice is down 27c at present. It seems that judgement on the announcement, like consideration of a dividend, is being deferred for now.

[Biscuit]

The real action is, of course, on the parent's exchange, the ASX, where ANZ's shareprice is down 27c at present. It seems that judgement on the announcement, like consideration of a dividend, is being deferred for now.

Yes, Aussies not so optimistic as the kiwis overall at the moment. ANZ seem confident they will be able to contend with whatever is thrown at them over the next few months, but then a bank would say that - confidence is everything. I guess their confidence comes also from their liquidity, and liquidity in the system. No matter how rough it is in the short-term, the whole she-bang will skid along on all the excess money until it eventually gains some traction on the other side. The dividend will be a blow to some, but certainly the right decision.

[Tomtom]

Good:
Deferred, instead of outright cutting or cancelling, interim dividend (on regulators guidance) and no extra capital will be raised at this point :). Interestingly that was based on a projected scenario far more pessimistic than the one NAB are working on! Reaffirmed strong capital position compared to some rivals.

Bad:
Took another write down due to Mike Smiths pet project in Asia from which they continue to try to untangle themselves.

[peat]

I just commented on ANZ on the Bank Stocks thread

https://www.sharetrader.co.nz/showthread.php?11779-Bank-stocks&p=811992&viewfull=1#post811992

[macduffy]

[QUOTE]Bad:
Took another write down due to Mike Smiths pet project in Asia from which they continue to try to untangle themselves. [QUOTE]

I wouldn't be too hard on Mike Smith. ANZ were involved in Asia long before his time. Remember Grindlays Bank in India, a subsidiary of the ES and A Bank which ANZ merged with in 1969?

[Biscuit]

[QUOTE]Bad:
Took another write down due to Mike Smiths pet project in Asia from which they continue to try to untangle themselves. [QUOTE]

I wouldn't be too hard on Mike Smith. ANZ were involved in Asia long before his time. Remember Grindlays Bank in India, a subsidiary of the ES and A Bank which ANZ merged with in 1969?

I always liked the Asia strategy, one of thereasons I originally bought in. Unfortunately it didn't bring in as much as just lending to Assies to buy houses.

[Cyclical]

lending to Assies

Seems harsh.

[Biscuit]

Seems harsh.

Ah, that is, Aussies

[Cyclical]

ANZ in for a further pounding on Monday? At Friday close, the NZ listing was at $17.14, down 78c or 4.35% for the day. The AU one ended down 6.8% at close, which by my calcs should see NZ at $16.66, however, that steep decline at the end of the AU trading looked a bit ominous...

11463

[Grimy]

Maybe things are a bit tight. I notice they've started charging me a $5 monthly account fee as of the end of April.
It wasn't so long ago that BNZ dropped their monthly $5 charge. I wonder if that will be reintroduced?

[Cyclical]

Morningstar's revised guidance dated 30/4 for the Aussie listing is AUD$25, accumulate.

"With our longer-term forecasts largely unchanged, the changes are not material enough to move our AUD 25 FVE. We believe the bank remains undervalued, trading at a 32% discount to our fair value."

[nztx]

Maybe things are a bit tight. I notice they've started charging me a $5 monthly account fee as of the end of April.
It wasn't so long ago that BNZ dropped their monthly $5 charge. I wonder if that will be reintroduced?

There's been quite a long running chapter of these sort of charges being refined & whacked upwards by ANZ ..
On a commercial account I remember less than $4, then $4 monthly fee - paper statements got knocked back to 6 monthly - but no change in fees
More recently, base fee got whacked up to $8.50 pm on pretence of increased free transactions - a huge increase for no extra
service rendered for some low transaction accounts ...

As I have always thought - show me a bank that is not for very long behind the eight ball .. Banks are goldmines
ANZ is no different & IMO potentially a good buy ATM for mid to longer term, and looks better of the two Aussie
banking outfits listed on NZX

[Tomtom]

Morningstar's revised guidance dated 30/4 for the Aussie listing is AUD$25, accumulate.

"With our longer-term forecasts largely unchanged, the changes are not material enough to move our AUD 25 FVE. We believe the bank remains undervalued, trading at a 32% discount to our fair value." A Morningstar recommendation to buy? Ominous news for us shareholders.

[Cyclical]

A Morningstar recommendation to buy? Ominous news for us shareholders.

Oh really? Guess I'm not up to play with their track record, will flick them (the shares) off tomorrow ;)

[dabsman]

I've been buying ANZ and WBC around $16 to $18. I think the easiest money to be made in the next 2 years. Pity there wont be a DRP in these low prices too. I am nowhere near as bearish as many and I think all the downside is factored in now at these prices. Who knows but I'm happy to park money here. $20 ex divvy end of year I'm picking easy

[Cyclical]

I've been buying ANZ and WBC around $16 to $18. I think the easiest money to be made in the next 2 years. Pity there wont be a DRP in these low prices too. I am nowhere near as bearish as many and I think all the downside is factored in now at these prices. Who knows but I'm happy to park money here. $20 ex divvy end of year I'm picking easy

I'm thinking along similar lines. Doesn't hurt to have some in a diversified portfolio. The downside is already factored in you'd think, and if not, I'll DCA as we go, assuming the troubles don't get completely out of hand.

[Biscuit]

I've been buying ANZ and WBC around $16 to $18. I think the easiest money to be made in the next 2 years.

In 2009 I bought in at around $19 thinking they were well undervalued (they probably were) and now here we are 10 years later back under that level. I also have bought a few more around $16 as they will survive and eventually bounce back up as the economies pick up. Could be a few years before all the bad debt is worked through and it could be a rough couple of years for both the business and the share price.

[dabsman]

In 2009 I bought in at around $19 thinking they were well undervalued (they probably were) and now here we are 10 years later back under that level. I also have bought a few more around $16 as they will survive and eventually bounce back up as the economies pick up. Could be a few years before all the bad debt is worked through and it could be a rough couple of years for both the business and the share price.

You would have doubled your holding if you had DRP approx?

[Cyclical]

Noob question time... Why do we see this? Is it some kind of manipulation to keep the price in a tight range and try build some support? Or am I reading too much into it?

11488

On second thoughts, you'd have stuff all chance of manipulation with this stock on the NZX anyway I guess.

[Biscuit]

You would have doubled your holding if you had DRP approx?

Probably, it is a good dividend stock and I like getting dividends. But the dividend was better spent elsewhere. In the same time-frame, many NZ growth stocks have far, far exceeded ANZ's return. Ita a good dividend stock - I take the dividend.

[dabsman]

Probably, it is a good dividend stock and I like getting dividends. But the dividend was better spent elsewhere. In the same time-frame, many NZ growth stocks have far, far exceeded ANZ's return. Ita a good dividend stock - I take the dividend.

I always take the DRP but I do wonder if it is better to have the cash and make your own investment decisions as and when you see vale wherever it is

[tomm]

ANZ and WBC which one will you go for ?

[Cyclical]

I see the AU listing has broken down through a lot of resistance (~450k shares) at $15.50...I wonder what's going on.

[Tomtom]

Any update on deferred dividends?

Interesting to me that banks aren't finding love when the wider market is pricing a V.

[Waltzing]

trade the banks never hold... trouble is there always trouble in the banks...... Dividend? your kidding... well i think that over the NEXT 9 year these stock are very very tradeable.... note to one self if still not retired ... sell everything before the next crisis... war with china?

[nztx]

Any update on deferred dividends?

Interesting to me that banks aren't finding love when the wider market is pricing a V.

from memory they said they would be reviewing Dividends etc again in August 2020

[macduffy]

Any update on deferred dividends?

Interesting to me that banks aren't finding love when the wider market is pricing a V.

Financial year ends 30 September. I wouldn't expect any news on dividends until the results announcement in November.

[Scrunch]

Financial year ends 30 September. I wouldn't expect any news on dividends until the results announcement in November.

Agreed. Its not going to be clear how the auzi economy is doing until their job seeker scheme ends - at the end of Sept. Even then you are not going to have good clarity for a few months as a post JS period occurs and is then reported on.

[Waltzing]

FED news on US bank stress tests coming over the wires and possible restrictions on dividend payments may have some influence on Aussi bank share prices going forward.

[Panda-NZ-]

More relief payments trickling out in the news with the second round of lockdowns. Loan deferrals extended etc.

[thegreatestben]

From what I read, these measures end up costing the borrower more over the life of the loan so not exactly bad news for the lenders?

[macduffy]

From what I read, these measures end up costing the borrower more over the life of the loan so not exactly bad news for the lenders?

Extending the length of the loan naturally means that more interest is paid over the longer period. All parties will be hoping that this also improves the prospects for eventual repayment.

[Lion_graf]

Looks like ANZ will pay a dividend in today's announcement

[macduffy]

Looks like ANZ will pay a dividend in today's announcement

The dividend was announced a few weeks ago. Today's announcement advises the DRP price and the exchange rate to NZD. Payment date of 30 September is unchanged.

[Gregnz]

Just curious if anyone knows, as sure as the sun rises each day, everyday at midday (when the ASX opens in Oz), trades suddenly appear in market depth, 400 shares in each parcel, one trader, and both the sell and buy sides. Eg. sell side 19.20, 19.21, 19.22 etc, all one seller with 400 shares. Likewise on the buy side 19.19, 19.18, 19.17 etc. Whats the purpose of this, I assume its a bot, but where is the profit in trying to influence the price each side? Potentially buying and selling from itself?

[BlackPeter]

Just curious if anyone knows, as sure as the sun rises each day, everyday at midday (when the ASX opens in Oz), trades suddenly appear in market depth, 400 shares in each parcel, one trader, and both the sell and buy sides. Eg. sell side 19.20, 19.21, 19.22 etc, all one seller with 400 shares. Likewise on the buy side 19.19, 19.18, 19.17 etc. Whats the purpose of this, I assume its a bot, but where is the profit in trying to influence the price each side? Potentially buying and selling from itself?

Just the normal opening auction. As far as I know - all stock exchanges are doing this for opening and closing - helps to avoid funny spikes at the start and end of trading. While bots are these days involved as well - this tradition ways predates the invention of trading bots (and does not need them).

https://rivkin.com.au/resources/understanding-the-asx-opening-and-closing-auctions/

[Gregnz]

Great, thanks. I'm just not sure with ANZ if its something just related to opening and closing action. Its happening with ANZ at all times of the day, but only appears once the ASX opens, and also appears on the NZX from midday. Its clear its a bot trying to drive the price up or down, I just cant get my head around what it actually achieves as I imagine it ends up gobbling up its own shares during the process. For ANZ its often the only trader trading, as all parcels are 400 shares.

[BlackPeter]

Great, thanks. I'm just not sure with ANZ if its something just related to opening and closing action. Its happening with ANZ at all times of the day, but only appears once the ASX opens, and also appears on the NZX from midday. Its clear its a bot trying to drive the price up or down, I just cant get my head around what it actually achieves as I imagine it ends up gobbling up its own shares during the process. For ANZ its often the only trader trading, as all parcels are 400 shares.

Not sure - 400 ANZ shares are not an unreasonable parcel size ... not quite what most bots would trade (remember - bots don't pay a minimum fee per trade ...).

As well - selling to oneself would be blatant market manipulation and illegal. While things like that might happen from time to time, I would not assume that as the default explanation.

As well - if anybody would want to manipulate share prices - this clearly would be easier with a less liquid stock.

[Tomtom]

Is the 'happy time' returning to banking? Australia unwinds it's onerous regulation. (https://www.bloomberg.com/news/articles/2020-09-24/australia-to-loosen-lending-laws-to-boost-flow-of-credit)

[peat]

Is the 'happy time' returning to banking? Australia unwinds it's onerous regulation. (https://www.bloomberg.com/news/articles/2020-09-24/australia-to-loosen-lending-laws-to-boost-flow-of-credit)

Thanks for that
Aussie retail banks doing well today but I wouldn't say its happy times