More competition from UDC now being owned by a Japanese bank and now more competition for reverse mortgages https://tmmonline.nz/article/9765169...aved+borrowers
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More competition from UDC now being owned by a Japanese bank and now more competition for reverse mortgages https://tmmonline.nz/article/9765169...aved+borrowers
SBS guy says ‘SBS feels reverse mortgages aren't not done very well in New Zealand’
Not quite sure on the OZ reverse mortage figures - new players in the market there, including support from Legal and General UK - product appears overpriced against lower rates
https://www.sbsbank.co.nz/rates 6.20% for home equity release loans. Makes Heartland's 6.50% look a bit high.
This scenario is for King when I finally put on my more optimistic hat. I wouldn't want to see him sell out at the wrong time.....
I am making three changes from Scenario 2b.
a/ I am assuming used car sales fully recover by FY2022. But I am continuing to assume that new car sales remain depressed. This is a 'cautious recovery' picture where tradies get back to work but prudently settle for one or two year old pre-depreciated set of wheels as they remain 'cost conscious'.
b/ For reverse mortgages, I am going for 8% growth over and above the accumulating compounding interest of 6.7%. This is mid way between last years underlying growth rate for NZ (3.3%) and Australia (13.3%). My logic here is that pensioners will want to travel and splash put on some treats that will be increasingly denied to them as traditional sources of fixed interest income go to zero. They may even choose to finance their recently redundant children into new careers.
c/ I am assuming the decline in 'relationship business' is only half that previously assumed, as Heartland sees the value in getting back alongside their long standing clients directly.
How does looking at these three things in a slightly more positive way change Heartland's fortunes going forwards?
1/ Motor Vehicle Finance Adjustment (Used)
I have assumed that used market down by 10% by revenue in FY2021, but that it recovers to reference year (FY2019) levels by FY2022..
I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.
FY2021: -$75m x 0.15 = -$11.3m
Because I am modelling finance deals with a three year life, this annual loss is carried through the ensuing three years. That is why when I model revenues recovering in FY2022, the profit does not recover (because FY2022 still carries the long 'reduction in funding' shadow of the FY2021 downturn).
2/ Reverse Mortgage Adjustment
I had assumed a 'steady' Reverse Mortgage market. But because the interest on Reverse Mortgages are compounded and not collected, even a steady Reverse Mortgage market means the receivable book will grow by about 6.7% per year. I am going to add to this an extra 8% increment (for a total of 14.7%) to model continuing growth in the reverse mortgage portfolio going forwards, This is a similar growth rate to what actually occurred over FY2019.
Reverse Mortgage Balance at EOFY2019: $1,318.8m
Reverse Mortgage Balance at EOFY2021: $1,318.8m x 1.147 x 1.147 = $1,735.0m
Incremental Receivable Gain EOFY2019 to EOFY2021: $1,735.0m - $1,318.8m = $416.2m
Incremental Profit Gain from EOFY2019 to EOFY2021 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $416.2m = $54.1m
Reverse Mortgage Balance at EOFY2022: $1,318.8m x 1.147 x 1.147 x 1.147 = $1,990.1m
Incremental Receivable Gain EOFY2019 to EOFY2022: $1,990.1m - $1,318.8m = $671.3m
Incremental Profit Gain from EOFY2019 to EOFY2022 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $671.3m = $87.3m
3/ Business Finance (Part 2): Business Intermediated & Business Relationship
3a/ 'Business Relationship' lending
'Business Relationship' lending fell by 16% in FY2019 to $559.4m (Annual Review FY2019 p9), and I expect this trend to continue into FY2020 but stabilize by FY2021. This means I am projecting the 'Business Relationship' loan book to be down to:
$559.4 x 0.84 = $470m
That number corresponds to the receivables book shrinking by: $559.4 - $470m = $89.4m. We are told ROE for these loans is between 0% and 11% (AGM2019 Presentation p15). If the closed out loans averaged an ROE of 6%, this would represent a drop in Heartland profit from FY2019 levels of:
$89.4m x 0.06 = $5.4m
I am predicting that when some of the lending through intermediaries (see below) starts to shrink, Heartland will renew their interest in writing business relationship loans directly. So I see no further shrinkage in profit from this category between FY2021 and FY2022.
3b/ 'Business Intermediated' lending
Over FY2021, I am modelling Heartland's downstream lending partners will shrink back to 10% below FY2019 levels in revenue terms (down to $425.4m x 0.9 = $383m, a decrease of $42m). My reason for believing this is that I think there will be lower tradie activity in FY2021, as sensible tradespeople will have transferred to IRD backed ultra low interest loans, at least in NZ. The silver lining of this is that by existing Heartland customers effectively refinancing with the government, many bad debts to Heartland will be avoided. Business Intermediary loans have an ROE of between 11% and 15% (AGM2019 Presentation p15). If we assume the average margin is 13%, this will represent a loss of profit for Heartland in FY2021 of:
$42m x 0.13 = $5.5m
The kind of business loans sought by Heartland tend to be short term. So I am not expecting the general reduction in business loans to have a compounding effect year on year. i am picking this will affect FY2021 only, and intermediary earnings will recover to FY2019 levels by FY2022.
So putting this updated information into our scenario table.
FY2021 FY2022 Baseline Reference Profit $74.5m $74.5m Reverse Mortgage Adjustment $54.1m $87.3m Motor Vehicle Finance Adjustment (New) ($11.4m) ($17.1m) Motor Vehicle Finance Adjustment (Used) ($11.3m) ($11.3m) Business Finance (Part 1) Adjustment ($5.3m) ($2.1m) Business Finance (Part 2) Adjustment ($10.9m) ($5.4m) Rural Finance Adjustment $0m $0m Harmoney and Other Consumer Lending Adjustment ($3.6m) ($3.6m) Total Forecast NPAT $86.1m $122.3m No. Shares on Issue 581.0m 581.0m Earnings Per Share 14.8cps 20.1cps
What a recovery! Jeff's concentration on Reverse Mortgages as they continue to grow at historic rates is really paying off, and more than wipes out the declines in business lending as profit in FY2022 rockets.. Jeff does it again! (although because this is a future scenario, Jeff hasn't actually done it yet).
SNOOPY
Great detailed work Snoopy.
One question I have, how confident are you that the present amount of shares on issue stays steady at app 581m?
If I have my numbers right than HGH has app 1.7m share options and app 3.2m performance right on issue at the end of 2019 financial year.
This company has a bad habit of diluting shareholders through dividend reinvestment plans, share options, performance rights and capital raisings.
With all these regular dilutions in shareholdings the earnings per share do not rise
anywhere as fast as the profits.