How's it being funded, if P&I on Reverse jobs are all being backloaded until a later rainy day
when the bucket gets kicked ? :)
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Well - its being funded by HGH through drawdowns on committed facilities & deposits, as the reverse mortgages are drip fed (IE not provided all at once up front) to customers.
Yes - interest income isn't realised in the form of cash (think I was the first to point this out) until the underlying property is sold and the loan is repaid. That's not a bad thing - as it compounds. Ah - the power of compounding interest - especially when provided at very attractive NIM/NOI margins as a % of average receivables, and exceptional NLM (net interest income less credit losses). Analogous to a bank account, I think most would agree it makes better long term financial sense to reinvest interest income so that interest in turn compounds, and then compounds, and compounds again until maturity. Thanks to committed facilities which it uses to fund its RM working capital requirements, and other diversified cash income streams, HGH is in the nice position it can defer interest cash conversion so it can secure a larger and accretive payout later.
A more fulsome analysis of the cashflow and capital intensity profile of the reverse mortgage business - and banking more generally - needs to consider the risk weighting of underlying credit exposures as that is ultimately the key driver to the capital tied up in a financial institution. In that respect RM's are highly capital efficient, with 50% risk weightings in both NZ and Australia.
Digging into the disclosure statements for HBL (NZ bank), of its $5.359bn net credit exposure, $2.037bn of that was corporate exposures to unrated borrowers, which demanded a 100% risk weighting ($2.037), and tied up $162.9m of pillar 1 capital (8% of RW exposures)
Reverse mortgages has net credit exposure of $805.1m, a 50% risk weighting, and required only $32.2m of pillar 1 capital.
So - the differential in risk weighting dramatically more than offsets interest income being capitalised to receivables when looking at the aggregative capital intensity relative to traditional lending. Couple that with compounding interest income, high NIM/NOI margins achieved, and effectively nil credit losses, the economics of the RM division are outstanding.
As the growth engine behind HGH it was nice to see RM in such rude health at the 1H FY23 result.
NZ: 24.6% growth in receivables YOY (and up 12.1% on June22), with NOI as a % of average receivables expanding from 2.45% tp 2.68%
AU: 22.8% growth in receivables YOY (and up 12.9% on June22), with NOI as a % of average receivables expanding from 1.72% to 1.75%
But it is important to note that the RBNZ is under going a review of risk weightings of various asset classes, including reverse mortgages, with submissions ended in February. I made a submission. I mentioned this last year but went without notice, even from those +20 post-a-day full timers whose lives revolve meandering through various threads posting noise, rubbish and out of context factoids. Should the risk weightings be increased, the RM business would still be an outstanding one, but would dampen its growth reasonably significantly.
going to get savaged today ... how are there bond's positioned need a update ?
KPMG review of NZ banking sector 2022
Banks don’t make excessive profits but Kensington says -
Tough times ahead. Kensington said all the bank chief executives and chief financial officers recognise their organisations have been “making hay”, but that the economy is likely heading into a slowdown or recession.
In previous crises, such as the 1989 share market crash and the global financial crisis (GFC), the NZ economy has generally weathered the first couple of years very well, but it’s been the third and fourth years in which most distress has been felt, he said.
That’s also likely to be true of the covid pandemic.
Lot of stuff in report but some charts/tables show HGH relative performance to others
https://assets.kpmg.com/content/dam/...banks-fips.pdf
heartland net int margin had a big fall last yr not good when compared to other banks increasing there's