The sell depth seem's to be getting chewed through
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The sell depth seem's to be getting chewed through
The problem with Heartland is that it hasn't been in existence in its current form for one business cycle yet. So who can really say where the top of the earnings cycle is? The best I can do is to look across the road to ANZ in New Zealand. They have a similar breakdown in loan allocations in their loan portfolio. IMO that gives some guide as to where Heartland might be going.
The parallel isn't so good in that ANZ are right into mortgages whereas Heartland seem to be trying to exit that market (?). I don't follow the need for a Heartland tie up with Kiwibank regarding mortgages. Went past Heartland Riccarton yesterday. They were advertising two year mortgages fixed at 5.95% via a poster in the window. So perhaps if you went into Heartland and begged, they might still make a mortgage loan to you?
My assessment is that Heartland are now going after business with greater profit margins (car loans, machinery loans. seasonal financing). But in a climate of rising interest rates those are just the kind of loans that are more likely to go bad. All would be well if the Heartland operating margin on assets was somewhere up near where Dorchester is. But it isn't.
According to the first quarter, HNZ are operating at the lower end of forecasts. They can only grow their earnings by:Quote:
The AGM was very vague about where growth will come from for FY15. Acquisitions and product development were referred to. I suppose they don't want to give too much away.
For me, I'd be happy for HNZ to make the upper end of forecasts. This alone should spark a rerate. After that, I'd want to see some evidence that they can grow their loan book in FY15.
1/ increasing operating margin, or
2/ increasing their capital base.
I concede that attaining the operating margin level of ANZ is certainly possible. In fact they probably need to do that to make up for the lower quality loan book. So let's assume Heartland can do that which is equivalent to coming in at the higher end of profit forecasts. To drive profits even higher they need to start outperforming the likes of ANZ and Westpac New Zealand. But how much blood can you squeeze from the same stone? This is why I can't see how the Heartland share price can increase if earnings come in at the top end of expectations, while the capital base remains the same.
So now we come to point 2. HNZ need to grow their capital asset base. But they can't do that if all their profits are paid out as dividends to appease shareholders. From where I sit, there is no easy way forwards. That is why I come to the conclusion that Heartland must be close to the top of their earnings cycle.
SNOOPY
Higher interest rates means greater margins to banks/finance companies.
People let their home loans get behind,but are more careful with their car loan, as they need their car to get to their work.No work,no money,no food.
HNZ loans to the productive sector means equipment,livestock,better security.Security is income generator.
Mortgage loans.HNZ clip the ticket by referring loans to Kiwi Bank.A commercial arrangement that suits both parties.
If Heartland lend long and borrow short, increased profits will only come from higher interest rates if Heartland don't have to pay out more in higher rates offered to depositors. This year as declared in the annual report there is larger shortfall in term deposits required form the public than last year. So it follows that Heartland will have to pay more for the funds they need, on average, than last year.
Yes, but the low risk car loans are those tacked onto the house mortgage. The fact that you are forced to take out a higher interest rate car loan from Heartland is in itself a measure of such a customer's lower credit rating.Quote:
People let their home loans get behind,but are more careful with their car loan, as they need their car to get to their work. No work,no money,no food.
Higher interest rates => export demand is cramped => all industry payers in that sector under pressure => no market for second hand capital goods should one of the industry players go bung. Doesn't sound like a low risk lending environment to me.Quote:
HNZ loans to the productive sector means equipment,livestock,better security.Security is income generator.
So what are you saying? HNZ is achieving scale by going in with Kiwibank and that is leading to lower input (cost of capital to bank) costs?Quote:
Mortgage loans. HNZ clip the ticket by referring loans to Kiwi Bank. A commercial arrangement that suits both parties.
SNOOPY
AA the credit rating of ANZ in New Zealand means "Very strong ability to repay principal and interest." according to Standard and Poors and Fitch.
BBB the credit rating of Heartland means "Adequate ability to repay principal and interest. More vulnerable to adverse changes." according to Standard and Poors and Fitch.
From this we can conclude that Percy does not work for Standard & Poors nor Fitch!
SNOOPY
Percy, where Snoopys concerned you have the patience of a saint. I really think snoopy has missed his calling. He would be better off spreading his message at the local retirement village, I'm sure he would go down a treat , the confused spreading the investing message to the befuddled . lol.
cheers kiwigold
Perhaps Snoopy thought rationally and realises a bank in a saturated market like NZ with no offshore growth and a lower ROA than the big banks should not be trading on a valuation of 40+ times earnings?
I do not think he is that silly.[I could be wrong!!! lol]
He is,or should be, fully aware the projected PE is under 10 and ROE is improving very quickly.
Astute investors are looking at future earnings.You could say they are keeping a careful eye on the road ahead.!
Like Percy, I prefer to look ahead.
The valuation of 40+ which you are useing was after property write-downs last year of some $18m. Normalised earning were from memory $24m. Currently HNZ is on track to earn after tax profits between $34 to $37m which at today's price of 85c = 9 to 9.8 times earnings.
See my post 2968 0n this thread. I see others have corrected you on the forward PE. That 40+ PE figure was because of (hopefully) one off property write-downs. Despite what some may think, I am not here to beat up people for investing in HNZ. I believe that HNZ has a good future in NZ like others here. Where I do differ is what the suitable entry price for a new investor might be.
My main problem is determining where the competitive advantage of Heartland is. As a measure of how widespread the measure of opinion is on this, you see HNZ as "one player in a saturated market". Go back to post 2895 and hanth888 sees HNZ as
"a near monopoly position on the type of products it provides (i.e. high-margin livestock/personal/business lending - they're not battling it out with the big 4 to see who can write more residential mortgages)"
So which is it? Like any issue with a wide range of opinions, the truth probably lies somewhere in between. And that leads me back to trying to figure out what the competitive advantage of Heartland really is.
'No offshore growth' is not really an issue because compared to the big 5 banks, Heartland is a minnow. If Heartland can find their niche, they wouldn't have to take much business off the big 5 to greatly increase the size of the Heartland loan portfolio.
ROA is not a good comparative measure for banks, because the loan book base is theoretically proportional to total Tier 1 capital available. And net assets are just one component of this.
A very brief summary of my quest for a competitive advantage is as follows:
1/ Heartland do not seek to compete in the mortgage market by going head to head with the big banks. They are still advertising for mortgage business. But they aren't pushing hard where the big 5 banks do it better.
2/ Heartland do not earn as much margin as Dorchester Finance and Turners Auctions Finance when it comes to financing motor vehicle.
My best assessment of Heartland going forwards will be as a plodding minnow, outflanked on both sides. Nothing wrong with just being Mr Average Piggy in the Middle bank of course. But I want to invest in a Bank/Finance company that is on top of the game. So far I can't see the path for Heartland getting there.
SNOOPY