Is that a breather or a hibernation?
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Just rereading the thread and I don't think I ever replied to this question on 19-09-2013. From the annual report, page 61.
"On 26 August 2013, the Directors resolved to pay a final dividend for the year ended 30th June 2013 of $9.7m, representing 2.5cps. The dividend is payable on 4th October 2013"
We then go to the NZX website and the 4th October release for what happened:
Number issued: 3,850,604. Issue price: $0.826. That adds up to $3.181m
$3.181m/ $9.7m = 33% (round numbers)
So it looks like owners representing one third of the shares on issue shares on issue took new shares rather than the cash dividend.
Total equity at balance date was $370.546m.
Total equity after the dividend was paid was therefore:
$370.546m - $9.7m + $3.181m = $364.027m
Any way you look at it, paying a dividend -with some of that reinvested- has resulted in a decrease in Heartland equity. You suggested that Heartland's capital might increase as a result of this process Under Surveillence? Sorry don't see where you were coming from there! Either way in the grand scheme of things this one off smallish dividend is immaterial in the grand capital structure of HNZ, IMO.
SNOOPY
You really shouldn't have been at pains to respond now, Snoopy. Let's just agree that HNZ has $3.181m more total equity for dividend reinvestments than it would have had without them. And that punters who took shares under the DRP last October at 82.6 cents have reason to be congratulated given the price increase meantime. And that those who weren't in last time might usefully subscribe to the DRP for the final dividend due in a couple of months.
You are not wrong there US. I think us long term holders are pretty happy with the performance of HNZ and the DRP. Sadly, the last sentence in your post applies to Percy who did not subscribe to the last DRP. Hopefully he will be "better positioned"for the next one ;)
Over the last few weeks I have been concentrating on Heartland's operational statistics. It is all very well being a good zookeeper, feeding out the straw and clipping the customers ticket as they come through the door. However, it can all mean very little if as a keeper you go home and find an elephant in your lounge. So I want to look again at Heartland's elephant.
Here is what Fitch said when they inspected Heartland's elephant on 3rd November 2013.
"The weak asset quality performance of HBL's non-core property assets remains a drag on profitability and capital. A change in strategy to reduce these loans, which totalled NZD107m at financial year end 30 June 2013 (FY13), is likely to support a faster run-off. Provisioning of the portfolio is high, covering a significant proportion of impaired assets. Should further provisioning be needed, HBL benefits from sound pre-impairment operating profits, providing some absorption capacity. Fitch views the legacy property portfolio as one of the main constraint to a higher rating."
Now that $107m figure surprised me. $107m represents 27.5cps of capital. That is around three years worth of normal operating profit which brings all the day to day Heartland zookeeping into perspective.
If you look at the 30th June 2013 balance date, you will see that Heartland value their "investment property portfolio" (problem property bucket) at only $58.287m. That still leaves some $49m unaccounted for. I can only assume that the 'missing' problem properties are still in the 'finance receivables' part of the balance sheet.
Of course that $107m does not mean that this capital is lost. It just means that some but hopefully not all will be difficult to recover. But something else caught my eye in the Fitch statement (my bold).
"The weak asset quality performance of HBL's non-core property assets remains a drag on profitability and capital."
I had presumed that Heartland will still be racking up interest on these risky loans. But does the drag on 'profitability' mean Heartland have given up collecting interest on part of this portfolio to the extent that even the interest they are still collecting is not enough to balance any loans that have already collapsed?
Heartland. From a public perspective they have been quite good zookeepers over FY2013. But nothing was done to address their elephant, apart from making it incrementally bigger.
SNOOPY
Heartland's 6 month result up to 31/12/2013, will be announced on Tuesday 25th February 2014.
Indeed... It should be a good read once released.
The results will be the primary factor for the 'probable' SP increase prior to dividend payment in.. April was it?
However even if results are bad, I don't think the SP will move much due to the dividend around the corner.
I am expecting the half year result to confirm they are on track to deliver $34mil to $37mil full year result.Although new lending growth is hard to achieve, Marac should be doing well considering motor vehicle sales have been at record levels.
Maybe more progress on legacy property sales.I have been looking forward to an announcement on an acquisition,but not rushing it is better for shareholders in the longer term,yet a lot of next year's growth will depend on a good acquisition.2.5cents per share or 3 cents dividend? Happy with either.
Fitch mostly agrees with you Vorno. From their November 2013 credit assessment:
"HBL's focus on niche banking products and services where it can achieve a leading market share allows it to compete effectively against the larger New Zealand banks. It offers motor vehicle finance invoice and shorter-term asset finance for businesses and livestock for farmers in New Zealand. These are niche products in which HBL has been able to gain greater market share and price-setting powers. This in turn supports a strong NIM (Net Interest Margin) relative to peers, providing capacity to absorb potential adverse credit developments in its core loan book. Cost management is an area that could, if improved, support pre-impairment operating profitability further in FY14."
SNOOPY
Obviously my point was too obtuse PT. I have spent no time at all considering the net asset position of Heartland over the last two months, until three days ago.. The performance of HNZ going forwards depends on two largely unconnected questions.
1/ What is the real underlying Tier 1 capital behind Heartland?
2/ How well are Heartland executing their business strategy?
Banking is a competitve business. So if 15% of Heartland's capital disappears, the whole company shrinks regardless of how well their business strategy is executed.
The banking licence agreement for Heartland specifies that:
"the Tier 1 capital ratio of the banking group is not less than 12%"
This is more than the 8% required for the big four banks
http://www.rbnz.govt.nz/regulation_a...y/4572979.html
From 1st January 2014 an additional common equity buffer of 2.5% is required. Since all of Heartland's Tier 1 equity is common equity, the minimum amount of equity that must be held is now 12.5% of the loan book. Assuming the loan book has not changed in size significantly since balance date when it measured $2,010.4m, the share capital required to be held is now $251m (minimum). Share capital at balance date was $371m. So plenty of capital headroom there, or is there?
A net $6m in cash came out for the dividend. Hopefully, that has since been made up for in half year earnings. But take out the $107m in 'property investment' (dodgy property loans) that Fitch refers to and the capital cover above the reserve bank minimum is reduced to a skinny $20m. Some may counter that losing all of that $107m is absurdly pessimistic. But I would counter that the likelihood of loss depends on how skinny the customer equity is in those development projects. And this information is known only to Heartland and their customers. I don't believe it is in any way certain that Heartland will not need further capital injection if not to survive then to prosper. Whether the DRP is enough, I suppose time will tell.
Heartland can execute the perfect business strategy in their defined core markets (point 2). That will in no way mitigate the elephant debt burden effect that I have outlined (point 1).
SNOOPY
I often find it useful to use other management's measuring sticks for evaluating a business. ANZ does not segment their loan portfolio into 'judgement loans' and 'behavioural loans' as Heartland does. Instead all loans, not just judgement loans, are evaluated on a 0-9 (or 1-10 in Heartlandese) scale. Probabilities of default according to loan class are summarized on my post 51 on the ANZ.NZ thread. Now what would happen if I used these probabilities of default on the Heartland judgement loan book? IOW, all things being equal, what sort of provisioning would ANZ management put on the Heartland judgement loan book? The calculation based on section 37e of the Heartland report is as follows:
Grades 8 & 9: ( $21.158m + $27.761m )x 0.1125 = $5,503m
Grade 7: $18.034m x 0.0267 = $482m
Grade 6: $198.370m x 0.0112 = $2,222m
Grade 5 & 4: ( $438.068m + $264.986m )x 0.0029 = $2,039m
Grade 1,2 & 3: ( $83.612m+$15.607m+$0.575m)x 0.001= $100m
That gives a grand total of $10,346m.
To this we need to add the confirmed write offs of $6.679m (table 37e AR2013), under the provision for 'individually impaired assets'. That is what Heartland call 'grade 10' loans ('reflects loss accounts written off') , page 55. So the grand bad debt total for all judgement loans is $10,352m.
The Heartland closing provision for individually impaired assets stands at $34.530m (table 37e again).
So one conclusion from that is that if ANZ, were running this finance company their provisioning would be somewhat less. Of course the proviso here is that all things are not equal, because the Heartland judgement loans contain up to $49m in residual loans from the bad property portfolio reacquired from PGC. Since Heartland are likely to know their own loan book far better than ANZ managers might, we might infer that the Heartland loan book quality is considerably below an equivalent UDC loan book quality that ANZ might expect to manage.
SNOOPY