Xerof and macduffy.
Thank you for adding sense [as does Paper Tiger] to this thread.\
I have given up on him.!!!
Printable View
Xerof and macduffy.
Thank you for adding sense [as does Paper Tiger] to this thread.\
I have given up on him.!!!
Table 38 - definition
The now infamous Table 38 of the Hearland New Zealand 2013 Financial Results presents outputs of two totally hypothetical scenarios applied to both the 2012 and 2013 Financial Years and presumably is required by IFRS or the Reserve Bank of New Zealand.
The Contractual Scenario can be defined as "What happens if all existing loans are repaid and all existing deposits are withdrawn at their earliest contractual dates and no new loans are made and no new deposits are taken"
The Expected Scenario can be defined as "What happens if all existing loan are repaid and all existing deposits withdrawn at the most likely date given what has historical happened and also no new loans are made and no new deposits are taken".
Table 38 - possible interpreted outputs
For the 2013 financial year if we restrict ourselves to that part of the scenarios with a time-frame of 1 year or less we can calculate that:
For the Contractual scenario there is a hypothetical net outflow of $781.1m
For the Expected scenario there is a hypothetical net inflow if $685.5m
And the difference in outcomes for the two hypothetical scenarios is $1,467.6m
If we do the same for the 2012 financial year the equivalent figures are:
For the Contractual scenario there is a hypothetical net outflow of $520.5m
For the Expected scenario there is a hypothetical net inflow if $666.0m
And the difference in outcomes for the two hypothetical scenarios is $1,186.5m
Reality check
It is worth reminding anybody who is still reading this that we are taking about hypothetical scenarios totally divorced from the real world.
It is also worth stating that the large cash outflow of the Contractual scenarios would, in the real world, result in the bank running out of cash, needing recapitialising or worse, and is thus usually regarded as not a good thing.
It is further worth stating that the large cash inflow of the Expected scenarios would result, again in the real world, in the bank having an excess of fairly unproductive cash and is also usually regarded as not a good thing. It could give the cash back to the shareholders though.
Back to the arithmetic
Should we so desire we could subtract the $1,186.5m from the $1,467.6m and come up with the result of $281.1m.
What does this figure represent?
It represents the difference between the difference of part of two hypothetical scenarios for the 2013 financial year and the difference of the same part of the same two hypothetical scenarios for the 2012 financial year.
Now that is a really useful thing to know, isn't it?
So how do you apply this stuff to the real world?
Some of you might suggest that given the expected scenario is more realistic and that it can be transferred to the real world, by adding the new loans and new deposits that are part of the reason the bank exists, and that this new model suggests that the more important issue is not so much the raising of new deposits but the making of new loans, given the excess cash that would build up.
Or what you can do is realise that in the real world it is necessary to make both new loans and new deposits in a prudent manner to be most effective. The balance you need to strike will vary depending upon what happens in the real world and that is a forever changing place.
How do you not apply this stuff to the real world?
One thing that you should not do is take the dollar differences of two hypothetical, non real world scenarios or the dollar difference of the differences of those two hypothetical, non real world scenarios and translate them directly into any form of real world dollar amount.
A particularly foolish thing to do would be to believe that an hypothetical scenario is a companies actual business plan.
Best Wishes & A Relaxing Weekend to All
Paper Tiger
Umm !!.. Are you saying ??.. Uhmmm ???
The above is further explained by Paper Tiger in the post I have quoted from. I know that he/she knows what it means. However, this introductory paragraph might give the impression that table 38 is just historical. This is not so.
I would have said that table 38 presents outputs of two totally hypothetical scenarios applied to both the 2013 and 2014 Financial Years. These are both forecast hypothetical scenarios based on starting points fixed from the end of FY2012 and FY2013 years. But table 38, because it is a forecast, is current and the timeline covered is unfolding in the market right now as I write this post.
SNOOPY
The above statement is hyperbole that I will not allow to go unchallenged. The first 'contracted' scenario is extreme to be sure and is very unlikely to occur. But it is connected to the real world because it is the 'do nothing' baseline. If all existing borrowing and lending contracts were frozen in time, unable to be altered, and no new deals were done then this extreme 'contracted' scenario would actually happen.
If it was 'totally divorced from the real world' as PT claims, why do you suppose the accounting rules asked for it to be included in the annual results announcements?
I agree with the above interpretation.Quote:
It is also worth stating that the large cash outflow of the Contractual scenarios would, in the real world, result in the bank running out of cash, needing recapitialising or worse, and is thus usually regarded as not a good thing.
I think the term 'expected' scenario with reference to the above is a misleading accounting term. Yes the above is 'expected' if term deposits and the loans they offset are rolled over as though everything is in some kind of investment bubble. But we know for a fact that management are planning for this not to happen. Management do have plans to attract new capital, such as the new 'five star' business call account, and no doubt they have undisclosed plans for more seasonal lending. So am I agreeing with PT here that these 'expected' cashflow projections are, in the real world, next to worthless?Quote:
It is further worth stating that the large cash inflow of the Expected scenarios would result, again in the real world, in the bank having an excess of fairly unproductive cash and is also usually regarded as not a good thing. It could give the cash back to the shareholders though.
No. We have to remember that Heartland are planning their business options going forwards with all ways to adapt going forwards known and on the MDs desk. By contrast that 'expected' table is a dumb document generated from historical business rollover rates in accordance with prescribed accounting standards. Thus, here is the big point where I disagree with PT. I will explain why, step by step:
-----
1/ Heartland management have an overall plan going forwards that includes a combination of rolling over of existing business contracts and a whole lot of new business contracts. Heartland know where they want to go, but to publish their whole plan in advance would give an unwelcome amount of information away to competitors. Nevertheless accounting rules force them to publish this limited 'expected' projection listed in note 38.
2/ Heartland have a whole other spreadsheet of expected projections of which shareholders do not know the details. This other arm of 'expected' transactions are based on new term deposits and loans, and rollovers that above or below historical norms.
3/ Heartland's business plan going forwards is a combination of 1 and 2 above.
Accounting rules have given shareholders an insight into 1, but nothing in detail has been said to shareholders about 2.
4/ Nevertheless Heartland management know all about 1 and 2. They may have only disclosed information on 1 to shareholders. But this 1 was compiled by management and done so by people with full knowledge of 2.
5/ Expected plan 1 has therefore been drawn up by people in the know about both 1 and 2. 1 and 2 are complimentary parts of the whole business plan going forwards. PT argues that knowing 1 on its own is not that useful. I would agree if 1 and 2 had no connection.
But 1 and 2 are connected and part of a whole business plan going forwards. I would argue that 1 has been drawn up in the full shadow of 2. Even though we know nothing much of plan 2, the content of 2 has been instrumental in defining what happens in plan 1.
My conclusion then is that there is nothing hypothetical or unreal about the expected cashflows listed in note 38 of the FY2013 results, even though they do not give the total cashflow projected future.
PTs last comment that they 'could give the excess cash back to shareholders' contains the unstated assumption that this is the projection of all of the companies future cashflows. The table in note 38 does not include the cashflows from complementary 'plan 2', which will be executed side by side with 'plan 1'.
SNOOPY
I'm sorry but the term a**l retentive comes to mind here.
Went up the hill today (in the rain) ...... Percy Rata doing good but Snoopy Rata is going great guns .... so much so I had to pull the long grass out from around Snoopy Rata .... and put the pulled out stuff around the base as mulch because that's what the DOC ranger once told me to do.
I'll just give Snoopy Rata the mulch .... go back up tomorrow with one of the special fertiliser pellets for Percy Rata ..... that'll give him a spring boost