The bad debt position of Heartland's problem property assets has evolved. I have prepared a graphic to show what has happened over the years, and how that relates to capital risk
Attachment 6228
Now to explain.
Each year (FY2012, FY2013 and FY2014) is represented by three columns. The column to the left (total height) represents Heartlands shareholder funds at the end of each financial year. The LH column is made up of three colours. The first section, in wavy blue pyjamas, is the minimum amount of capital Heartland needs to satisfy Reserve Bank requirements. The mauve and yellow sections on top of that represent the safety margin. This is the amount of capital in excess of reserve bank requirements. The yellow section, which on the original version of this graph I drew was part of the mauve section, represents net profits earned during the financial year, less dividends paid. The yellow part therefore represents retained earnings from normal operations.
The second column (orange) represents 'doubtful debts' as taken from the company's breakdown of asset quality. The third column (red) I have labelled 'difficult debts' and this one incorporates the 'doubtful debts' as well. I calculated this by starting with the doubtful debts and adding on the next categpry of debt (not quite bad enough to be doubtful).
The effect of all the doubful debts going bad can be seen by subtracting the height of column 2 from column 1. You can see that for all three years that if all of the doubtful debts went bad, it wouldn't affect Heartland that much. The capital buffer above minimum reserve bank standards is still largely intact. However, if all the 'difficult debts' went bad, then that is where things could get interesting.