Originally Posted by
Snoopy
Good discussion here on ROE, but I think some of you Heartlanders see ANZ on a pedestal that is higher than it should be. From a bankers perspective the amount available to loan is tied to the amount of 'tier' capital available to be loaned against. In the case of Heartland 'Tier Capital' and shareholders equity are one and the same thing. But the ANZ and teh other big banks have other sources of 'Tier capital' not available to Heartland.
Perusing my latest ANZ report (from 2012) page 58 lists total shareholders equity as $41.22 billion.
Now go over to page 117 and you will $752m of US trust securities (currently also Tier 1 capital) and three issues of ANZ convertible preference shares adding up to $5,114m (I believe these currently rank as Tier 2 capital). Perpetual subordinated notes of $953m add more tier 2 capital.
Below that is a list of more subordinated notes. Those maturing five years into the future can be fully regarded as more tier 2 capital amounting to $4,632m. Those maturing in four years time ($582m) need to be discounted 20% to arrive at yet more tier 2 capital of $466m.
As at 30th June 2012 ANZ has $5,114m + $4,632m + $466m = $10.212b of Tier 2 capital. That is less than 50% of the available Tier 1 capital ($41,220m + 752m = $41.972b).
So all of that tier 2 capital is available to be borrowed against.
Summing up all the Tier 1 and Tier 2 capital then, ANZ has $52.184b of Tier 1 and Tier 2 capital to back up their loans.
For FY2012 the ROE based on end of year shareholders equity is:
$6,011m/$41.220m = 14.6%
But if you do the same calculation on tier 1 and tier 2 capital, the Return on 'backing capital' is a rather lower.
$6,011m/$52,184m = 11.5%
That is close to the 10% ROE that Heartland is projected to achieve for FY2013.
In addition to this Heartland in common with all other banks will be facing the new Basel III capital conservation buffer(CCB) requirements that will increase the backup equity required to be held on the balance sheet significantly.
Even assuming all those doubtful Heartland property loans on the books coming good (no more capital destrying provisions for bad debts) , the picture that emerges here is irrefutable. Heartland has a very fully stretched balance sheet as everything stands now. There is very little room for growth beyond FY2013 with such a constrained capital base
SNOOPY