Originally Posted by
Snoopy
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.