UDC Underlying margin for FY2013
Quote:
Originally Posted by
macduffy
Hi Snoopy/
Do your calculations factor in any transfer-priced amount that UDC pays to ANZ for services rendered via the latter's branch network?
Macduffy, note 4 (expenses) on the UDC prospectus has an item as follows:
'Fees paid to related parties' $9.715m
This is further explained as 'Fees paid to ANZ NZ for information technology, property and other services all of which are charged on an arms length basis'.
When I imposed by 'virtual branch structure' on UDC this would be expected to include the above. So by doing that and leaving the $9.715m fees to related parties in the accounts I have effectively charged for those services twice. So yes, a very good point you have brought up. I should return the double charging of those fees to the bottom line, and I can do so as follows:
FY2013: ($83.07-$39.46+$9.72)/$2065.11 = 2.58%
That is a bit more encouraging 'operating margin on end of year assets' as a target for Heartland to aim at. I do need to add a disclaimer here. ANZ wholly own UDC. So they have total control as to what costs are passed through to their subsidiary. If UDC were to fully split from ANZ, to become a real equivalent of Heartland, they would almost certainly incur extra costs for a new independent board, sharemarket listing fees and all the associated costs of being a small(er) business. So 2.58% as a return on the end of year loan book as measured by assets is very likely a stretch target for the likes of Heartland.
SNOOPY
Write Offs vs Loan Book Size
Today I want to focus on the actual bad debt write offs in relation to the size of the loan book at the end of the year. Section 10 in the UDC 2013 prospectus is named "Provision for Credit Impairment on Loans and Advances". Bad debts actually written off were:
FY2013: $12.399m
FY2012: $10.164m
I note in both instances these exceed the 'provision for loan impairment' stated on page 33, the 'Summary Financial Statement', which were $7.123m (FY2013) and $6.031m (FY2012). I am reading between the lines when I say the actual write offs probably reflect the worse times immediately following the GFC. With a more benign business environment going forwards we might expect future write offs to be smaller, trending towards the current year write off figure.
Putting these actual write offs as a percentage of the end of year loan book gives them better context.
FY2013: $12.399m/$2,065.117m = 0.600%
FY2012: $10.164m/$2,014.473m = 0.505%
For comparative purposes, it is informative to look 'over the fence' to Heartland Bank. Note 10 details impaired asset expense as follows:
FY2013: $22.527m
FY2012: $5.642m
Normalize these against the total finance receivables
FY2013: $22.527m/ $2010.4m = 1.12%
FY2012: $5.642m/ $2078.3m = 0.271%
We know that last year was a particularly bad one for Heartland, regarding bad debts. Taken on a two year average performance though, the amount written off at UDC and Heartland was similar.
SNOOPY
UDC Credit Risk via Internal Risk Grading.
Note 17d (page 53 UDC 2013 prospectus) lists the internal risk grading of the loan assets on a scale of 1 to 9. On this scale 1 is the lowest risk while 9 means a default. The grade 6 and below categories for EOY2013 add up as follows:
$1,157.111m + $83.790m + $24.814m = $1,265.765m.
These represents a fraction of the total loans outstanding as follows:
$1,265.765m / $2,198.653m = 57.6% of total loan assets.
Some impairment ($37.46m) has already been taken onto the book over the years. This impairment of $37.46m represents
$37.46m / $1,265,765m = 2.96% of the Grade 6 (monitor) and below grade assets.
For comparative purposes it is interesting to see what happens when we take the same statistics for Heartland bank. The situation is not strictly comparable because Heartland has a different credit risk system for so called 'Behavioral Loans'. Behavioral loans consist of consumer and retail receivables usually relating to the financing of a single asset.
OTOH 'Judgement Loans' are graded on the 1-9 system. A 'Judgement loan' within Heartland consists mainly of business and rural lending, including non-core property, where an ongoing and detailed working relationship has been developed.
The grade 6 and below categories of 'Judgement Loans' for Heartland EOY2013 add up as follows:
$198.370mm + $18.034m + $21.518m + $27.761m = $265.683m.
These represents a fraction of the total loans outstanding as follows:
$265.683m / $1,068.531m = 24.9% of total Judgement loan assets.
Some impairment ($15.96m) has already been taken onto the book over the years. This impairment of $15.96m represents
$15.96m / $265.683m = 6.00% of the Grade 6 (monitor) and below grade assets.
SNOOPY
Industry Sector Risk, UDC vs Heartland
Heartland are not so generous with their breakdown of sector business. So I will use the Heartland business categories, p36 Heartland AR2013 for comparison purposes. The UDC figures come from the 2013 prospectus Note 17c, page 53.
|
HNZ |
UDC |
Agriculture Forestry & Fishing: |
$529.507m (22.3%) |
$374.264m (17.3%) |
Mining: |
$19.044m (0.8%) |
$5.224m (0.2%) |
Manufacturing: |
$79.915m (3.4%) |
$108.477m (5.0%) |
Finance & Insurance: |
$348.166m (14.7%) |
$100.994m (4.7%) |
Retail & Wholesale Trade: |
$232.776m (9.8%) |
$247.856m (11.5%) |
Households: |
$629.854m (26.5%) |
$443.089m (20.5%) |
Property & Business Services |
$320.198m (13.5%) |
$113.745m (5.3%) |
Transport & Storage: |
$25.267m (1.1%) |
$387.356m (17.9%) |
Other Services: |
$189.028m (8.0%) |
$380.188m (17.6%) |
Total for Heartland $2,373m (100%) , with the collectively impaired assets yet to be adjusted for.
Total for UDC $2,161m (100%), with credit impairment already adjusted for.
I am really surprised at the big difference between the two in 'Finance & Insurance'. However UDC has a category 'Construction' ($282.407m) which I grouped as 'other'. If this were included in 'finance & insurance' then the finance and insurance categories would be much more comparable, with UDC now having the higher percentage of funds in that area.
Despite HNZ seemingly lightening their 'household' business, it is still substantially bigger than UDC on a percentage basis (not unexpected).
The property and business services is also substantially greater at HNZ, although I presume this includes the non core property business that HNZ is exiting.
Very different is transport and storage. UDC has nearly 18% of its business in this category verses only 1% for Heartland.
SNOOPY