make sense.
Printable View
CFO of Heartland,Craig Stephen returned my call.He told me they don't reply to blogs such as sharetrader.Told him I was disappointed to hear that.However, he said if any sharetraders had any questions he would be pleased to answer them .His phone number is [09] 9279219.
Please ring and tell him that.!!!!
I would have thought a financial institution who was looking for a banking licence would be the first company to help sharetraders ,by posting reguarly,and correcting any posters who made mistakes.
Not helpful at all.I did tell him I am a shareholder.
Arrogance!!! I think that is a reflection also of PGC management.
A company that wants to grow,needs management expertise,but also good shareholder/customer relations,they need to be humble imop.
They need to provide whatever clarity they can, so that shareholders get a good understanding of the financial workings,or just provide that info in the first place.
Smaks of"We are way to good to give you little people that sort of info" or"we don't really want you digging there".
A bank also needs excellent IT systems, not being able to tell the difference between a blog and NZ's top share trading forum is not a good start!
Had another look at the Heartland FY2012 interim report. Found this comment on page 2
"Total equity was $360 million at 31 December 2011 compared to $296 million at 30 June 2011, which was an equity ratio of 15% to total assets (up from 14% at 30 June 2011)."
This shows my calculated figure for the equity ratio as at 31-12-2011 was absolutely correct. It also shows that the HNZ declared equity ratio on 14/03/2012 of 13.5% has declined to below what it was on 30-06-2011. And all this has happened in a sub three month period when the great wash out from the wind up of the government guarantee was thought (at least by me) to be over!
SNOOPY
Am ignorant as to the latest report,but could this drop in equity be an increase in lending?
No need to be
http://www.heartland.co.nz/_upload/r...ancials_LR.pdf
Just be be clear HNZ's equity has not gone down, it has in fact gone up. The 'equity ratio' has gone down. Since assets include finance receivables your hunch is probably correct. Yes HNZ have more equity but if they have concommitant new lending going out proportionately faster than their own equity is increasing then that would weaken the equity ratio.Quote:
but could this drop in equity be an increase in lending?
I think you are probably onto it kizame.
SNOOPY
I have been covering these hurdles out of my original order to better match the flow of this thread. But there is one more bankers test that HNZ must face.
4/ Single new customer group exposure (as a percentage of shareholder funds) <10%
This criterion may have lead to the downfall of PGGW Finance (PGF) as an independent entity. As at 31/12/2010 PGG had $126.7m of loans in the dairy sector from a total loan portfolio of $491.8m. Total Crafer loans from all institutions are reputedly $200m. PGF claim they are a 'junior partner' in the banking syndicate. But if the PGF exposure was say $40m, then as other loans were wound back those
Crafer loan interest is capitalized, Crafer farms might approach 10% of all PGF loans.
I can't find any information in the Heartland HY2012 interim report on customer concentration. Since one of the objectives of merging all the entities that formed Heartland together was to reduce the concentration of risk, I don't think it likely that a single customer has 10% or more of the balance of the loans outstanding.
The HNZ interim report does say that post merger, 40% of loans are now in the Canterbury region (note 11). That might mean regional volatility need be considered in future.
Result: PROBABLE PASS (interim report has insufficient information)
Out of interest I looked at Westpac on yahoo finance.Their return on equity is 16.82%.Should HNZ achieve this HNZ's profit would be over $60mil.
WBC equity was a low 6.176% 381,890,000/618,277,000.
ANZ bank.ROE 14.88% equity 6.247% 33,220,000/531,739,000
CBA bank.ROE 18.81% equity 5.5% 35,570,000/646,330,000
Hi Snoopy,
Only just getting the chance to read through your analysis - possibly someone else has commented, as yet to finish reading. My calc for the EBIT ratio would be 1.08. However, we knew they would not be running at top return in first half as they still had a considerable quantity of debentures that they were having to allow for possible repayment on close to end of period - that meant holding lots of cash while also paying interest to the debenture holders. Once the last of the guarantee debentures had expired, they would either not have the interest payments to make on them OR they would have been renewed and HNZ could then reduce the amount of cash on hand through lending once they no longer needed to allow for a bulge of maturing deposits.
As expected, the third quarter is said to have lower funding costs and it could be expected that this would be maintainable. Therefore, we could probably comfortably multiply the 3rd quarter NPAT of $5.3m by 4x, divide by 0.7 to allow for tax and add to funding costs (doubling first half funding costs of $62m). That would give an EBIT ratio of 1.24 by my calc - and given the funding costs have likely reduced somewhat, conceivably higher.
I don't think you should get too hung up on these figures right now Snoopy - at the time that those covenants were put in place, we know there was a material level of impairment going on in regards to loans and I am guessing these equity covenants were set to cover.
For instance, by comparison, Kiwibank has $11,500m of loans and $608m of equity, so ratio there was only 5.2% (Kiwibank could probably do with more equity capital though in my not-so-expert opinion).
I think Percy is correct - in the current environment with the bulge of impairments dealt with and now at more stable levels, the Reserve Bank regulatory requirement is a satisfactory test. And while they are making a profit, the equity ratio should only improve, at least until they start to pay dividends.
Actually Snoopy, Percy may have just read the wrong column on the table and given you the Jan 2011 equity ratio, as the table on page 29 of the Mar 14 presentation says 15.1% equity in Dec 11 up from 13.5% in Jan 11.
They would have to have significant impairments or abnormals of some description for the equity ratio to have fallen, not the operating profits they are indicating.
You are probably best to go back to the Jun 11 Annual Report and look at the liquidity risk tables on page 49 and 50. There are two sets of tables - the first is based on "contractual maturity" and the second on "expected maturity" (i.e. taking into account expected rates of roll-over of deposits. Not surprisingly, there was a very high rate of maturity in the 0-6 month category as investors tended to take advantage of the guarantee for as long as possible.
Gaze at these tables for long enough and it becomes clear that the securitisation measures were mostly just to allow space in case an unexpectedly large proportion (i.e. nearly all of the investors with maturities prior to the end of the guarantee) turned out to be only hanging in until expiry (after all, at that stage they could be perceived as safer than the bank, but with better rates!). I think from memory that later announcements have indicated that the reinvestment rate actually held up solidly and new investments rose, so the extra liquidity buffer provided by the securitised facility was probably not necessary. Having said that, in financial services, safety begets investor confidence and investor confidence begets safety. So there was no point risking any false rumours tipping things over at the last minute.
Possibly there is some indication in the 14 March presenation - the trust deed limit is 15% of consolidated group capital to one customer. From the last annual report, the only concentrations of credit risk look to be the concentrations of cash held at other banks if I'm reading the note at bottom of page 46 correctly.
Good thread. Good to see a few sharetraders looking into the finer details. I asked and just received hard copies of HNZ financials. With this, came a bussiness card of HNZ investment relation manager (IRM), Ben Searle.
Maybe the job of IRM is more to relate to term deposit investers than to share holders. Even so I would like to think that Ben Searle has a commitment to answer share holders questions.
Below are Bens contact details, please share anything of interest,
ph (09) 9279210, F (09) 9279321 and E ben.searle@heartland.co.nz
I have total agreement with you forest..
Also with Belgarions ..
" Craig needs to get with the times ... ST is an active forum and not a blog. "..
With quality members like Lizard.. and many, many, many, others.. We have influence !!!....
Front up and face the questions... Or on your own head be it !!..
Influence example !!..
How many PGC shares passed hands this week ??..
It would be very unlikely for HNZ to pay out all profits in dividends,so equity ratio will improve.$20mil profit would mean over $200mil of extra lending is possible, if no dividend were paid. Easy to see how banks can grow earnings/profits very quickly.The next few months should see further gains,and we all may be surprised with an early dividend.Certainly the equity ratio of HNZ would be the envy of many a bank.For us shareholder it is a comfort to know we have invested in a company that has built a solid platform for future growth.Looks as though HNZ could increase lending by 65% without putting too much pressure on equity ratio.Don't think any other bank could do that without requiring more capital from shareholders.Quote:
I think Percy is correct - in the current environment with the bulge of impairments dealt with and now at more stable levels, the Reserve Bank regulatory requirement is a satisfactory test. And while they are making a profit, the equity ratio should only improve, at least until they start to pay dividends.
Your thinking has got me thinking again Percy. I have to admit the equity ratio of Heartland looks good compared to all of those bank statistics you have rolled out. The question in my mind is, what is the difference in Reserve Bank thinking on banks vs NBDTS (Non bank deposit takers) ?
SNOOPY
Apologies if I am paraphrasing your retort to my Heartland hurdle test too briefly Lizard. But:
1/ HNZ EBIT at 31-12-2011 is in a transitional state. Underlying EBIT/ Interest Expense is already around 1.24 > 1.2, so EBIT/ Interest Expense hurdle is cleared. I accept that.
2/ The securitisation of loans in August 2011 was a way to bring more cash onto the balance sheet in case of a wall of debenture redemption after the government guarantee expired. A good point which leads me to a QUESTION:
What happens come August 2012? Do Heartland buy their own loans back, effectively swapping equity for debt but boosting their loan book? Or do they try to renegotiate with the banks on those securitized loans?
3/ The 20% minimum equity contribution hurdle was based on PGF being a distressed company and is too conservative. Not sure I can agree with that
In the PGW FY2010 share issue prospectus, PGF was snapshotted like this:
"In the first four months of FY2010, PGF's net interest margin increased (+20.6%) while EBITDA declined (-10.5%) relative to the previously comparable period. This was due to the cost of the Crown Retail Deposit Scheme and higher bad and additional doubtful debt provisioning. From 30-06-2009 to 31-10-2009 the loan book remained largely static and as at 31-10-2009 was $565m and assets under management grew 0.5% to $639m driven by natural growth from existing credit commitments. (Equity at 30-06-2009 was $66.82m). Over the same period the deposit book reduced 7.5% to $281m, driven by reduced levels of new deposits, while average reinvestment rate of existing deposits were maintained at 76% over the same period which is comparable with historical averages."
I would argue that PGF itself was not distressed at the point the prospectus was compiled. And it was even less distressed when following the PGW cash issue, PGF had a new total of $100.38m of shareholder equity (as at 30-06-2010). I would argue that it was the cash bolstered post capital raising PGF that the banking syndicate had in mind when drawing up their financial hurdles.
SNOOPY
I now move to the PGW documentation relating to the sale of PGF which was discussed at the PGW special general meeting of FY2011
Northington Partners suggested that investors should look for a few more signs of improvement. One of these is a reduction in bad debts. In the HY2012 commentary we learn:
"New impaired and past due loans over 90 days were $88m which was 4.2% of net finance receivables as at 31st December 2011. This is down from $101m and 5.0% of debts as at 30th June 2011."
Bad debts were at least going in the right direction.
SNOOPY
Northington asks us to look out for the reinvestment rates of existing deposits. There is no direct information in HNZ HY2012 about that. However, if we look in Note 11 we can see that total deposits from NZ total $1,664.9m as at 31st December 2011, up from $1,556.6m as at 30th June 2011. Overall Heartland has more money on deposit at the end of the half-year than six month previously, and that has to be good.
But didn't the merger with PGG Finance occur after the 30th June 2011 balance date? I am not sure what the value of PGGW Finance term deposits were transferred over. But if it was less than $108.3m, then pre merger Heartland went backwards over the last reported half year. On this evidence, I think it is too early to say that Heartland has the confidence of the retail deposit market.
A quote from p2 of the Heartland HY2012 commentary backs this up:
"Cash and cash equivalents reduced to $120m from $267m at 30th June 2011 as excess liquidity held in the lead up to the expiry of the crown guarantee was utilized as planned."
Translation: Term deposit holders have pulled a net $147m out of the company in the last six months.
SNOOPY
I wondered that myself.HNZ equity ratio is so much greater than the banks.Around about 2.5 x the banks ?!
I can understand the ROE figures,but having banks with 5.5% equity is a real worry.I am thinking of all the banks exposure to property in both Australia and NZ.I believe Australian property prices are under pressure,so it would not take too much for the banks to take some pretty big hits.Their 5'5% equity could disappear very quickly.We have been there before,I think it was 1992 when Westpac was under threat from Kerry Packer.Westpac came back to shareholders for more capital.This course of action is open to all listed finnacial instituations.In fact HNZ is the result of PGC having to recap after losing their shareholders funds in property.From memory Marac had an equity ratio of over 16% but ofcourse had 25 to 30% of total lending in property.
Back to the Reserve Bank's thinking.I suspect dark thoughts.!!!!!!
Your not to far of of the top on the NZX Belg.. !!..
Guarantee that Craig et al keep a watching brief on ST and what punters are saying
He probabaly having a good laugh and thinks we are no hopers anyway .... thats what happens to good guys when they get sucked into the corporate way of doing things .... the more passionate they get about the company the less they listen to others who have an alternative view
I shall send my sincerest apologies to HNZ for some of the things I have said .... and implore Xerof and some others to do the same ..... Prob this Craig and a few others got a pissed off hearing some of the things we say .... heck we are only ignorant nobodys and wouldn't have a clue about what we are talking about
Speak for yourself w69...I shall continue to challenge the spin coming out of this FINANCE COMPANY as I see fit.
:ohmy:
Still of the view that Kerr remains an embarassment to HNZ, and will be a stumbling block to them being granted a banking license.
BTW, when was Craig appointed CFO percy? Last I saw was an announcement saying a recruitment company was to be appointed to fill the vacancy. Perhaps you mean 'acting CFO'?
Craig Stephen , toe's the company line, you'll get nothing sensitive or revealing from him. His title when I contacted him a few weeks ago was "Group treasurer" he may have had a promotion since then??.
I noticed when I looked up HNZ web page to check the spelling of Stephen he was listed as "Group Treasurer",so error may be mine.
Although against posting here,I found him easy to speak to.He made a genuine offer to discuss HNZ with anyone who cared to phone him.He then gave me his phone number,which I posted.
[QUOTE=Xerof;372971]
Still of the view that Kerr remains an embarassment to HNZ, and will be a stumbling block to them being granted a banking license.
Hope not.Any loose talk/actions by Kerr will only result in him shooting himself in the foot.
Of course it was toungue in cheek .... like you Xerof I would never apologise for saying what I think .... and I take heart that it might hurt those who passionately 'toe the company line' as percy puts it
But then again their eyes we are ignorant nobodys anyway
Love the way you say FINANCE COMPANY
In todays "The Press" NZ Post [kiwi bank] chairman Michael Cullen said "NZ Post had 'some small capacity" to supply more capital,Kiwi-bank's needs-which included new capital levels required by the Reserve Bank-could not be met by NZ Post alone."
So would appear to me the day of banks having 5.5% equity ratios may becoming to an end.
But Xerof, Kerr has sold all of shares in HNZ. Granted there is still an attachment there because Kerr has a large stake in PGC which holds HNZ shares. But whatever anyone thinks of Kerr one thing he is not is stupid. Do you suppose that Kerr has realised that HNZ is unlikely to get a banking licence when he is so closely associated with the company? And that pulling back one step behind the PGC mask is a way to overcome this?
SNOOPY
What is the current relationship between Heartland, Pyne Gould Corp, and Torchlight.
Given the current PGC turmoil with the auditor leaving, it is hard to imagine that the Reserve Bank will look favourably on issuing a banking licence if there is a relationship between these parties.
Boop boop de do
Marilyn
Hi Lizard, just going over your calculation again.
If I annualize 3rd quarterly profits while annualizing first half funding costs, while assuming a 30% income tax rate, this gives an "EBIT to interest expense ratio" of:
[4($5.3m/0.7) + 2x$62m]/ 2($62m) =1.24
I agree with you on the mathematics. However the HNZ third quarter results are a bit lacking in detail for me on exactly what is meant by 'operating profit', and whether this is truly an equivalent figure to the 'operating profit' disclosed in the more finely detailed previous half year report.
Generally though I think your calculation method is better than the one I was using, so I was wondering if you could detail how you came to your figure of 1.08 for that previous half year period.
Keeping all figures six monthly this time and working from p10 of the HNZ interim financial statements I get:
[$5.426m + $62m]/ ($62m) =1.09
But that $5.426m is after an impaired asset expense of $3.788m which is not a cashflow item (or is it in this instance?).
Sorry to be so pedantic about this. I realise it is all historical, but I want to make sure I have my methods right for the future.
SNOOPY
Hi Snoopy,
Yes, my calculations would have been as per your method. And yes, I would have left the impaired asset expense in for now - a level of impairment will always be part of this business. I would hope it would reduce in future, but that is in the same category as saying I hope their funding costs will continue to reduce as their excess cash (held as liquidity buffer during the expiry of the guarantee) continues to be deployed... i.e. probably more crystal-ball gazing than you are looking for here.
The problem I am wrestling with when analyzing banks is that 'one off impairments' - which have to be judged as a real loss for 'testing the health' of the bank - are not distinguishable (in my eyes) from the 'core business' of the bank when it comes down to the basic level of passing money across the desk to and from your bank manager. No bank wants to make a bad loan. A bad loan is always a good loan that has turned bad. So here is my latest thought experiment.
What is the difference between two bags of money when:
1/ A bank passes over the first bag of loan money to an existing client to refinance their debt, while at the same time
2/ The bank passes over a second bag of money to ring-fence and refinance a bad performing 'bad business unit' as an impaired asset?
I would argue that there is no difference at the across the desk level - and by extension at any level. Any bank loan money sitting in an impaired assets is not available for that bank to make an alternative use of that money as a regular loan. It therefore follows that for a bank there is no such thing as a one off impairment cost. One off impairments have to be incorporated into the regular business profits, which is quite the opposite of what would happen with any non-financial business. Anyone agree or disagree?
SNOOPY
Hi Snoopy,
In certain types of contracting business, some would say it pays to invoice everything you can and write credits when you need to - if you're not writing the odd credit, you're probably not asking for enough in the invoicing. And sometimes, it is also better to finance the cashflow yourself to keep a regular customer who always pays a month late, but never argues the bill. Likewise, for a finance company, if they're not having to write off a few bad debts or accept a few overdue accounts, they're probably not going to be taking enough business at the edge to maximise the profits.
There is always uncertainty with anything that is valued on the basis of future cashflows, whether it is property, biological assets, loan assets or a collection agency book... at some point, you have to evaluate whether the assumptions used are appropriate to the business or liable to eventually result in tears. Maybe Winner or Balance would be able to give some pointers on a long-range "typical" level of impairments to allow for in a business of this type. Although "normal" might not be a good reference point for this decade.
Thankfully, IFRS provides for a level of transparency in the accounts that should allow underlying assumptions to be examined (even if it doesn't always prevent them from occasionally being laughable!).
You are agreeing with me that a bank impairment charge should be regarded as just normal bank business?
But you are also saying that for some other businesses, like certain contractors, that bad debts are part of the normal way of doing business? So my supposition that impaired loans are only normal business for banks and no other businesses doesn't really hold? That point is outside the one I was trying to make (or is it?, I will let you be the judge). I guess that an unrecoverable bad debt does ultimately become an impairment. But the kind of impairment that I was thinking of in my bad bank loan context was a one off large quantum event.
One real example I can think of was PGW putting a deposit on a large Brazilian farm, to the extent of some millions of dollars, and then pulling out of the purchase deal because the company decided it was going in another direction. Nothing changed on the farm and there was no 'act of god' weather event that suddenly changed the profitability potential of the land. PGW management simply changed their minds and rather than complete the deal and sell off the unwanted farm later, decided to just walk away from their deposit. As far as PGW shareholders were concerned the deposit money was written off. By extension the bank behind PGW that put up the deposit money to buy that land also lost it, at least in a superficial 'hand over the cash' way. Of course PGW still had the obligation to pay the bank that lost loan money out PGW shareholders funds.
Another way of thinking about that same transaction could be that PGW did not lose any shareholder funds immediately, but instead set up a 'bad loan' to offset against PGW shareholder funds. There was to be no hope of the bad loan ever 'coming right', because there was no brazilian farmland land in PGW ownership to offset against this lost deposit. Nevertheless the banking syndicate supporting PGW did not put the company into receivership, because most of the other loans made to the PGW company were still OK.
From the PGW perspective the write off of the farm deposit was a one off impairment event. However, from the point of view of the banking syndicate which viewed all of the collected loans given to PGW as 'one big loan' the write off was just part of doing business as normal with PGW. The banking syndicate would like to continue doing business with PGW in the future even though the overall loan portfolio to PGW has been permanently weakened by PGW management action.
This brazilian farm cancelled purchase was only one event. But:
1/ From a PGW perspective it was a one off impairment.
2/ From the point of view of the perspective of the banking syndicate supporting the deal it was an ongoing and normal part of doing business with PGW, and cannot be separated from the overall package of loans made to PGW that comes under the heading 'normal banking business'.
Thus we have a bad loan that was a one off impairment event to PGW, but not a one off impairment event to the banking syndicate supporting it.
Does that make any sense?
SNOOPY
Who is the one dropping 9 mill ??. An associate of GK ??
PGC sold 19m PGW shares in March and bought 17m HNZ shares under 45cps,now sold at 52cps, made good profit.
They could buy back PGW shares at under 35cps( sold at 40cps ).
The parcel sold for 50 cents yesterday - you forget PGC is buried on the rest they own at 75,65 cents
and boys stop being silly with your frivolous imminent banking license comments - the RBNZ now has them where they want them and where they should remain - caught by the NBDT rules and reporting directly to them - anything else is simply moral hazard
Using 'Heartland' as an example I have been through five bank-imposed hurdles that any finance company, that will give you your invested capital back, must jump through. However, I know that numbers make some readers glaze over. So I think it is worthwhile trying to explain the reasoning behind imposing each of these 'hurdle tests' in a 'number free' way.
H1/ 'Interest Cover Ratio' In order to pay out interest to debenture holders, a finance company must have someone feeding cash into the other end of the 'debenture paying machine'. That cash must be sufficient to cover all debenture interest, with a margin for safety.
H2/ 'Liquidity Buffer Ratio' Real cash is required to pay debenture interest. " I have earned the money but I will pay it to you later" is not an acceptable business practice. Matching payments with incoming money can only be achieved when there is some kind of connection between the term over which the money is used and the term the money is lent.
H3/ 'Gearing ratio' Underlying every finance company is a building, some staff and a few computers. 'The office' must be in sound financial shape itself to provide a firm foundation to the lending capital business that is built on top of it.
H4/ 'Single Customer Group Exposure' If a disproportionate amount of business is done with a single customer, however good that customer seems, the potential exists for the whole finance group to collapse because of an unexpected glitch in one customer arm.
H5/ 'Minimum Equity Contribution' Why don't you and I don't go out and start a finance company tomorrow? Because a certain buffer of shareholder funds to cover unexpected bad debts and to help massage any small mismatch between borrowers and lenders expectation in the timing of loans.
Once you understand the importance of these five hurdles you can see how unhelpful the information generally published in share tables on finance companies is. PE ratio? Yield? Asset backing? Profit trends? As an potential investor in the finance industry I won't be considering those statistics any more. Because whatever their value, unless the finance company under consideration can pass the five hurdle test then I don't think it can survive at all in the medium term.
SNOOPY
Now you can understand why the team at HNZ spent so much time and effort wooing high nett worth depositors and kept so much money on hand to get through govt quarantee period.
At long last they have the building blocks in place and can start generating some real profits.
I am now going to take Heartland shareholders on a little trip back in time to when PGGW Finance was an independent entity. As soon as PGGW Finance was sold to Heartland all the business financial reports were taken off the PGW website very quickly and not put back on the web under the Heartland brand. Changing names can be an effective way to whitewash the past. However those that do not learn from the past are often doomed to repeat past mistakes.
Unfortunately for Heartland management (but fortunately for you Heartland shareholders) I have retained this information. The aim of what I am going to present is this:
1/ Look at how PGW Finance stacked up hurdle wise before the PGGW cash issue bailout (at the end of FY2009).
2/ Look at how PGW Finance stacked up hurdle wise after the PGGW cash issue bailout (at the end of FY2010).
3/ See if any lessons can be learned from the exercise.
SNOOPY
Here is how PGGW Finance stacked up as at 30th June 2009.
H1/ Interest Cover Ratio:
EBIT/(Interest Expense) = ($10.180m)/($37.758m)= 0.270 cf target figure of 1.2.
Result: Fail Test
H2/ Liquidity Buffer Ratio:
(Current Liabilities)/(Current Assets) = [$83.032m+($180.0-$71.5)]/$411.56m) = 0.465 cf target figure of 1.1.
Result Fail Test
H3/ Gearing ratio
(Non risk Share Liabilities)/(Non risk Tangible Assets)
= [508.659-83.032-(71.5+123.584+221.05)]/[575.475-559.659-1.163]= 9.493/14.653= 0.6479 = 65% cf 90%. Result: Fail Test
H4/ Single Customer Group Exposure
(Single Customer Loan Exposure)/(Shareholder Funds)
= ($20m)/($66.8m)= 30% cf 10% target
Result: Fail Test
(Note total Crafer farm debt is $200m so I am assuming PGW has 1/10th of this. This is a guess on my behalf)
H5/ Minimum Equity Contribution
(Shareholder Funds)/(Risk Share Lending)
= $66.8m/$559.659m= 11.9% cf target 20%
Result: Fail Test
(note all loans are assumed to be Tier 1, a conservative assumption)
The old PGGW Finance failed every banking hurdle test. It looks like it was a disaster waiting to happen despite all the bullish management comments of strong profitability and 80% debenture reinvestment rates plastering the media at the time. So did the subsequent capital injection after the PGW rights issue shore up the situation?
SNOOPY
Here is how PGGW Finance stacked up as at 30th June 2010.
H1/ Interest Cover Ratio:
EBIT/(Interest Expense) = ($13.095m)/($30.357m)= 0.430 cf target figure of 1.2.
Result: Fail Test
H2/ Liquidity Buffer Ratio:
(Current Liabilities)/(Current Assets) = [$70.819m+($120.0-$21.0)]/$432.105m = 0.393 cf target figure of 1.1.
Result Fail Test
H3/ Gearing ratio
(Non risk Share Liabilities)/(Non risk Tangible Assets)
= [449.287-70.819-(21.0+99.658+247.58)]/[549.662-530.119-1.180]= 0.6479 = 56% cf 90%.
Result: Fail Test
H4/ Single Customer Group Exposure
(Single Customer Loan Exposure)/(Shareholder Funds)
= ($20m)/($100.375m)= 19.9% cf 10% target
Result: Fail Test
(Note total Crafer farm debt is $200m so I am assuming PGW has 1/10th of this. This is a guess on my behalf)
H5/ Minimum Equity Contribution
(Shareholder Funds)/(Risk Share Lending)
= $100.375m/$530.119= 18.9% cf target 20%
Result: Fail Test
(note all loans are assumed to be Tier 1, a conservative assumption)
A casual glance at those figures shows that PGGW Finance was in a poor situation, even after being bailed out by the shareholders!
SNOOPY
SNOOPY.
Forget for a moment PGWF or PGGW F.
Some real fun would be to have a closer look at ANZ Bank,whose 6% equity ratio has to withstand,a falling Australian property market,struggling retailers,and fast going broke Australian manufacturers. 6% equity for that sort of concentration of risks must be of great concern to both shareholders and the Australian Reserve Bank.
HNZ is in a very strong position with spread of lending and avenues of funding,and has an equity ratio far superior to any Australian or NZ financial institution.
The outcome must be sell ANZ,buy HNZ.
OK time to assess what all of this means.
It is possible I have made some mistakes in my calculations. But I guess only those who have those old PGGW Finance annual reports will know!
Assuming I haven't made mistakes here is my explanation for PGGW Finances apparently desperate situation before it was acquired by Heartland.
1/ The interest cover figure probably represents a loan portfolio in transition. PGW is on record as saying that they were exiting a number of long term loans before the business was sold. Taking write downs or even just downsizing the investment portfolio before the supporting debentures were due would have reduced the earnings side while leaving the amount of interest due to debenture holders unchanged. This interest cover statistic is being distorted by the restructuring process.
2/ The liquidity buffer ratio was being influenced by the expiry of the government guarantee. A whole wall of debentures was maturing before the guarantee expired, thus spiking the 'current assets' total sharply higher than it would normally be post and pre guarantee. Due to this special situation, the liquidity buffer ratio is probably not a suitable test for FY2010 (or FY2009 for that matter).
3/ The gearing ratio largely depends on the asset allocation policy within PGW. Start thinking of PGW Finance as a separate company with its own administration structure and I think this fail would be fixed.
4/ Single Customer Group Exposure. As I stated by figure for the Crafers debt of $20m was a guess. If it was only $10m then things would look better.
5/ Shareholder funds are within cooee of the 20% level required by the banks.
In summary I don't think the picture of PGG Finance as I paint it on 30th June 2010 is quite as bad as those bare figures suggest. Heartland shareholders could take solace from the fact that some of the worst debts were retained within PGW when the finance business was sold.
SNOOPY
OK my concentration appears to have strayed while making this post. Heartland shows shareholder funds of $356.5m as at 30th December 2011. So even if the Crafar farm exposure was $40m, that is still only just over 10% of shareholder equity. I think we can be fairly sure that Heartland does not have a concentration of single loan exposure problem.
SNOOPY
Wrong again.Get over to ANZ.!!!!1
Crafar and other problems loans remain with PGW.HNZ only took over "the good" loans.
Correct, HNZ does not have a concentration of single loan exposure.
What we may say is a well balanced book,the envy of any ;I was going to say Australasian financial organization,but really I must say any world wide organization.
The other side of the coin is HNZ's strong balance of funding.
Hello Percy,
I have been reading your posts with interest lately as I'm considering buying a few thousand of HNZ shares.
Am I right in thinking that these could sky rocket if and when they are granted a banking licence?
Can anybody see why I should'nt have a go at trying to make a few dollars on these?
Lost a few thousand on PRC, would'nt mind a bit of good luck right now.
First of all I am sorry you lost money on PRC.I have also lost money on shares.
Now HNZ.At present I feel HNZ is the best value for money on the NZ market.It is trading at over 35% discount to NTA.
It has achieved a lot in a short time,getting approvals and merging three companies.It has successfully got through the Govt guarantee,and now looks to be getting on with the business on making money.From earlier posts you will note the high rate of return banks/finance companies earn.This means they can grow quickly.You will also note that bad loans/deals have been left at PGC or PGW.
Once we have seen good earnings we will see HNZ rerated.It will /could trade at two or three times NTA.ie $1.60 to $2.40.The recent announcement of ACC buying approx 10% means a lot of the risk is past us.Kerr's influence is gone.
On the downside low interest rates,and low demand for money could delay big profits.
I think in two or three years time we will all look back,and kick ourselves for not buying more HNZ shares at today's price.
Whether the SP rockets on bank licence or not I do not know.In fact I see HNZ doing very well with out one,so a bank licence does not concern me,however I would rather have one>!!!
Hello again Percy,
Thanks for your comments on HNZ, its always good to get someone else's opinion.
I'm pleased that my thinking is on the right track.
I do have some other shares that I have had for a while, but now I'm reading these posts on a regular basis, I may have to re think on some of them. While I think of it Percy,what are your thoughts on A2 Corp ?
I'M holding,
DIL
NEW
FPA
GEL
Snakk Media via Claridge Capital
LME
With your holdings you will never find the sharemarket boring.!!!!!!!1
ATM.I was never impressed with Cliff Cook when he was at MET,so never brought any ATM.However I never brought any DIL because of the Henry's track record.!!! Wrong again !!! ATM have a good product,and are doing everything right,so you should do well. with them.
Got to get 'Heartland' out of my heart first before moving on!
I stand corrected by you and Master 98 regarding Heartland leaving those Crafer loans with PGW. In my defence, I don't think PGW ever admitted the make up of the so called bad loans that they retained in house. Although it would be logical to assume the Crafer farms were one of them. Nevertheless I remember chatting to some senior management at the PGW EGM just proir to the finance division sale. They were adament that the retained loans would all be recovered in full, in time.
SNOOPY
Here are the latest basel 3 requirements outlining hoops that must be jumped through for all new banks.
http://www.rbnz.govt.nz/finstab/bank...on/3564868.pdf
I draw your attention to Clause 10(c) amongst the information the Reserve Bank need to have on record.
----
10(c) Financial accounts for the parent company or bank for the last 3 years.
----
Since Heartland have only existed since the second half of last year, I think this means we can rule out registration of HNZ as a bank for about three years.
SNOOPY
Does HNZ have a Treasury function ..... one that is charged (and incentivised) to make profit out of idle funds?
Just been looking at the latest (FY2011) ANZ annual report Percy.
The balance sheet on page 88 shows net assets of $37.954m. Net loans and advances are listed on the same page $396.337m. So I get an equity to loan ratio of:
$37.954m/$396.337m= 9.58%
ROE based on end of year equity was
$5.873m/$37.954= 15.5%
Of course the true ROE figure uses the average equity over the year which could account for the different figure you quoted. I am intrigued though that our equity to loan ratios are so different though. Can you clarify your figure?
SNOOPY
Percy you have missed your calling. You should have been the Heartland head of publicity in 2007. Of course the fact that Heartland did not exist in 2007 may have mitigated against the chances of your successful job application.
I will get the bit I agree on with you over first. I do agree that Heartland has significant share appreciation potential. In these post GFC days that means it may end up trading at asset backing. As for going to two to three times that figure, I think you would need to wind the clock back to 2007 to achieve it.
Why? Post GFC regulations have tightened around finance companies and banks. All are now required to hold a lot more capital in relation to the loans that underlying capital supports. If the NZ economy suddenly upticks that means HNZ cannot suddenly expand the amount of lending they do like finance companies of yore. Any expansion in lending will require very careful management of company equity so that everything expands in proportion. To make best use of capital I would say a dividend should not be paid.
Likewise if there is a downturn HNZ should keep their capital base strong so that they can manage the reduction in their lending book and any mismatch of depositors and lending interest that entails. That means no dividend in those circumstances either. In short it is hard to think of a scenario post GFC where HNZ will ever pay a dividend again.
The other 'problem' is that unlike a factory where plant can lie idle between downturns and be fired up again when the demand kicks in, modern finance industry requirements mean that the 'finance factory' itself must now be dismantled and rebuilt between business cycles. This is very different to loans being written on whiffs of capital as happened pre GFC.
The finance industry is not dead. But the former thoroughbred is wearing concrete clogs. There is a reason that even the likes of the National bank will be changing their promotional animal from thoroughbred steed to a draught horse.
SNOOPY
Unfortunately Yahoo finance do not seem to have received the latest annual reports.May I aplogise on their behalf.
However all comparisons were based on Yahoo figures, so apples were being compared with apples or in this case banks with banks.
ROE.ANZ is achieving over 15%.For a huge elephant like ANZ to achieve this,makes the case for HNZ coming from a much smaller capital base very compelling.20% or more.?
After you making me do some comparisons I have begun to believe what I have posted,and today sinned and brought some more HNZ.!!!!
I don't believe that stacking up banks against finance companies is an apples with apples comparison. I would say that the 'huge elephant' is liable to be more efficient on a per loan basis, not less efficient. You should also remember that all that surplus Heartland capital you think is there is also required to spruce up the branch offices, and pay for advertising.
Maybe I haven't been looking in the right places but I haven't seen any advertising at all for Heartland this year. I imagine this is because they are downsizing their loan portfolio as the recession bites. Nevertheless I am not going to say you were wrong with your purchase today. Just that your tolerance for risk is higher than mine. Personally I will be waiting for the next set of HNZ results and reviewing the terms of any possible cash issue before buying in.
SNOOPY
[QUOTE=Snoopy;374420]I don't believe that stacking up banks against finance companies is an apples with apples comparison. I would say that the 'huge elephant' is liable to be more efficient on a per loan basis, not less efficient.
.Agree to disagree with you.
For what's it worth I'd be really worried if HNZ were making 20% ROE .... to me it would mean they are taking too many risks and/or are too highly leveraged
Leverage has stuffed the world ..... aided and abetted by measuring (and paying) bankers on ROE .... things will revert to the old fashioned ways of doing things one day .... like building societies / financial institutions only lending out what is prudent to do so
And I still would like too know what that 'treasurer' does with the spare cash .........
[QUOTE=percy;374421]Just to be clear I am not saying that comparing the likes of Heartland with banks is a waste of time. Just that you should realize that when you compare an Apple with say a Nashi, you might need to adjust your comparative stick.
For starters I would expect a significantly higher equity to loan portfolio ratio with a finance company. That would imply a lower ROE for Heartland than the likes of ANZ, without any consideration of economies of scale.
SNOOPY
Well ring him and ask him.His name is Craig Stephen and his phone number is [09] 9279219. Then you can tell us all.Tell him you are a mate of percy's.
Must admit I would be happy if they could match ANZ's ROE.
remember the Aussie bank's have HUGE risks with their property,retailers and manufacturers.HNZ does not have these risks.
[QUOTE=Snoopy;374424]Nashi/apples ?? maybe.As I have pointed out before the Aussie banks have huge loan problems.The Australian housing and realestate market is facing big right downs.Australian retailers are losing the battle and Australian manufacturers have long since lost the battle to Asian manufacturers.HNZ does not have these problems/risks.All the Australian banks could queit easily lose more than their shareholders funds.We have been there before in 1991 when Aussie banks lost their shirts in the property down turn.
A case of comparing fresh NZ apples with ....... Aussie apples.!!!!!
Percy, there are no huge loan problems in Australia or at least nothing that isn't manageable in my eyes. You seem to think that a 5% fall in house prices will wipe out ANZs equity which is only just above 5%. In fact ANZs tier 1 capital is 9.5%. And a fall of 9.5% in house prices would only be a problem if:
1/ Every Oz homeowner is mortgaged to the hilt.
2/ Every Oz homeowner cannot manage their cashflow situation, irrespective of the capital position of their loan.
Australian retailers may be 'losing the battle'. But that means reduced profits for retailers, not the write off of all loans to retailers. Australian manufacturers have had to adjust just like those in Kiwiland and have had many years to do it.
I don't buy your doomsday scenario for banks in Australia Percy.
Besides if you really do believe Australia is in such trouble, how do you think NZ and by implication HNZ will escape, as Oz are our biggest trading partner?
A more realistic concern might be the collapse of rural lending in NZ, with PGGW Finance severely hit, as farmers tighten their belts. That would flow through to a housing downturn in Canterbury , where HNZ have most of their mortgages. I can see two years of book deconstruction at Heartland as the asset base shrinks back towards that share price.
I have no objection to people taking weighed up risks on the market Percy. But I am a bit worried Percy about the way you have weighed the risks of owning HNZ shares. I see the price has slipped below 50c today.
SNOOPY
May I direct you to KW's post No.50 on ASX forum:NOD nomad ;"The residential real estate market is going down the toilet I'd steer clear of the whole sector.even mining is not saving property prices-perth was the first to crash and burn."
Google Australian real estate bubble;"prices have fallen for the last 21months."
ILF meeting booklet,page 16;"given advice that there is an extensive number of distressed retirement villages and portfolios currently for sale in the market."
Australians have over spent because of over lending by Australian banks.Retailers and manufacturers under pressure.
NZ rural sector has paid down debt and is in good shape.
HNZ SP did weaken today.This is because of the PF [percy factor].When he buys SP weakens and only strenghtens when he sells.As he is not selling the SP may further weaken.
Glad to see that your sense of humour at least is still intact Percy. I had not considered the 'Percy Factor' before and it will certainly require some study. However, I do not believe you have considered the GS factor. Glen Stevens is the Reserve Bank Governor of Oz. In case you hadn't noticed, interest rates in Australia are (still) some of the highest in the western world. Property prices may ease back in Australia but GS is sitting by the interest rate button to make sure things don't correct too far.
Meanwhile back to Heartland.
I check in a 'sharechat' daily Percy and always note that in the top deposit rate section Heartland usually offer the best returns. However something curious has happened of late. BNZ (a proper bank) are currently offering the same call deposit rate as Heartland. Heartland are not paying any more, 4.5% for 90 day money. So why take the risk with Heartland when you can get the same return with a real bank?
My conclusion is that Heartland are not all that keen for funds because their lending book is shrinking, not growing as some shareholders think. I think that the full year result Y/E 30-06-2012 , will be a milestone but not in the way shareholders hope.
PGG Finance will not save them. PGF were getting out of lending on land and doing more seasonal lending and lending on new farm equipment when sold to HNZ. This side of farming will be very heavily hit should the farming downturn gather momentum.
As I explained in a previous post there is little prospect of a dividend, and even less of becoming a bank within the next two years. I can can see a very good argument for holding off investing in HNZ before the first integrated result is out in mid August at the earliest. I am still interested in HNZ as an investment prospect. But I think my timing and pricing can get a lot better than buying today.
SNOOPY
Snoopy, whatever happened to your swap your fridge man ......... surely you have a new hero by now
GS factor resulted in Myer's profit warning /downgrade which confirms the state of Aussie retail.
HNZ sharehoders will be "heartened" by FPA finance result,which shows there is life in NZ finance market.Lets hope Marac are doing as well.
Agree that next profit result/announcement will be of great interest.
I personally do not mind forgoing divies so long as they are reinvested wisely.Wish I owned some Berkshire,who have never paid a divie.
What's this GS factor Percy?
Ah so I am so stupid sometimes
Retail sales still look pretty robust if you believe the chart from ABS shoen below
Michael Pascoe had this in the SMH the other day about Myer - Was anyone surprised that Myer continues to slide? No, I thought not. And the best insight into the chain’s problems might well come from an anonymous butcher in Sydney’s Sutherland Shire: “If the number of people coming into my shop drops off, it’s my fault and it’s up to me to fix it. If they start buying more mince instead of rump steak, that’s the economy.”
Rather good I thought .... and as one punter aptly said yhe problem with Myer and David Jones they don't sell the mince
GS prob thinks the retailers just have to face up to changing times and sort themselves out.
Notice how the headlines in Australia always seem to be the same as we saw in The Press etc four or five yewars ago .... and even Postie Plus survived
Read more: http://www.theage.com.au/business/re...#ixzz1vrbAOL1v
Another good article,thank you.However if you google Book City Hobart,I don't think they would agree with either Michael Pascoe or the butcher. I know that the owner of this business has had his house on the market for over a year.My brother lives opposite him. Not easy to sell houses in Hobart.In fact, near impossible.!!!!
Hobart eh .... went there last year for a break and it rainred continously for 5 days and we did not see Mount Wellington at all .... even when we drove to the top it the mist was so thick a few metres visibility was it.
Nice place but not surprising Tassie and Hobart has negative population growth
I note that the nuymber of house sales in Hobart have halved over the last 10 years but also note the property prices have trebled (RP data) So that joker across the road from your brother maybe asking too much?
The Hobart paper had a story about the book shops closing down .... seems a trend world wide and not unique to Hobart -- the times they are a changing Bob once said .... and bookshops are a casulty eh
Liked one of the comments under that article - If Bill Blake is correct, one power cut and we'll be doomed. The people with books will survive. And good luck to the rest of you. .... better not throw out my books
Better not go into my wife's nephew who lives in Sydney's problems,other than to say he has sold his house to put the money into his business ,which is suffering from 'lack of buying interest' for his goods and services.
Like the joker in Hobart he most probably asked too much for his house,however he got to sell it before the bank did.
Hairdressers must be doing well as a lot of people are taking a haircut.!!!!!
Not sure about that; I am a bit like the butcher Michael Pascoe was talking about,still selling a lot of chops.!!!
I did read recently somewhere, that a very highly repected commentator said "we should be proud to have a strong currency........means a strong economy." Yeah right.!!!!!
After much thought I think in future we should refer to this phenomenon as "GPF";Grimy Percy Factor.
Only hope Snoopy's analysis does not find it depends on what side of the bed we got out of in the morning.!!!
On this subject of factors, I must confess to having a 100% record of failure picking the direction of the NZ$.But that is another story.!!!
Percy - maybe you are right, things are worse in OZ than I realised if these remarks from a laid off Hastie staff ‘‘I’m a little bit older, my mortgage is nearly paid off so I’m probably not in as bad a position as some of the others. But I know a lot of them, they could lose their house in 28 days the way banks are at the moment,’’ Mr Guest said
Then again the NBR over here had a big headline today Bankers eye dairy farm debt as payout slides .... maybe we need to be worried as well