A Conceptual Answer to the Finance Company Comparison Question
Quote:
Originally Posted by
winner69
I wonder how Heartlands crop of hair compares to other finance companies. seeing they are really one in drag
This is a great question. The problem is that all finance companies, and I include in that definition finance companies wearing bank suits, are a bit different. An obvious comparison is Heartland vs UDC. But as a potential investor, you can only buy shares in UDC through buying the ultimate ANZ parent in Australia which is a very different beast.
Another obvious comparison is HBL vs Turners Group. The problem there is that TNR now contains the old TUA auctions business which is very different to anything inside HBL. So this is why I have spent some time on the TNR thread, pulling the 'finance' part out of TNR using the segmented information provided in the TNR report. 'TNR Finance' provides a better measuring stick.
When I do a comparison between companies, I like to compare common 'stuff'. With finance companies I consider the basic building blocks of 'stuff' to be 'loans'. The underlying 'resource' that allows a finance company to operate I consider to be EBIT. The more EBIT a finance company can make, relative to the size of their loan book, the more 'naturally profitable' they are. So I consider the driving engine of any finance company to be:
EBIT/ (average loan book size)
Unfortunately in the real world both 'I' and 'T' need to be paid. So the amount of underlying parent bank debt can reduce the strength of this earnings engine.
Now if all loans were equal, then this is the only statistic any analyst would need. But as we know all loans are not equal. 'Haircuts' need to be taken from time to time. Indeed any finance company that does not build 'haircuts' into their normal business model is kidding themselves.
I consider a useful measure of 'possible haircutting' to be:
'impaired loans' / 'shareholder equity'
This is becasue it is ultimately we shareholders who have to pay for these 'haircuts'. And the greater the bad loans in relation to our shareholder equity, the more at risk we shareholders are.
So there we have in essence my way of answering Winners question.
1/ Look at the Earnings Capacity from the loan book on a 'normalised' basis.
2/ Balance this against the likelihood of shareholders having to take haircuts on bad loans.
Putting it all into practice is another step. I wish things could be simpler. But unfortunately, this is as simple as things are liable to get :-(
SNOOPY
When is a Bank not a Bank - When it IS a Bank
The history of any company, its antecedents and major events, is important to the extent that it helps one to understand the present situation of the company, the journey so far and how this may affect the likely future performance.
An obvious for instance of this is how the corporate memory of the Ansett Collapse has influenced Air New Zealand to make the recent poor decisions that are the current Virgin Australia Disaster.
Looking forward the current situation with the dairy industry will obviously have a greater effect on the short & possibly medium term profitability of Heartland Bank the longer it lasts, as will the decisions and impairments that are made in other areas of lending.
However the Bank is well capitalised, the management are well aware of the situation, being open and communicating their updated assessments as the process unfolds.
It is probable that it will survive. :mellow:
I will reiterate the important of remembering that dairy is just one string in the Banks bow and at different times different sectors have their ups and down.
This is what being a Bank is all about, spreading and managing risk for the benefit of their shareholders and creditors.
Best Wishes
Paper Tiger
PS I presume you have all been 4% for a one year term-deposit as well?