Ok fair point. Other contributors views are definitely welcome, and I am sorry if I have hinted otherwise.
SNOOPY
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Snoops
Some reckon ANZ cost of capital is about 8.5%
So one of your sentences above could read ......ANZ charging 4.5% for a residential mortgage and the weighted cost of capital was 8.5% you would have to question whether mortgage lending charges properly reflected the risk from a ANZ shareholder perspective.
As I said above you can’t really compare the two rates ..maybe in the ANZ context above you can see why.
O.K. so maybe I am looking at this the wrong way.
You have a whole office load of guys and gals at Seniors Finance. Someone in the Northern Territory wants a new reverse mortgage. Seniors check with their Ozzie bankers CBA to see if they will pay out the money in cash, while Seniors (Heartland) takes out a first mortgage on the house. "Sure" say CBA "$440m borrowed already, but borrowing headroom doesn't max out until $600m". "Go right ahead"
So Seniors hands over the reverse mortgage loan to our 'Crusty NT Couple'. But no more guys or gals had to be hired to do the deal. No more office space had to be rented out to do the deal. So although the Heartland WACC was 7.4%, the actual cost of writing out that new deal was a phone call and a couple of e-mails - close to zilch. And because the overheads have not increased, the difference between what CBA charge Seniors, say 4.5% and what the end line NT customer ends up paying say 7.8% - (7.8%-4,5%=) 3.3% is all 'profit' for Heartland. 3.3% profit may not sound like much. But 3.3% profit over a zero incremental asset/cost base is one heck of a return. And it doesn't take too many deals like this to really ramp up the return on the original Seniors asset base.
However, if Heartland wanted to sell Seniors to another company that did not have a finance operation, then you would have to look at things differently. In this instance you would have to look at the whole Seniors asset base as a cost centre, to be cost allocated across all the Senior's loans. So in this instance using the WACC of Heartland as an estimate to measure the efficiency of a whole business unit is valid.
Does that make sense?
SNOOPY
NZ REL's are financed by HBL.
Snoops .....third paragraph good ...fourth paragraph says a prospective would look at it as a business and see if returns exceed their hurdle rate (maybe their cost of capital)
Back to Heartland it’s good they make a 11% ROE when WACC is about 7.4% eh .....excessive returns over and above their cost of capital which are rewarded in its share price being significantly above its book value.
I would hazard a guess that the HER business is one of Heartlands better ‘value creating’ bits ...but have no numbers to support that
Five O'Clock and the lawn is still too wet to mow. Don't want to substitute other chores, so time to rip into Winner's exercise.
Seniors interest rate is 7.82%. It is variable but since we don't know how it will vary in the future I will keep it fixed for the purpose of this exercise. To keep the figures easy, Mr & Mrs Crusty will look to take out a $100,000 reverse mortgage loan.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Interest Payable $7,820 $8,432 $9,091 $9,802 $10,568 $11,395 $12,286 $13,247 $14,282 $15,399 $112,332 Time Discount Factor Face Value 7.4% 7.4%^2 7,4%^3 7,4%^4 7.4%^5 7.4%^6 7.4%^7 7.4%^8 7.4%^9 Time Discounted Interest $7,820 $7,851 $7,881 $7,912 $7,935 $7,974 $8,005 $8,037 $8,068 $8,099 $79,582
Here is a graphic demonstration of compound interest. Mr & Mrs Crusty end up paying back $112k interest on top of the $100k that they borrowed! Or put another way each dollar they spend in their ten years of retirement costs them $2.12. Just as well the Crusty kids weren't banking on much of an inheritance then!
Now we look at the adjusted income on a per year basis: $79,582 /10 = $7,958 averaged per year.
And on loan capital of $100,000, that equates to an annual interest rate of 7.95%
And that proves, I am not sure what?
SNOOPY
Payable $212,322 plus exit fees.
The power of compounding interest.
ps.It is not The Crusty kids' money.It is their parents.
pps.If you borrow at 4.5% and lend at 7.82% you are making nearly 74% gross .
Leaves a bit of room for a few overheads,??.Think NIM.
ppps.Better to own a bank than having money in the bank.?...lol.
Well I got that wrong then! I had thought the answer might be "the greed of Heartlanders."
From:
https://www.stuff.co.nz/business/mon...interest-rates
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Consumer Affairs Minister Kris Faafoi has unveiled proposals to cap the amount lenders can earn off loans.
Faafoi is on a mission to reduce the damage "predatory" lenders do in poorer communities, and released a consultation document with three options for capping borrowing costs.
The first, dubbed "Cap Option A" would be to limit the total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal.
---------
Well a $212,000 payment is more that 100% of the loan principal. So could Heartland be looking at a government imposed cap on its lending arrangements?
In this case it is neither the parents nor the kids money. It has become Heartland's money.Quote:
ps.It is not The Crusty kids' money.It is their parents.
Well 7.82 - 4.5 = 3.32 percentage points. That makes a NIM of 3.32 percentage points. But wait, Heartlands overall net interest margin was 4.34 percentage points over FY2017. So doesn't that indicate that Heartland's REL business could actually be lower margin than the other business units?Quote:
pps.If you borrow at 4.5% and lend at 7.82% you are making nearly 74% gross .
Leaves a bit of room for a few overheads,??.Think NIM.
SNOOPY
HBL do a bit of magic...….lol.
ps.TRA's NIM is over twice HBL's.
NB.TRA and HBL are the good guys.!
[QUOTE=percy;
ps.It is not The Crusty kids' money.It is their parents.[/QUOTE]
I have to agree. It is better to use your equity than to see out your retirement in poverty.
However, you also have to consider that it doesn't neccessarily have to be Mr & Mrs Crusty eating away the equity in their forever home.
This model is also suggested to property investors with a portfolio of properties. Take the increase in equity out on one house a year to fund retirement. Assuming properties double in value every 7 years it should self fund. If the market crashes catastrophically you might want a plan B. And shares in the banking industry might not be it? Not that I am predicting that kind of global market failure.
Looks like it was the Australian tax loss selling that smacked it down to $1.70 last Friday. Those cunning enough to get some off our Australian friends appear to have done rather well :)
Given that:Quote:
Originally Posted by Beagle;720621
1/ Heartland is not listed in Australia AND
2/ There has been no announcement to the stock exchange on any Australian based company selling AND
3/ There appear to be no Australian based shareholders in the top 20 largest shareholders at the last balance date
I wonder how you reached the conclusion that 'Australian Tax Loss Selling' has been responsible for the drop in share price?
SNOOPY
HBL - Market Update
Jeff saying full year $70m after all
No ...just the date when they will announce something
Bugger
just recalling Heartlands commitment to diversity and maori. Just noticed this on the end of an email from ANZ today
Tō ao, na tō Ara – Kei te whakanui a ANZ i Te Ao Māori.
Your World, Your Way – ANZ is supporting all things Māori
Certain Australian investors can claim a tax deduction for losses incurred on their share portfolio but they must be sold on or before end of financial year, (which for them is 30 June, last day of trading here 29 June). Given the shares were north of $2.10 six months ago its quite conceivable that some investors decided to crystalize their loss and claim the loss back. Its just a theory Snoopy, could just be coincidence it got smacked down to $1.70 on the last day of the financial year for Australian investors.
On a brighter note I see the American banks had a big day on Wall Street. Maybe seeing as HBL has done a fair bit of "work" in the low 170's it's built a base here and we can look forward to brighter days ahead, what with the company reporting next month ? Cheap PE stocks not exactly in vast abundance on the NZX are they !
Small is beautiful. ...and I’ll leave it to others to point out the wow NIM
KPMG's quarterly financial institutions performance survey showed small locally-owned banks have expanded their loan books at a faster pace than the big four Australian-owned lenders and state-owned Kiwibank, with Heartland, SBS Bank, and TSB all logging double-digit expansion in the year through March.
(From sharechat)