What is a 'Stressed Loan'? For the purpose of this discussion, I have a special definition.
Stressed Loan Definition |
UDC |
Heartland |
|
|
|
|
1/ Take loan total from categories 7 and 8 |
a/ Take loans at least 90 days past due. |
|
2/ add 'Default' loans |
b/ add Loans individually impaired. |
|
|
c/ add Restructured assets. (*) |
|
3/ less Provision for Credit Impairment |
d/ less Provision for Credit Impairment.' |
|
4/ equals 'Total Stressed Loans' |
e/ equals 'Total Stressed Loans'' |
(*). (Note that from FY2017 ' Restructured Assets' are now not reported on by Heartland.)
A 'Stressed Loan' can be thought of as a kind of 'Vulnerable Loan', as previously described, but with the Impairment provision taken out. There is no overlap between a 'stressed loan', as defined here, and the amount of money written off each year in bad debts. But yes, 'Stressed Loans' are very much a judgement call by management.
They may
1/ recover,
2/ stay stressed or
3/ have to be written off.
As a shareholder in either ANZ (owner of UDC) or Heartland:
1/ I would hope that management would have a robust process that identifies problem loans before they have to be written off.
2/ So as a shareholder, I would hope such loans were seen as 'stressed' before being classified as 'impaired' and certainly before an actual write off was declared.
How does one check that this is what happens in reality? One way could be to look at the 'stressed loans' for both companies on an annual trending basis and see how this compares with the equivalent annual trend in write offs.
Heartland
The column (W) lists the actual dollar amount in bad debts written off over that period, as detailed in AR2017 note 19e.
The key point to note here is that the 'impaired loan expense' / 'write offs' (represented by letter 'W' in each case) only occur:
1/ when the impaired portion of the loan has gone through the whole loan review system'. AND
2/ when a loan repayment has been missed, or a non payment is imminent
Heartland |
Date |
'Stressed' Loans on the books (X) |
Net Financial Receivables (Impairments deducted) (Y) |
(X)/(Y) |
Write Offs (W) |
Gross Financial Receivables (Z) |
(W)/(Z) |
EOHY2012 |
$87.728m |
$2,075.211m |
4.23% |
$12.138m+$1.685m |
$2,104.591m |
0.66% |
EOFY2012 |
$90.489m |
$2,078.276m |
4.35% |
$14.636m+$3.180m |
$2,105.702m |
0.85% |
EOFY2013 |
$48.975m |
$2,010.393m |
2.43% |
$6.679m+$1.961m |
$2,060.867m |
0.42% |
EOFY2014 |
$41.354m |
$2,607.393m |
1.59% |
$35.258m+$3.260m |
$2,631.754m |
1.46% |
EOFY2015 |
$39.066m |
$2,862.070m |
1.36% |
$1.555m+$1.910m |
$2,893.704m |
0.12% |
EOFY2016 |
$37.851m |
$3,113.957m |
1.21% |
$12.010m+$6.653m |
$3,135.203m |
0.60% |
EOFY2017 |
$38.341m |
$3,545.896m |
1.08% |
$2.140m+$9.531m |
$3,567.191m |
0.33% |
Note: During FY2016 'Heartland New Zealand Limited' and 'Heartland Bank Limited' combined into a single listed entity.
UDC
I have redefined the 'Total Financial Assets' as listed in note 10d to be 'Net Financial Receivables', because they have already had their 'Provision for Credit Impairment' deducted (netted off).
UDC |
Date |
'Stressed' Loans on the books (X) |
Net Financial Receivables (Impairments deducted) (Y) |
(X)/(Y) |
Impaired Asset Expense (W) |
Gross Financial Receivables (Z) |
(W)/(Z) |
EOFY2011 |
$126.218m |
$2,007.012m |
6.29% |
$15.103m |
$2,049.504m |
0.74% |
EOFY2012 |
$96.670m |
$2,102.299m |
4.60% |
$10.164m. |
$2,141.780m |
0.47% |
EOFY2013 |
$86.877m |
$2,161.193m |
4.02% |
$12.399m |
$2,198.653m |
0.56% |
EOFY2014 |
$95.364m |
$2,344.131m |
4.07% |
$21.933m |
$2,375.936m |
0.92% |
EOFY2015 |
$82.267m |
$2,429.695m |
3.39% |
$11.503m |
$2,461.224m |
0.47% |
EOFY2016 |
$85.475m |
$2,655.841m |
3.22% |
$12.352m |
$2,684.750m |
0.46% |
EOFY2017 |
$116.131m |
$2,975.781m |
3.90% |
$4.838m |
$3,005.059m |
0.16% |
Discussion
In the case of Heartland, the 'stressed loan' percentage is consistently going down. However, the actual write offs per year do not show an obvious correlation to the same year's 'stressed loan' figure. In FY2014, for example, the quantum of write offs are almost equal to the quantum of stressed loans. Yet one year later (FY2015) the write offs are only less than one tenth of the stressed loans. Will the case of FY2016 and FY2017, where stressed loans are two to three times the amount actually written off become the new norm?
.
In the case of UDC, the stressed loans look to float around at 4% of the total, much higher than the Heartland equivalents of recent years. For FY2017 only, the 'Impaired Asset Expense' to 'Gross Financial Receivables' is startlingly low, even as the stressed loans jumped up. A one year aberration? Despite making my own interpretation of how to define a 'stressed loan' at UDC - to bring the number more into line with what happens at Heartland - the stressed loan percentage at UDC remains stubbornly high in comparison. UDC loans are perhaps more heavily weighted towards 'working equipment' which may not have much 'fire sale' value during a business downturn. So could it just be in the nature of the UDC business that management need to keep a really close eye on a large portion of their loans? How they do this, while using a skeleton staff compared to Heartland, remains a mystery to me!
What would I like to see in these figures? If you accept that:
1/ When a loan is written off it is largely too late to fix it, AND
2/ The overall number of write offs can be contained (it is inevitable that in any lending organisation, some loans will have to be written off) [TR]
[TD]EOFY2014[/TD][TD=align:right]$43.354m[/TD][TD=align:right]$2,607.393m[/TD][TD=align:right]1.66%[/TD][TD=align:right]$35.258m+$3.260m[/TD][TD=align:right]$2,631.754m[/TD][TD=align:right]1.46%[/TD]
[/TR]
THEN I am interested in how management deals with 'stressed loans' before they get to that stage.
My concern is that the write offs at UDC over FY2017 are exceptionally low, and there is an unusual incentive for management to project the result like this (UDC is up for sale). Write offs are also down at Heartland over the comparable period (which could indicate a favourable market to lenders), but not by as much. The percentage of 'stressed loans' at UDC remains significantly comparatively higher than Heartland. There are a couple of ways to interpret that:
Either:
1/ UDC staff remain 'exceptionally diligent' in reviewing stressed loans (as assessed by UDC) and this policy is leading to lower and lower actual write offs.
2/ UDC are being exceptionally lenient in classifying some loans as stressed when really they should be wholly or partially impaired or maybe even written off.
I would have expected more 'exceptional diligence' from Heartland, simply because they have more staff. The Heartland pattern of reducing 'write offs' coupled with reducing 'stressed loans' does make a plausible narrative. But I am concerned that some of those UDC stressed loans may be a little more stressed than UDC management are letting on. It is hard to be definitive about one year's results. In the meantime I would be cautious in assessing the UDC write off picture.