Yes -that as well.
I must admit I have nearly sold all my HGH over the past 5 months .
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If a finance company doesn’t have some bad loans it’s not doing a very good job
These are very difficult times and lots of companies are going to fail.
If they have a culture that allows loans without adequate security it is not doing a very good job.
Finance companies fail in such circumstances.
At the very least it could be years before dividends resume.
I am likely to sell my remaining shares as I feel increasingly uncomfortable.
Pretty obvious some major provisioning is going to be required in regard to Covid 19 as per what Australian banks have done and in percentage of loan book terms probably a fair bit higher because of the nature of a significant part of HGH's lending. I am not sure one way or the other whether that places an obligation upon HGH to update guidance under the continuous disclosure regime of the NZX ? I half expect an update some time this month but who knows...
As fish has astutely observed the dividend outlook is very uncertain. When one of the major supporters of this stock for many many years, (Percy) has sold out, (although we all make mistakes and nobody has a perfect track record, myself included), people should probably sit up and take note.
With the financial year ended 30th June just wound up, I am trying to get more of a handle on Heartland's upcoming 'Covid-19 loan book losses'. I said previously that the ECL (Expected Credit Loss) method is a more conservative way of looking at the bad debt picture. But I am not sure if this is really true.
On my wider reading on this subject (actually just studying the Westpac FY2019 Annual Report, and HY2020 Interim Report) I note that all of the new business signed up during the year and the end of the line business that is finally written off are two classes of loans that are excluded excluded from the ECL analysis. This isn't so surprising when you think about it. A new loan that is not on the ECL system at the start of the year cannot be re-rated for credit quality if it has never been rated in the first place. Such must be the case with all 'new' loans. Likewise once a loan - or part thereof - is finally written off, it drops out of the bottom of the credit rating system. You can't re-rate a loan that has finally been determined to be unrecoverable!
Having said that, when I go to the Heartland interim report Note 7 (p16 HY2020 i.e. period ended 31-12-2019) and look at the Non-securitised loans') both the 'new and increased provisions (net of collective provision releases)' are combined in a single ECL analysis. That seems to immediately make a lie of my claim that 'New Loans' are not part of the ECL. But I tend to think my logic is right. That means, whether combined with existing loans or not, new loans cannot be re-rated in the period in which they are instigated.
There is another bit of the Heartland presentation on that page that strikes me as odd. The impairment allowance is reduced by adding back the 'Recovery of amounts previously written off'. That seems to make a liar of me again, as I have just stated that what is 'written off' under ECL cannot be brought back into the system. Yet two lines down that same figure is added back in (as though the recovery didn't happen) when it comes to calculating the impairment allowance. Weird to my eyes.
The interesting thing about the three finance companies with which I am most familiar, (Heartland, Turners and Westpac) is that all of them had an increased 'bad loan provision' on adopting the new ECL debt rating system. But I am wondering if that was a conservative provision realignment, due to the lack of familiarity with how the new system will operate over time? I did note that in the case of the Westpac HY2020 report, hidden in all the Covid-19 and other new provisions, the 'Business Activity During Period' was written back up in value (meaning the bad debt provision was decreased as a result) under the ECL method.
I am quite encouraged by comments coming out of Turners after the lockdown period. They reported their finance division remained profitable as people stayed home, didn't spend their money on frivolous things and paid down their loans. I am hopeful that many of the Heartland 'motor vehicle loans' got similar treatment. But whether this will continue into FY2021, now that we NZers are 'unlocked' and possibly about to lose our jobs as the wage subsidy ends is another matter.
SNOOPY
Bank profits down 20% so far because of Covid-19
Sell, sell, sell why you still can.
[and I will buy them] :t_up:
Disc: this post may contain traces of ramping. :p
The article states that profits are down 'driven by a significant increase in impaired assets'.
The article then goes on to talk about 'mortgage deferrals' which the banks have previously indicated are not being counted as evidence of impairment.
Then John Kensington, KPMG head of banking and finance says:
“What no one can say with certainty is the form of the recovery – will it be a V, a W, or some other shape? So many unknown factors impact the answer here."
I would summarise the article as follows. The banks have made a guess that they might lose a lot of money and have provisioned accordingly. But they don't really know how all of this will pan out, so all guesses as to losses are really up in the air. If this article hadn't been published electronically, I would say it was a complete waste of printers ink!
The whole 'write off' question depends on the quality of the underlying assets. With the big reverse mortgage portfolio that Heartland has, I would say the Heartland loan book is as sound, credit wise, as the big banks. Yes I do expect issues with some Heartland business loans. But a lot of these are short term and seasonal. I am feeling a lot happier about my Heartland shareholding than my Westpac shareholding. Yet if you believe the bank credit ratings the reverse should be true.
SNOOPY
I think one trend worth keeping tabs on is the 'Credit Provisions' vs 'Write Offs'. The common factor linking these two figures are that they are 'statements of judgement at the time'. But one is a forecast taking into account future periods while the other is the 'actual amount' written off.
1HY2019 2HY2019 1HY2020 2HY2020 New and Increased Provision $13.347m -$1.485m $10.668m Covid-19 havoc? Write Offs $12.456m $8.257m $8.771m Covid-19 havoc?
The second half year figures are made up from the full year figure less the first half figure. That negative provision for the second half year does look odd though. I wonder if I have that right?
SNOOPY
Maybe proactive provisioning ...you know the game.
But Jeff hasn’t indicated any issues yet so no Covid havoc?
June year end but a lot of this stuff is done a month before (and then fine tuned in last period) so he would essentially know what ‘havoc’ there’s been and should have told us by now?
Some more thoughts on this 'Expected Credit Loss' (the new method under NZ IFRS9) bad debt build up.
Looking at p11 in AR2019, 'Stage 1' doubtful debts are described as follows:
These are loans 'past due 30 days or less' BUT 'Where there has been no evidence of increased credit risk since initial recognition and are not credit impaired upon origination, the portion of the lifetime ECL associated with the probability of default events occurring within the next 12 months is recognised'.
To me this doesn't quite scan. if there is no evidence of increased credit risk, why are we picking out loans that are up to 30 days overdue as part of the baseline method to identify bad loans? Surely the fact that a loan is 'past due 30 days or less' is in itself a precursor indicator that a loan might go bad. Otherwise why use 'past due 30 days or less' as a sifting tool in the first place?
Perhaps this is some sort of sop to the 'stage 1' ECL loan originators? Are we saying to them:
"Well, if patterns of history repeat, then some of you boys who have taken out loans will be 'bad boys'. But we don't want to call out any of you boys as bad yet because none of you have done anything wrong, (except being a little late with your payments). Nevertheless some of you actually will go bad, but we don't want to pin down which of you that will be yet. Right now you are all good, but we know some of you are shysters, yet we don't want to finger you as such just yet."
My next thought is that although the potential bad loans recognised go up, this is just a timing issue. Winner is quite right when he talks about 'proactive provisioning'. That is the whole point about ECL. But contrary to what Winner implies this does appear to be a brand new game. The implication here is that ECL was brought in because lenders, in general, have not been nearly pro-active enough in bad loan provisioning in the past. But can we tag Heartland with this broad brush view?
Peat's comment is by my way of thinking a twisted way of looking at what is happening under ECL. The timing of a loan going bad does not change. But the timeframe in recognising that a loan might go bad has expanded. Effectively bad loans are tagged as bad before they even look like going bad. Yet the only thing that makes these loans 'look bad' is historical precedent.
The result of the ECL method looks to be more loans being put under the 'bad loan microscope'. But that does not mean more bad loans, even though it appears on the books as though there are more bad loans. This was what I had in mind in my own quoted post when I said the ECL method was 'more conservative' in identifying bad loans. IMO, it is the people equivalent of 'racial profiling' where people of a certain race are targeted as 'suspects' to a crime. Some loans just 'look' suspicious from a bad debt perspective. But if Heartland knew these loans 'looked suspicious' to start with, why approve them in the first place? Or is this part of the 'second tier lender risk profile' where bad loans are deliberately entered into? But because only a proportion of these will go bad and because the profitability of the loans that do not go bad is high, it is worth doing it anyway?
To summarize, I think what I am saying here is that the ECL method observed jump in bad loans on the books is a one off. It means more loans under scrutiny at any one time. But if the bad loan recognition problem has not been an issue in the past for Heartland, then it does not mean more bad loans. Conversely if Heartland had consistently underestimated bad loans in the past, then the adoption of ECL should 'fix' this problem (if it existed).
I'd like to throw in one last curve ball on the subject. The ECL method rates loans. But it does not rate the propensity of existing clients to take out future bad loans. The Westpac half year result had an extra 'Covid-19' adjustment factor to take this into account. The thinking here was that certain customer classes would have a propensity to get into debt trouble on loans they had not yet entered into. Thus there should be provisioning against future loans that the customer has not even asked for yet. Ultimately these loans will come under the ECL system as well. But the ECL system cannot provision for loans that do not yet exist. So an extra 'Covid-19 fiddle factor' is required. Heartland hasn't hinted that they will do anything like Westpac has done. I wonder if they will?
SNOOPY
https://sendy.tarawera.co.nz/l/J6oLV...3jcs76335id4WQ
Well done Heartland Bank.
An insolvency expert was reported on NBR to be predicting a really substantial level of bankruptcies in 2021. Reckons the economic stimulus has kicked the can down the road a bit but 2021 will be where the rubber meets the road in a really big way. Has serious implications for banks engaged in extensive business and motor vehicle lending in my opinion.
A very plausible forward looking view on the future of financing in New Zealand. But the market is forward looking too. So how does 'Mr Market' view the future of financing in New Zealand as things have developed over the last month? Here is Mr Market's take on four financers in descending order of creditworthiness (according to the ratings agency anyway).
Share Price 26th June Monthly Low Share Price 26th July Monthly Gain Westpac $19.45 $18.75 $19.05 -2% Heartland Group Holdings $1.26 $1.20 $1.32 +5% Turners Automotive Group $2.12 $2.06 $2.27 +7% Geneva Finance $0.425 $0.37 $0.425 0%
The worst performer is the one that has the highest credit rating. Of course the fact that 4/5s of Westpac's business is in Australia might have something to do with this. But both Heartland and Turners, big motor vehicle funders, are up 5% for the month and up 10% off their monthly lows. Turners even managed to pay a dividend over the period. Geneva, down at the more dodgy end of the loan market has flat-lined. So what can explain this?
Most motor vehicle funding will have been 'baked in' well before Covid-19 struck. So loans kept on being paid off with many of the alternative spending temptations unavailable. The other side of things is that NZ is very much a 'motor country'. An awful lot of people still need motor transport to go to work. And car use has bounced back faster than public transport use. I am surprised at how well Holden- with cars sold financed by Heartland-, but now a zombie company, are doing in the motor vehicle market. Did I see last month they were number 2, behind only Toyota? I guess there isn't much wrong with the product they sell, and kiwis are never shy to turn down a run-out bargain. I also read that during the worst month of lock-down Kia, also financed by Heartland, held the number one position, ahead of even Toyota! That doesn't mean much given the low numbers of vehicles sold that month. But it does show that Kia are on the ascendance. Turners funding is all for used vehicles. The used vehicle market should be naturally more resilient when times are tough.
My own feeling is that we are in a kind of 'false holding dawn'. Come September when the wage subsidies are suddenly removed, I think the dire outlook for 2021 will suddenly come into sharper focus. But with Inland Revenue kindly funding the bad company loans (thank you Grant) , I can see Heartland with a smaller loan book but not necessarily a loan book that is worse for wear credit wise. So maybe Mr Market's view that mid tier finance companies are in a relative sweet spot is correct? That Mr Market does seem to do an OK job of forecasting, for 90% of the time at least, might be something to ponder?
SNOOPY
Good point. It pays not to forget the 'bigger picture'.
Share Price 25th November 2019 Dividends Paid Share Price 26th July Period Gain Westpac $25.89 0c $19.05 -26% Heartland Group Holdings $1.70 4.5c $1.32 -20% Turners Automotive Group $2.62 4.0c+6.0c $2.27 -10% Geneva Finance $0.56 (1.25c +1.5c)x 0.7c $0.425 -21%
Turners suffering less than the others. Perhaps being free on all restrictions about paying dividends has something to do with that? Although I see Geneva Finance are still paying dividends post pandemic. Some things don't change though. Westpac has still been the worst of the four to own over the Covid-19 period.
SNOOPY