BC1/ Tier 1 and Tier 2 Lending Ratios FY2017
Quote:
Originally Posted by
Snoopy
The promised capital note issue never happened. So once again this calculation is straightforward with all 'Tier 1 and Tier 2 capital' being shareholder equity.
Total Heartland Equity at balance date was $498.341m,
Total Heartland liabilities at balance date were $3,048.840m
So: Equity / Total Liabilities
= $498.341m / $3,048.840m = 16.3% < 17% (*)
Result: FAIL TEST
Note that I have changed my equity target for Heartland to the 17% equity (down from my 20% target) that Heartland had when Governor Wheeler originally approved Heartland as a bank. I had previously used 20% as the figure appropriate for a more marginal finance company without a strong history. Even so, Heartland has did not have the amount of equity on the books to support a loan book of the current size in my judgement. However the December 2016 equity raising has no doubt addressed this issue for now.
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Target |
Total Tier Capital/ Loan Book |
19.3% |
17.7% |
17.6% |
16.6% |
16.4% |
>17% |
In April 2017, Heartland had a subordinated capital note issue of $A20m. Approximately 72% of the face value of the Notes will be recognised as Tier 2 Capital by our banking regulators. So we must add the 'Tier 1 capital' (being shareholder equity) to 72% of the 'Tier 2 capital' to obtain the total recognised 'tier' capital for liquidity purposes
Total Heartland Equity at balance date was |
$569.595m |
, PLUS |
Tier 2 capital as apportioned |
$14.975m |
EQUALS |
Total Tier Capital |
$584.570m |
Total Heartland liabilities at balance date were $3,465.076m
So: Equity / Total Liabilities
= $584.570m / $3,465.076m = 16.9% < 17% (*)
Result: PASS TEST
I have been a little generous in 'passing' Heartland here, because I am not convinced that using 'only' 72% of the Tier 2 capital is justified (if 100% of Tier 2 capital was used the 17% pass figure would be achieved). I have also included 'intangible assets' as equity. This is because a financial institution is 'punished' for spending on having up to date computer software (software is an intangible asset), when I see up to date software as a really good idea in keeping track of troublesome loans. Nevertheless, whether you agree with my reasoning or not, no one can dispute that Heartland was in a better loan security position at EOFY2017, than at the end of the previous two financial years.
{Note that I have changed my equity target for Heartland to the 17% equity (down from my 20% target) that Heartland had when Governor Wheeler originally approved Heartland as a bank. I had previously used 20% as the figure appropriate for a more marginal finance company without a strong history.}
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Target |
Total Tier Capital/ Loan Book |
19.3% |
17.7% |
17.6% |
16.6% |
16.4% |
16.9% |
>17% |
SNOOPY
BC2/ EBIT to Interest Expense ratio FY2017
Quote:
Originally Posted by
Snoopy
Updating for the full year result FY2016:
The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs
EBIT (high estimate) = $265.475m - $68.872m= $196.603m
Interest expense is listed as $118.815m.
So (EBIT)/(Interest Expense)= ($196.603m)/($118.815)= 1.65 > 1.20
Result: PASS TEST
The historical picture of this ratio is tabulated below. Despite the shakey start, the trend is very pleasing.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Target |
EBIT/ Interest Expense |
1.15 |
1.22 |
1.44 |
1.52 |
1.65 |
>1.2 |
Updating for the full year result FY2017:
The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs
EBIT (high estimate) = $278.279m - $71.684m= $206.595m
Interest expense is listed as $115.169m.
So (EBIT)/(Interest Expense)= ($206.595m)/($115.169m)= 1.79 > 1.20
Result: PASS TEST
The historical picture of this ratio is tabulated below. Despite the shakey start, the trend remains very pleasing.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Target |
EBIT/ Interest Expense |
1.15 |
1.22 |
1.44 |
1.52 |
1.65 |
1.79 |
>1.2 |
SNOOPY
BC3/ Underlying Gearing Ratio FY2017
Quote:
Originally Posted by
Snoopy
The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the recivables that are loaned ultimately sit.
According to the full year (FY2016) statement of financial position the debt excluding borrowings is:
$42.099m + $6.754m = $48.853m (1)
-----
To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:
$3,571.181m - ($3,113.957m +$8.384mm + $236.435m) = $188.405m (2)
We are then asked to remove the intangible assets from the equation as well:
$188.405m - $57.755m = $130.650m
----
Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities:
$48.853m/$130.650m= 37.4% < 90%
Result: PASS TEST
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Target |
Underlying Gearing Ratio |
20.2% |
14.7% |
40.5% |
58.4% |
37.4% |
< 90% |
The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the receivables that are loaned ultimately sit.
According to the full year (FY2017) statement of financial position the debt excluding borrowings is:
$25.479m + $9.856m = $35.335m (1)
-----
To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:
$4.034.671m - ($3,545.897m +$4.909m + $318.698m) = $165.167m (2)
We are then asked to remove the intangible assets from the equation as well:
$165.167m - $71.237m = $93.930m
----
Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities:
$35.335m/$93.930m= 37.6% < 90%
Result: PASS TEST
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Target |
Underlying Gearing Ratio |
20.2% |
14.7% |
40.5% |
58.4% |
37.4% |
37.6% |
< 90% |
SNOOPY
'Fit for Purpose' discussion EOFY2017
I have spat out quite a few numbers over the last few days. Now I am going to try and 'bring it all together' with no numbers.
No one wants to invest in a financial institution that isn't sound. The Reserve Bank of New Zealand set their own standards that any financial institution operating in New Zealand must have to keep to. In particular the amount of equity that must be held 'on the books' to stand behind the loan portfolio is specified. However, as an investor, I do not consider the reserve bank capital adequacy requirements for second tier financial institutions to be good enough. To me a much more worthwhile standard is what a top tier bank would require to loan to a second tier finance institution (i.e. a lending organization with 'skin in the game'). The top tier banks don't widely publicise what this figure might be. Suffice to say it is well above reserve bank minimum requirements though.
Irrespective of all this, investors can see that Heartland management hold their own Total Tier Capital/ Loan Book relatively steady, and well above reserve bank minimum requirements.
Not all loans are equally profitable. One measure of 'underlying loan profitability' is to compare the institutions cash incomings with interest payment outgoings. If there wasn't a decent amount of net positive cash headroom between these two cash streams, then the profitability of the whole operation would come into question, no matter how adequate the capital base of the company appears to be at any snapshot in time.
The next risk for the unsuspecting investor is the 'house of cards' finance company. This is something that appears at face value to have sufficient capital on hand and has a good profit margin. But much of the underlying source of funds has come from a third source, like company debenture holders. If the debenture holders timing for return of their cash does not match the cash repayment profile of the loans those debentures support then the financial institution could run out of cash. A innate financial strength independent of the loan book is needed to minimise this possibility.
Finally the 'equity ratio' is normally closely related to measuring the robustness of the loan book. But it encompasses all other borrowing arrangements, that contribute to the capital structure of the financial group.
To summarize, in my assessment, the fundamental underlying strength of Heartland has never been sounder, to the extent that I could even see myself on the share register at some point in the future (!). My stumbling point right now remains price. Where the share trades on the market today, I judge it to be at the upper end of full valuation. Granted it is probably no more overvalued than half the shares on the NZX main index. But I have never done well by buying overvalued assets, and truth be told I am not stocking up on those other NZX main index companies either.
SNOOPY