Updating these risk calculations based on the last half year reporting date, using figures found here.
http://shareholders.heartland.co.nz/...ment-dec15.pdf
Our test requirement is:
Highest single new customer group exposure (as a percentage of shareholder funds) <10%
Regional Risk
From reference Note 12b, the greatest regional area of credit risk in dollar terms is Auckland, with $779.242m worth of assets. This represents:
$779.242m/ $3,237.047m = 24% of all loans
This is two percentage point reduction on FY2014. Still high. But I don’t rate that concentration of loans in Auckland as being an issue. Particularly so when ‘Auckland’ is such a varied catch all group.
Industry Group Risk
From reference Note 12c, the greatest 'business group' risk in dollar terms is Agriculture, with $570.735m worth of assets. This represents:
$570.735m/ $3,237.047m = 18% of all loans
This is slightly up on FY2015, when agriculture was
$537.286m/ $3,234.025m = 17% of all loans
These figures are quite high and continue trending in the wrong direction for HY2016. Given that Heartland is nominally a specialist agricultural lender I wouldn't be too concerned. But if agricultural loans go above 20% of the total (or dairy representing about half the agricultural loans above 10%), then I would sound an alarm bell. This situation will need careful watching when the FY2016 result details are released IMO.
Now a word on
Asset Loan Quality.
In the half year result, ther is no breakdown of the 'judgement loan' category of lending. Judgement loans consist of business an rural lending, the latter in particular of interest in this climate of dairy industry turmoil. This means that accounting provisions on dairy loans are largely hidden in these half year accounts.
In the half year presentation p14, Rural impairments are up $0.3m to $0.4m, "which remains very low." Total impairments across all loan categories are now $5.6m. I wonder how realistic that rural sector provision is given a very recent Fronterra milk solid payout forecast of $4.20? I would be happier if the rural provisioning at Heartland was higher! But all will be revealed when the greater disclosure on these judgement loans is released at the full year reporting date.
When these loans appear on the balance sheet, they are netted off against provisions for impaired assets already made. The provision for collectively impaired assets is now $12.029m, up from $10.201m at full year balance date. This has risen largely because new provisions have exceeded actual write offs over the last six months.
The $5.599m ‘fair value adjustment for present value of future losses’ in HY2016, is slightly reduced compared to the $6.242m for all of FY2015. This provision relates to the Home Equity Release Loans acquired in FY2014. I believe this provision is a requirement of accounting standards and in the past has overestimated actual losses. So is this an indicator of HBL writing net less home equity release business going forwards? IOW their home equity release portfolio is unwinding as it shrinks, in real terms? I note that the interim presentation p19 states "steady increase in new business" but "high repayent levels".