Do the accounts tell a consistent story? (background)
Quote:
Originally Posted by
Snoopy
A bank will always have some loans that cause real concern. Indeed the impairment provisions in the accounts are there to allow for just such a contingency. But sometimes these accounting contingencies are not enough. Sure there are the annual adjustments to impairment to allow an annual 'stock take' of risk. But these do not cover every possible loan problem. This is why I have concluded that further risk assessment is warranted.
Here is the information behind today's Heartland 'Question of the day'.
Date |
'Stressed' Loans on the books (X) |
Net Financial Receivables (Impairments deducted) (Y) |
(X)/(Y) |
Impaired Asset Expense (V) |
Write Off (W) |
Gross Financial Receivables (Z) |
(V)/(Z) |
(W)/(Z) |
EOHY2012 |
$87.728m |
$2,075.211m |
4.23% |
$1.854m |
$12.138m+$1.685m |
$2,104.591m |
0.18%* |
1.32%* |
EOFY2012 |
$90.489m |
$2,078.276m |
4.35% |
$3.788m |
$14.636m+$3.180m |
$2,105.702m |
0.18% |
0.85% |
EOHY2013 |
$80.383m |
$2,044.793m |
3.93% |
$5.254m |
$4.079m+$0.745m |
$2,072.270m |
0.50%* |
0.46%* |
EOFY2013 |
$48.975m |
$2,010.393m |
2.43% |
$17.313m |
$6.679m+$1.981m |
$2,060.867m |
0.84% |
0.42% |
EOHY2014 |
$42.498m |
$1,905.850m |
2.23% |
$3.325m |
$17.523m+$1.523m |
$1,940.064m |
0.34%* |
1.96%* |
EOFY2014 |
$41.354m |
$2,566.039m |
1.59% |
$2.570m |
$35.258m+$3.260m |
$2,631.754m |
0.03% |
1.46% |
EOHY2015 |
$33.469m |
$2,722.433m |
1.23% |
$5.102m |
$0.423m+$1.003m |
$2,749.232m |
0.38%* |
0.10%* |
EOFY2015 |
$32.824m |
$2,862.070m |
1.15% |
$7.003m |
$1.555m+$1.910m |
$2,893.724m |
0.24% |
0.12% |
EOHY2016 |
$29.147m |
$2,928.601m |
1.00% |
$5.610m |
$11.086m+$3.186m |
$2,951.075m |
0.38%* |
0.96%* |
{Note * ratios are annualised because they relate to impairments and write offs over a six month period only}
First a couple of definitions based on how Heartland present their books.
An [ADD]fully[/ADD]impaired loan is something that in the judgement of Heartland has zero balance sheet value. It was 'written off' during the period covered by the accounts.
Heartland in their breakdown of the 'Asset Quality of Financial Receivables' list the following three mutually exclusive problem loan categories.
a/ Loans at least 90 days past due.
b/ Loans individually impaired.
c/ Restructured assets.
[REMOVE]I find this slightly confusing. But[/REMOVE] the 'loans individually impaired' does not mean that those loans are written off [REMOVE], despite them being listed as impaired[/REMOVE]. If I interpret the accounts correctly, it means that these loans are partially written off, and accounted for in the 'Provision for Impairment' (a separate listing category, d/).
My definition of a 'stressed loan' total can be calculated as follows:
'Stressed Loan Total' = (a)+(b)+(c)-(d)
The column (W) lists the actual dollar amount in bad debts written off over that period.
SNOOPY
Do the accounts tell a consistent story? (discussion)
Quote:
Originally Posted by
Snoopy
Here is the information behind today's Heartland 'Question of the day'.
<snip>
The ratio of:
'Stressed Loans' / ' Size of Net Loan Book'
presents a very favourable picture. Investors can see that the 'stressed loans' in dollar terms are steadily reducing as the total net loan book size is increasing. Put simply four years ago evey hundred dollars of loan on the books was associted with just over $4 of 'stressed debt'. Today every hundred dollars of loan on the books was associated with just $1 of 'stressed debt'. It is a wonderful story. And 'the fans' would say it is entirely due to management taking hold of what was a 'rag tag' of lending institutions and blending them together into the slick Heartland operation we see today. The smooth progression looks almost too good to be true, with a seemless unbroken descent towards loan portfolio perfection. But sometimes when things look too good to be true, that is because they are!
Contrast this trend to Heartland's actual debt write off record, normalised in the last column. This last column is not 'spinnable' by management. When a debt actually goes bad, the payments stop coming in and the underlying asset is sold for recovery purposes, there can be no doubt that that asset is bad.
The 'impaired asset expense' is actually quite lumpy. The biggest lump was during the period 2HY2013. That $17m written down was connected with the problem property portfolio. Take out that 'outlier', and the latest three half yearly write downs are high in historical terms. Not high enough to be a problem: Writing off 20% of a $30m stressed loan book is not going to cripple a company like Heartland. But the divergence between the trends of the X/Y and V/Z ratios is stark.
OK, I'm coming out with it. I think this evidence here that the 'Stressed Loans' picture is being massaged for the benefit of making management look good. A further hint of this is the much higher percentage of stresssed loan provisions on the books of UDC, a comparable lender. I don't think this is a problem for Heartland now. But I am wondering how an ever lower level of stressed loan provisions, in absolute and relative terms, can be justified when the actual loan 'impaired asset expenses' at Heartland follow no such trend!
SNOOPY