Liquidity Buffer Ratio HY2016 (Part 1)
Quote:
Originally Posted by
Snoopy
Time to update the Liquidity Buffer ratio, the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:
(Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%
FY2015 Loan Maturity (Financial Receivables) |
Expected |
Contracted |
C/E |
On Demand |
$37.012m |
$37.012m |
100% |
0-6 months |
$503.452m |
$664.557m |
132% |
6-12 months |
$341.392m |
$450.638m |
132% |
Quote:
My table of expected depositor behaviour for FY2015 follows:
FY2015 Deposit Maturity (Financial Liabilities) |
Expected |
Contracted |
E/C |
On Demand |
$22.450m |
$748.332m |
3.01% |
0-6 months |
$395.102m |
$1213.450m |
32.4% |
6-12 months |
$249.762m |
$686.159m |
36.4% |
This is the most imprtant calculation that most nvestors in finance companies never do. I have rechristened it the 'Meads Test'. The Meads Test is way to find out if dear old Colin says a profitable finance company is 'solid as', whether that company will run out of cash when it comes time to repay your debenture. "Liquidity Buffer Ratio" sounds a bit pompous, so I will adopt the term 'Meads Test' in the future, as I think most investors will relate to that term better.
We are looking at the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:
(Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%
Heartland provides a nice projection of forward cashflows in note 14 of IRFY2016. But these are contacted cashflows. In practice depositors roll over their Heartland debentures. And when customers repay a Heartland loan, they often take out another loan. So what we as investors need to concentrate on is the expected behaviour of those that take out loans from Heartland and those that loan money to Heartland. Expected behaviour is not written in stone. But we can make an educated guess at this by looking at what happened in prior periods where both 'contracated' behaviour and 'expected' behaviour was tabulated. "Adjustment factors" in the table below:
HY2016 Loan Maturity (Financial Receivables) |
Contracted |
CE Factor |
Expected |
On Demand |
$31.879m |
1.000 |
$31.879m |
0-6 months |
$618,779m |
1.32 |
$816.778m |
6-12 months |
$277.017m |
1.32 |
$345.662m |
HY2016 Deposit Maturity (Financial Liabilities) |
Contracted |
CE Factor |
Expected |
On Demand |
$728.056m |
0.0301 |
$21.914m |
0-6 months |
$1,360.508m |
0.324 |
$440.805m |
6-12 months |
$498.705m |
0.364 |
$181.529m |
Now I have generated the expected cashflow data over the ensuing twelve months, I can proceeed to make some 'Meads Test' calculations.
SNOOPY
Liquidity Buffer Ratio HY2016 (Part 2)
Quote:
Originally Posted by
Snoopy
HNZ LENDINGS vs HNZ DEBENTURES
Customers owe HNZ 'Finance Receivables' of $2,862,070,000. There is no breakdown in note 11 of AR2015 as to what loans are current or longer terms. However, if we look at note 20, we can
derive the
expected maturity profile of total finance receivables due over the next twelve months.
|
On Demand |
0-6 Months |
6-12 Months |
Total |
Expected Receivables Due |
$37.012m |
+ $877.215m |
+ $594.842m |
= $1,509.069m |
less Expected Deposits for Repayment |
$22.450m |
+ $395.102m |
+ $249.762m |
= $667.314m |
equals Net Expected Cash Into Business |
$14.562m |
$482.112m |
$345.080m |
$841.755m {B} |
If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity. That now is the case here.
HNZ LENDINGS vs HNZ DEBENTURES
Customers owe HNZ 'Finance Receivables' (Lendings) of $2,928,601,000. If we look at note 14 of IFR2016, we can derive the expected maturity profile of total finance receivables due over the next twelve months. (This is what I did in part 1 of this calculation.) Adding the totals for the ensuing twelve months gives:
|
On Demand |
0-6 Months |
6-12 Months |
Total |
Expected Receivables Due |
$31.879m |
+ $816.788m |
+ $365.662m |
= $1,214.329m |
less Expected Deposits for Repayment |
$21.914m |
+ $440.821m |
+ $181.893m |
= $644.628m |
equals Net Expected Cash Into Business |
$9.965m |
$375.967m |
$183.769m |
$569.701m {B} |
If more money is expected coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity and debenture holders being repaid. That is the case here: good news for debenture holders.
It is important to note that this calculation is based on the loan book position at balance date. New loans taken out since balance date are not included. Neither are brand new customer debentures invested with Heartland since balance date. So these figures are not a forecast of what will happen. But they are are forecast of what will happen if all customer loan and deposit activity ceased at last balance date. This means the figures are best suited for comparing with previous periods, rather than being forecasts of what will happen in their own right.
SNOOPY
Liquidity Buffer Ratio HY2016 (Part 3)
Quote:
Originally Posted by
Snoopy
Time to update the Liquidity Buffer ratio for FY2015, the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:
(Total Current Money to Draw On)/(Expected Current Net Loan Maturity Outstanding) > 10%
On the numerator of the equation, we have borrowings.
HNZ BORROWINGS
1/ Term deposits lodged with Heartland. |
$2,097.458m |
2/ Bank Borrowings |
$465.779m |
3/ Securitized Borrowings total |
$258.630m |
4/ Subordinated Bonds |
$3.378m |
Total Borrowings of (see note 13) |
$2,825.245m |
Note 13 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.
Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are, I believe, in relation to the recently acquired reverse mortgage portfolio. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. Heartland can’t rely on CBA Australia as a source of short-term funds.
The information given in note 13 on the securitized borrowing facilities is as follows:
-------
|
Total FY2015 |
Total FY2014 |
Facility Maturity Date FY2015 |
Securitized bank facilities total all in relation to the Heartland ABCP Trust 1 |
$350.000m |
$400.000m |
3rd February 2016 (*) |
less Current level of drawings against this facility |
$258.630m |
$228.623m |
equals Borrowing Headroom |
$91.370m {A} |
$171.377m |
(*) I do not expect any problem in rolling this facility over for another year.
--------
Expected Current Net loan Maturity Outstanding $841.755m {B}
If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity. That now is the case here.
Summing up:
(Total Current Money to Draw On)/(Net Current Loans Outstanding)
= {A} / {B}
= $91.370m / $841.755m
= 10.8% > 10%
=> Pass Short term liquidity test (reversing the result of my most likely incorrect first iteration)
|
FY2015 |
FY2014 |
Amount lent to Customers (Receivables) |
$2,862.070m (+9.7%) |
$2,607.393m |
Total Borrowings |
$2,825.245m (+11.9%) |
$2,524.460m |
Amount borrowed from Customers (Debentures and Deposits) |
$2,097.458m (+20.8%) |
$1,736.751m |
Securitized borrowing facilities have gone down by $50m ($400m to $350m) over the same annual comparative period. So Heartland have upped their current period risk profile by having a smaller declared available loan buffer to cover any mismatch between maturing borrowings and maturing receivables.
(Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%
In the numerator of the equation, we have borrowings.
HNZ BORROWINGS
1/ Term deposits lodged with Heartland. |
$2,174.553m |
2/ Bank Borrowings |
$377.605m |
3/ Securitized Borrowings total |
$258.819m |
4/ Subordinated Bonds |
$3.381m |
Total Borrowings of (see note 7, IRFY2016) |
$2,814.358m |
Note 7 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.
Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are in relation to the reverse mortgage portfolio. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. Additional borrowing capacity is available up until 30th June 2017, but only if certain scheduled repayments are met by the Heartland group. It follows that Heartland can’t rely on CBA Australia as a source of short-term funds.
The information given in note 7 on the securitized borrowing facilities is as follows:
-------
|
Total HY2016 |
Total FY2015 |
Facility Maturity Date HY2015 |
Securitized bank facilities total all in relation to the Heartland ABCP Trust 1 |
$350.000m |
$350.000m |
3rd August 2016 (*) |
less Current level of drawings against this facility |
$258.819m |
$258.630m |
equals Borrowing Headroom |
$91.181m {A} |
$91.370m |
(*) I do not expect any problem in rolling this facility over for another year.
-------
Summing up:
(Total Current Money to Draw On)/(Expected Current Net Loan Maturity Outstanding)
= {A}/{B (from post Liquidity Buffer Ratio HY2016 (Part 2) }
= $91.4m / $569.701m
= 16.0% > 10%
=> Pass Short term liquidity test
|
HY2016 |
FY2015 |
Amount lent to Customers (Receivables) |
$2,928.601m (+2.3%) |
$2,862.070m |
Total Borrowings |
$2,814.338m (-0.4%) |
$2,825.245m |
Amount borrowed from Customers (Debentures and Deposits) |
$2,174.533m (+3.7%) |
$2,097.458m |
Securitized borrowing facilities are nearly constant over the six month comparative period. External Bank borrowings have reduced by $88.174m. Heartland have reduced their current period risk profile by:
1/ Having a potentially much smaller mismatch between borrowings and receivables.
2/ Sourcing more borrowed funds from Heartland bank customers, replacing borrowings from third party external banks.
SNOOPY
Left speechless by the enormity of my memory lapse
Quote:
Originally Posted by
Paper Tiger
...Last figures I can recall from HBL was sixty something percent, but not going to bother with finding the precise figure or when that was....
Was looking for something else when I spotted this from the commentary accompanying the last half year results:
Quote:
Given continued market interest in the dairy sector in New Zealand, Heartland advises that its direct exposure to dairy farmers is 8% of its total lending book as at 31 December 2015. The average loan to value ratio (LVR) for Heartland’s dairy exposures is 59%. However, it is important to note that LVRs are only one of the indicators of loan quality. Heartland remains cautious of market conditions and continues to monitor the dairy sector with close attention. Dairy customers are being supported through this challenging period.
So even I am wrong occasionally :scared:.
Best Wishes
Paper Tiger
A maths trick to shrink bad debts (Part 1)
Quote:
Originally Posted by
Jantar
Ooops. True .... 20% is borrowers equity for 80% LVR. However the 59% figure you found makes HBL's position even better.
I owe Jantar a more calculated answer than I gave him. So let's say the current LVR ratio is 60% (round figures) and update Jantar's previous calculation based on this. I will use the same $260m of dairy loans on the books as before.
A 60% LVR meas that the market value of assets for which the loan was taken out at the time of loan application was:
$260m / 0.60 = $433m
Or on a smaller normalised (loans broken into $1m slice) scale:
$1m / 0.60 = $1.67m
Now lets assume these assets are dairy cows and their value has fallen 45% (see my recently quoted Stuff article) from when the loan was taken out.
This means the value of $1m cows when the loan was taken out is now:
$1.67m x (1-0.45) = $0.9185m
So if the loan is called in and the cows sold the bank will lose:
$1m - $0.9185m = $81,500 for each million loaned.
Now, lets assume that 1/3 of that $260m dairy loan total was for cows and the rest was for land and other stuff.
$260m x 1/3 = $87m
So the total Heartland loss on dairy cows would be.
$87m x 0.0815 = $7m
This is not nice, but a far cry from the $52m that I originally claimed. This is positive proof that I was scaremongering - right?
SNOOPY
A maths trick to shrink bad debts (Part 2)
Quote:
Originally Posted by
Snoopy
So the total Heartland loss on dairy cows would be.
$87m x 0.0815 = $7m
This is not nice, but a far cry from the $52m that I originally claimed. This is positive proof that I was scaremongering - right?
Now lets take the same input information and formulate this problem in a slightly different way. The $260m in dairy loans remain, but are split like this.
1/$86.7m has been lent on cows with an 80% LVR.
2/$86.7m has been lent on land with a 60% LVR
3/$86.7m has been soent on bridging loans to well capitalised farmers with a 40% LVR.
So the loan money has been split between three broad asset classes which added together average out as a 60% LVR over the whole loan book, exactly the same overall LVR asw in Part 1. But what happens to our hapless sharemilker this time?
In part 2, each $1m in loan money represents:
$1m / 0.8 = $1.25m of dairy cows
Now lets assume, as in Part 1, the dairy cows have fallen in value 45% (see my recently quoted Stuff article) from when the loan was taken out.
This means the value of $1m cows when the loan was taken out is now:
$1.25m x (1-0.45) = $0.6875m
So if the loan is called in and the cows sold the bank will lose:
$1m - $0.6875m = $312,500 for each million loaned.
So the total Heartland loss on dairy cows would be.
$86.7m x 0.3125 = $27m
Note that this loss is nearly four times greater than that calculated in Part 1 for what is ostensibly the same loan book! Granted it is still far short of the $52m I claimed. But what about the downstream effects?
What about the crop farmer down the road who bought a combine harvester on tick to harvest silage for his dairy farmer brother down the road? The dairy farmer is no longer buying so our crop farmer, another Heartland Argi customer, has gone bust as well. I make this point becasue it shows how an apparent $27m could balloon much further for Heartland. Some might say a multiplier factor of 2 , bringing the money lost to $54m might be conservative.
SNOOPY
Reworking the number to show "No Loss"
Quote:
Originally Posted by
percy
From Heartland's presentation :"We don't expect there would be any impact on Heartland's capital."
So any loss of interest would go through profit and loss a/c.
If you prefer the 'maths trick' way of looking at the results (I don't but I will go with it to make my point), it is easy to rework with just one small change to tie into the Heartland presentation.
------
A 60% LVR meas that the market value of assets for which the loan was taken out at the time of loan application was:
$260m / 0.60 = $433m
Or on a smaller normalised (loans broken into $1m slice) scale:
$1m / 0.60 = $1.67m
Now lets assume these assets are dairy cows and their value has fallen 40% (see my recently quoted Stuff article) from when the loan was taken out.
This means the value of $1m cows when the loan was taken out is now:
$1.67m x (1-0.4) = $1.00m
So if the loan is called in and the cows sold the bank will lose:
$1m - $1.0m = $0 for each million loaned.
Now, lets assume that 1/3 of that $260m dairy loan total was for cows and the rest was for land and other stuff.
$260m x 1/3 = $87m
So the total Heartland loss on dairy cows (capital) would be.
$87m x 0 = $0m
-----
The change I have made is that I have assumed the cows were bought at $2,000 a head, not $2,200. So the cow price has fallen 40%, not 45%. That small change is enough to arrest any losses by Heartland.
I am showing you this because I want you see that these rural loans are at a very delicate stage. As it stands now, if Heartland were to wind up all their livestock loans, the sharemilkers would be left jobless and penniless. But Heartland and their shareholders would be OK (on paper). In practice, Heartland management would never take such a hard nosed approach. It would destroy their reputation as a 'friendly lender'. And any chance of riding the next rural profitability wave would be gone.
But we are at the stage where even a small decrease in cow value (5%) will suddenly cause a many million dollar writedown in Heartland group equity ($7m). Everything is finely balanced. I am not saying their current presentation is wrong. But very small changes in the market, could make their forward forecast thoughts out of date in a matter of days.
SNOOPY
Bad Debts HY2016 (period ending 31-12-2015)
Quote:
Originally Posted by
Snoopy
In the table under note 6 of AR2015, the 'impaired asset expense' has increased to $12.105m (FY2015, ended 30th June 2014) up from from $5.895m in the corresponding prior period (FY2014). The HY2015 impaired asset expense was $5.102m. By simple subtraction the bad debt expense for the period 1st January 2015 to 30th June 2015 (2HY2015) was $12.105m -$5.102m = $7.003m.
Information of the 'stressed - but not written off- loans' may be found in 'Financial Receivables', Note 11 from AR2015
Bad debts are outlined as follows:
At least 90 days past due $34.975m
Individually impaired $25.622m
Restructured assets $3.881m
Allowance for impairment ($25.412)m
PV of Future Losses Adjustment ($6.242)m
Total Stressed Loans (impairments deducted) $32.824m
Gross Financial Receivables $2,893.724m
Total Finance Receivables $2,862.070m
Stressed Loan Percentage (impairment removed)= $32.824 m/ $2,862.070m = 1.15%
In the table under note 4 of IRHY2016, the 'impaired asset expense' has increased to $5.610m (HY2016, ended 31st Dec 2015) up from from $5.102m in the corresponding prior period (HY2015). By simple subtraction the bad debt expense for the immediate period 1st January 2015 to 30th June 2015 (2HY2015) was $12.105m -$5.102m = $7.003m.
Information of the 'stressed - but not written off- loans' may be found in 'Financial Receivables', Note 6 from IRHY2016.
Bad debts are outlined as follows:
At least 90 days past due $21.207m
Individually impaired $27.179m
Restructured assets $3.235m
Allowance for impairment ($16.875)m
PV of Future Losses Adjustment ($5.599)m
Total Stressed Loans (impairments deducted) $29.147m
Gross Financial Receivables $2,951.075m
Total Finance Receivables $2,928.621m
Stressed Loan Percentage (impairment removed)= $29.147 m/ $2,928,601m = 1.00%
SNOOPY
A Conceptual Answer to the Finance Company Comparison Question
Quote:
Originally Posted by
winner69
I wonder how Heartlands crop of hair compares to other finance companies. seeing they are really one in drag
This is a great question. The problem is that all finance companies, and I include in that definition finance companies wearing bank suits, are a bit different. An obvious comparison is Heartland vs UDC. But as a potential investor, you can only buy shares in UDC through buying the ultimate ANZ parent in Australia which is a very different beast.
Another obvious comparison is HBL vs Turners Group. The problem there is that TNR now contains the old TUA auctions business which is very different to anything inside HBL. So this is why I have spent some time on the TNR thread, pulling the 'finance' part out of TNR using the segmented information provided in the TNR report. 'TNR Finance' provides a better measuring stick.
When I do a comparison between companies, I like to compare common 'stuff'. With finance companies I consider the basic building blocks of 'stuff' to be 'loans'. The underlying 'resource' that allows a finance company to operate I consider to be EBIT. The more EBIT a finance company can make, relative to the size of their loan book, the more 'naturally profitable' they are. So I consider the driving engine of any finance company to be:
EBIT/ (average loan book size)
Unfortunately in the real world both 'I' and 'T' need to be paid. So the amount of underlying parent bank debt can reduce the strength of this earnings engine.
Now if all loans were equal, then this is the only statistic any analyst would need. But as we know all loans are not equal. 'Haircuts' need to be taken from time to time. Indeed any finance company that does not build 'haircuts' into their normal business model is kidding themselves.
I consider a useful measure of 'possible haircutting' to be:
'impaired loans' / 'shareholder equity'
This is becasue it is ultimately we shareholders who have to pay for these 'haircuts'. And the greater the bad loans in relation to our shareholder equity, the more at risk we shareholders are.
So there we have in essence my way of answering Winners question.
1/ Look at the Earnings Capacity from the loan book on a 'normalised' basis.
2/ Balance this against the likelihood of shareholders having to take haircuts on bad loans.
Putting it all into practice is another step. I wish things could be simpler. But unfortunately, this is as simple as things are liable to get :-(
SNOOPY
When is a Bank not a Bank - When it IS a Bank
The history of any company, its antecedents and major events, is important to the extent that it helps one to understand the present situation of the company, the journey so far and how this may affect the likely future performance.
An obvious for instance of this is how the corporate memory of the Ansett Collapse has influenced Air New Zealand to make the recent poor decisions that are the current Virgin Australia Disaster.
Looking forward the current situation with the dairy industry will obviously have a greater effect on the short & possibly medium term profitability of Heartland Bank the longer it lasts, as will the decisions and impairments that are made in other areas of lending.
However the Bank is well capitalised, the management are well aware of the situation, being open and communicating their updated assessments as the process unfolds.
It is probable that it will survive. :mellow:
I will reiterate the important of remembering that dairy is just one string in the Banks bow and at different times different sectors have their ups and down.
This is what being a Bank is all about, spreading and managing risk for the benefit of their shareholders and creditors.
Best Wishes
Paper Tiger
PS I presume you have all been 4% for a one year term-deposit as well?
Offered is a good word too
Quote:
Originally Posted by
Paper Tiger
...
PS I presume you have all seen 4% for a one year term-deposit as well?
I have trouble with the difference between 'b' and 's' - they are on the same keyboard.
Best Wishes
Paper Tiger
Somehow I just knew I would pick the wrong word...
Quote:
Originally Posted by
Paper Tiger
I have trouble with the difference between 'b' and 's' - they are on the same keyboard.
Best Wishes
Paper Tiger
I can understand your difficulty - but fortunately most people know what is meant if you place those two letters together.
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
Just finished reading a P G Wodehouse on the plane back.
Quote:
Originally Posted by
Snoopy
I have decided to avoid a pointless argument and accept macduffys point (equivalent to your implied point) and change what I have written regarding 'impairment' in my post "Do the accounts tell a consistent story? (background)" .
Of course this makes absolutely no difference to the overall point I was making in the post, and all conclusions and implications remain. Since I know PT:
1/ that you are smart enough to know this. AND
2/ you have made no argument aginst the points I brought up in discussion part of the post,
I take this to mean you accept the point I was making.
SNOOPY
I say Snoopy old chap, you rather seem to have got hold of the wrong end of the stick completely!
What I was getting at, and I thought I was being dashed polite with my phraseology so to speak, anyway, what I was getting at is that those opening two chapters of your "Do the accounts tell a consistent story" novel, well the plot is a rather off-course right from the get-go.
If I was you, and obviously I am not, after all there can only be one Snoopy much the same as there is only one Paper Tiger Esquire, feline of leisure and connoisseur of accounts, but just to assume for a moment that I had been running the old pinkies over the typewriter and come up with something running off the track even before getting to the first corner like that, well, I would put the whole thing in a sack with a large rock and heaved the whole bally thing into the first spot of deep water I could find.
The pond in the woods would be best, if the head gardener got wind of a manuscript chucking session at the lily pond there would be an early rose pruning session, can't understand for a moment why Lady Constance keeps the man, absolutely no sense of humour when it comes to goings on in the formal gardens.
After indulging in that fine bit of sack throwing, enough exercise for a day for anyone, then I would find some nice spot where nature was doing its thing, you know the leaves rustling in the breeze while the birds sit on the boughs merrily trilling away, do a bit of the old research on back issues of Heartland form books as well as one of those investment encyclopedia tomes to help get the grey matter round the tricky parts and I wager you sixpence that I would be off and running like the favourite in the three thirty with a much more realistic little treatise.
Guaranteed best seller, One that any publisher would be so keen to take on that they would advance the train fare home.
Pretty sure I just heard the dinner gong and here I am still in my second best outdoor tweeds, I must dash off and swap them for the evening penguin suit, tootle-pip and
Best Wishes
Paper Tiger
PS Lady Constance sends her regards and wonders if you are coming up to Blandings this Summer?
PPS Do drop us a telegram either way.