A tale of "X to Y" verses "W to Z"
Quote:
Originally Posted by
Snoopy
Lot's of numbers here. So what does it all mean?
Our second comparison is between two buckets that have little directly in common. "Stressed Loans" is one of those statistics that I have made up. Making up a statistic can be useful. Because if I am measuring something that management don't measure, it is very unlikely that management will be trying to manipulate it.
"Stressed loans" are a wider collection of problem loans that specifically exclude the impairment provision. All the actual "write offs" come out of the impairment provision. So there is no particular reason for a "stressed loan" measure should correlate with a "write off" measure in any particular period.
Longer term, you might expect that impaired loans arise out of stressed loans. So you might expect some correlation in the "normalised" trend X/Y vs W/Z.
Now X/Y shows a beautifully monotonic reducing proportion, down to a mere 1% at the latest reporting period. The trend for W/Z is less clear, as might be expected from the more highly expected volatility. W/Z numbers tend to be less than X/Y values. That is also expected, because you wouldn't expect all the stressed loans to turn into write off amounts. Many of those stressed loans would eventually recover or at least be eased off the books with no loss for Heartland.
With X/Y representing 'Normalised Stressed Loan Percentage" and W/Z representing "Normalised Write Off Percentage", a table compiled from the above table might make things clearer.
Date |
Normalised Stressed Loan Percentage (J) |
Normalised Write Off Loan Percentage (K) |
(K)/(J) |
EOHY2012 |
4.23% |
0.66% |
16% |
EO2HY2012 |
4.35% |
0.19% |
4.4% |
EOHY2013 |
3.93% |
0.23% |
5.9% |
EO2HY2013 |
2.43% |
0.43% |
18% |
EOHY2014 |
2.23% |
0.98% |
44% |
EO2HY2014 |
1.59% |
0.74% |
47% |
EOHY2015 |
1.23% |
0.05% |
4% |
EO2HY2015 |
1.15% |
0.12% |
10% |
EOHY2016 |
1.00% |
0.48% |
48% |
The table above shows that in general, the actual half yearly right offs (a yes/no decision by management) is looking higher as a proportion of stressed loans (a management qualitative decision). If there were more stressed loans then this broad trend would not be apparent. So even looking outside of the impaired loan box, it seems that the stressed loans are unexpectedly lower than they should be. One conclusion from this is that there is a culture of systematic underestimation of risk that is progressing right through the Heartland loan book. Is this an imminent problem for Heartland? No. But once again the comparative trend implies that declared profits on average are higher than they should be.
SNOOPY