BC1/ Tier 1 and Tier 2 Lending Ratios FY2019
Quote:
Originally Posted by
Snoopy
This is an assessment of Heartland's total liabilities/borrowings (including the accumulated funds looked after for Mum and Dad's known as term deposits) in relation to Heartland's own underlying assets.
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 |
$664.160m |
, PLUS |
Tier 2 capital as apportioned (NZD1 = AUD0.9138) |
$15.758m |
EQUALS |
Total Tier Capital |
$679.918m |
Total Heartland liabilities at balance date were $3,831.766m
So: Equity / Total Liabilities
= $679.918m / $3,831.766m = 17.7% > 17%
Result: PASS TEST
I have been a little generous compared to what the reserve bank might do, in including 'intangible assets' as 'underlying equity'. The Reserve bank effectively punishes a financial institution for spending on having up to date computer software (software is an intangible asset). Yet 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 EOFY2018, than at the end of the previous three 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 former Reserve Bank 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 |
FY2018 |
Target |
Total Tier Capital/ Loan Book |
19.3% |
17.7% |
17.6% |
16.6% |
16.4% |
16.9% |
17.7% |
>17% |
Time to update the banking covenants for Heartland.
In a change of methodology from last year, I am going to consider 'Heartland Group Holdings' and not just 'Heartland Bank'. This is because the entity that shareholders can buy into is no longer just 'Heartland Bank'. We shareholders can only buy into 'Heartland Group Holdings' so it makes sense to only analyse that company.
What follows is an assessment of Heartland's total liabilities/borrowings (including the accumulated funds looked after for Mum and Dad's known as term deposits) in relation to Heartland's own underlying assets.
In March 2019, Heartland Australia had an unsubordinated capital note issue of $A50m. If this was still part of Heartland Bank, approximately 72% of the face value of the Notes would 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 Bank' Equity at balance date was |
$603.390m |
plus Total 'Heartland Australia' Equity at balance date was |
$72.278m |
plus Tier 2 capital as apportioned (NZD1 = AUD0.9566) |
$37.633m |
equals Total Tier Capital |
$713.301m |
Total Heartland liabilities at balance date were $4,250.736m
So: Equity / Total Liabilities
= $713.301m / $4,250.736m = 16.8% = 17% (with rounding)
Result: PASS TEST
I have been a little generous compared to what the Reserve Bank might do, in including 'intangible assets' as 'underlying equity'. The Reserve Bank effectively punishes a financial institution for spending on having up to date computer software (software is an intangible asset). Yet I see up to date software as a really good idea in keeping track of troublesome loans. The multi year picture is fairly steady with small deviations either side of my 17% equity ratio target.
{Note that I have changed my equity target for Heartland to the 17% equity (down from my 20% target) that Heartland had when former Reserve Bank 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 |
FY2018 |
FY2019 |
Target |
Total Tier Capital/ Loan Book |
19.3% |
17.7% |
17.6% |
16.6% |
16.4% |
16.9% |
17.7% |
16.8% |
>17% |
SNOOPY
BC2/ EBIT to Interest Expense ratio FY2019
Quote:
Originally Posted by
Snoopy
This is an assessment method of looking at the underlying earning power of Heartland, compared to the interest bill they face while making their earnings. Updating for the full year result FY2018:
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) = $309.284m - $80.433m= $228.851m
Interest expense is listed as $125.483m.
So (EBIT)/(Interest Expense)= ($228.851m)/($125.483m)= 1.82 > 1.20
Result: PASS TEST
The historical picture of this ratio is tabulated below. It looks to be getting better and better.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
Target |
EBIT/ Interest Expense |
1.15 |
1.22 |
1.44 |
1.52 |
1.65 |
1.79 |
1.82 |
>1.2 |
This is an assessment method of looking at the underlying earning power of Heartland Group Holdings, compared to the interest bill they face while making their earnings. Updating for the full year result FY2019:
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) = $334.330m - $85.589m= $248.741m
Interest expense is listed as $136.747m.
So (EBIT)/(Interest Expense)= ($248.741m)/($136.747m)= 1.82 > 1.20
Result: PASS TEST
The historical picture of this ratio is tabulated below. It looks to be getting better and better.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
FY2019 |
Target |
EBIT/ Interest Expense |
1.15 |
1.22 |
1.44 |
1.52 |
1.65 |
1.79 |
1.82 |
1.82 |
>1.2 |
SNOOPY
BC3/ Underlying Gearing Ratio FY2019
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 receivables that are loaned ultimately sit.
According to the full year (FY2018) statement of financial position the debt excluding borrowings is:
$24.249m + $11.459m = $35.708m (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:
$4,495.926m - ($3,984.941m +$9.196m + $340.546m) = $160.943m
We are then asked to remove the intangible assets from the equation as well:
$160.943m - $74.401m = $90.542m (2)
----
Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:
$35.708m/$90.542m= 39.4% < 90%
Result: PASS TEST
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
Target |
Underlying Gearing Ratio |
20.2% |
14.7% |
40.5% |
58.4% |
37.4% |
37.6% |
39.4% |
< 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 (FY2019) statement of financial position the debt excluding borrowings is:
$22.498m + $7.532m + $10.372m = $40.402m (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:
$4,926.404m - ($3,029.231m +$1,318.819m + $11.132m + $354.928m) = $212.294m
We are then asked to remove the intangible assets from the equation as well:
$212.294m - $72.679m = $139.615m (2)
----
Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:
$40.402m/$139.615m= 28.9% < 90%
Result: PASS TEST
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
FY2019 |
Target |
Underlying Gearing Ratio |
20.2% |
14.7% |
40.5% |
58.4% |
37.4% |
37.6% |
39.4% |
28.9% |
< 90% |
SNOOPY
Derivative Financial Positions: Why?
Quote:
Originally Posted by
Snoopy
According to the full year (FY2019) statement of financial position the debt excluding borrowings is:
$22.498m + $7.532m + $10.372m = $40.402m (1)
The $10.372m figure I refer to above is a 'Derivative Financial Position'.
Something I look for in any set of annual accounts is when a change is presentation happens with no explanation. This year there is an entry for 'Derivative Financial Instruments' in both the asset and liability breakdown of the balance sheet. If you go back to the FY2018 account presentation these entries are not there, although they have been retrospectively written into the FY2018 accounts when the FY2018 balance sheet was restated for comparison purposes in the current year (FY2019).
'Derivative Financial Positions' have really jumped up in size too, and are now over ten times larger on the asset side and around five times larger on the liabilities side (FY2019 Balance Sheet vs FY2018 Balance Sheet). In the FY2019 accounts there is a comprehensive explanation of what these are under note 12. However there appears to be no information as to whether the corresponding numerical entries are 'Fair Value Hedges' or 'Cashflow Hedges'.
Why does this matter? Because when I calculated 'Banking Covenant 3', I feel that:
1/'cashflow hedges' are part of the 'interest rate cashflows' WHEREAS
2/ 'fair value hedges' are interim changes in capital valuations that should nevertheless all come out in the wash at the end of the life of the derivative.
This means that when I consider the capital position of the company I should probably consider type 2/ hedges but not type 1/ hedges. Or maybe my thinking is wrong on this? Can anyone offer some insight as to why these 'Derivative Financial Positions' have suddenly appeared on the balance sheet and what part of the Heartland business they relate to?
SNOOPY
Derivative Financial Positions part 2: Why?
Quote:
Originally Posted by
Snoopy
The $10.372m figure I refer to above is a 'Derivative Financial Position'.
Something I look for in any set of annual accounts is when a change is presentation happens with no explanation. This year there is an entry for 'Derivative Financial Instruments' in both the asset and liability breakdown of the balance sheet. If you go back to the FY2018 account presentation these entries are not there, although they have been retrospectively written into the FY2018 accounts when the FY2018 balance sheet was restated for comparison purposes in the current year (FY2019).
'Derivative Financial Positions' have really jumped up in size too, and are now over ten times larger on the asset side and around five times larger on the liabilities side (FY2019 Balance Sheet vs FY2018 Balance Sheet). In the FY2019 accounts there is a comprehensive explanation of what these are under note 12. However there appears to be no information as to whether the corresponding numerical entries are 'Fair Value Hedges' or 'Cashflow Hedges'.
To try and unravel my own mystery, I have just re-read note 12 on 'Derivative financial Instruments' in the HGH annual accounts.
At the bottom of the explanatory notes there is this key sentence.
"A fair value gain or loss associated with the effective portion of a derivative designated as a cash flow hedge is recognised initially in the hedging reserve. The ineffective portion of a fair gain or loss is recognised immediately in the Consolidated Statement of Comprehensive Income."
If we now go to the 'Statement of Comprehensive Income', the following entry appears under 'Other Comprehensive Income'.
Effective portion of change in the fair value of derivative financial instruments, net of income tax ($4.762m)
That should translate to a pre income tax figure of: ($4.762m)/(1-0.28) = ($6.614m)
From the previous explanatory quote, this $4.762m must be the ineffective portion of the cash flow hedge. But the total 'Derivative Financial Liability' is listed in the balance sheet valued at $10.372m (presumably after tax is paid?).
So by a process of elimination, the remaining 'Derivative Financial Liability' must be 'fair value asset related'.
This amounts to: $10.372m - $4.762m = $5.610m
Have I got that right?
SNOOPY