How Depositors and Loan Customers are 'expected' to behave: FY2016 update
The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.
The following information for FY2016 is derived from note 20 in AR2016 on 'Liquidity Risk'.
1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is dervied from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.
Loan Maturity |
Expected Behaviour Multiple |
FY2014 Financial Receivables Maturity: Contracted/ Expected |
FY2015 Financial Receivables Maturity: Contracted/ Expected |
FY2016 Financial Receivables Maturity: Contracted/ Expected |
On Demand |
100% |
$50.254m / $50.254m |
$37.012m / $37.012m |
$84.154m / $84.154m |
0-6 months |
132% |
$477.190m / $629.445m |
$664.557m / $877.215m |
$743.389m / $961.274m |
6-12 months |
132% |
$367.564m / $483.727m |
$450.638m / $594.842m |
$484.420m / $639.962m |
Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.
Deposit Maturity |
Expected Behaviour Multiple |
FY2014 Financial Liabilities Maturity: Contracted/ Expected |
FY2015 Financial Liabilities Maturity: Contracted/ Expected |
FY2016 Financial Liabilities Maturity: Contracted/ Expected |
On Demand |
3.01% |
$629.125m / $18.922m |
$748.332m / $22.450m |
$718.587m / $21.630m |
0-6 months |
32.4% |
$748.129m / $242.431m |
$1,213.450m / $395.102m |
$892.944m / $289.314m |
6-12 months |
36.4% |
$538.050m / $195.682m |
$686.159m / $249.762m |
$837.844m / $304.975m |
Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.
If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.
Deposit Maturity |
FY2014: 'Expected' combined Loan and Deposit Cashflow |
FY2015: 'Expected' combined Loan and Deposit Cashflow |
FY2016: 'Expected' combined Loan and Deposit Cashflow |
On Demand |
$31.332m |
$14.562m |
$62.524m |
0-6 months |
$387.014m |
$482.113m |
$691.960m |
6-12 months |
$288.045m |
$345.080m |
$334.987m |
Total |
$706.391m |
$841.755m |
$1,089.471m |
I should note here that 'expected' behaviour from future and existing depositors can be modified. Heartland could put a special offer into the market to attract more deposit money if required, for example. Nevertheless even without this I see little cause for concern if customer behaviour pans out as expected.
From an historical perspective, the 'On Demand' net position outlook for FY2015 looked a little weak. But there has been a lot of promotion in the market regarding Heartland's 'on call' rates over the last year. So it is fair to assume that any potential problem in this area has been well and truly fixed.
SNOOPY
Buffett Point 2/ FY2016: Sustainable 'eps' trend
The trend below is required to track higher for five years with one setback allowed.
Financial Year |
Net Sustainable Profit (A) |
Shares on Issue EOFY (B) |
eps (A)/(B) |
2012 |
$26.606m + 0.72($5.642m + $3.900m) =$30.476m |
388.704m |
7.84c |
2013 |
$6.912m + 0.72($22.527m+ $5.101m)= $26.804m |
388.704m |
6.90c |
2014 |
$36.039m |
463.266m |
7.78c |
2015 |
$48.163m - 0.72(0.588m) = $47.743m |
469.980m |
10.2c |
2016 |
$54.164m - 0.72(1.136m) = $53.346m |
476.469m |
11.2c |
Result: Pass Test
One necessary hurdle has been lept over in a quest to see if Heartland is a suitable candidate to apply the Buffet growth model, as espoused in "The Buffettology Workbook" by daughter in law Mary Buffett.
SNOOPY
Buffett Point 3/ FY2016: Return on Equity history
The table is required to have an ROE figure of >15% for five years in a row, with one setback allowed.
Financial Year |
Net Sustainable Profit (A) |
Shareholder Equity EOFY (B) |
ROE (A)/(B) |
2012 |
$26.606m + 0.72($5.642m + $3.900m) =$30.476m |
$374.798m |
8.1% |
2013 |
$6.912m + 0.72($22.527m+ $5.101m)= $26.804m |
$370.542m |
7.2% |
2014 |
$36.039m |
$452.622m |
8.0% |
2015 |
$48.163m - 0.72(0.588m) = $47.743m |
$480.125m |
9.9% |
2016 |
$54.164m - 0.72(1.136m) = $53.346m |
$498.341m |
10.7% |
Result: Fail Test
Pre-empting the grizzlers, the thinking behind this test is that an ROE of 15% is well above the cost of capital of most firms. A lower ROE than this means that it is possible that some of the businesses under the Heartland umbrella are earning a return less than their cost of capital. This means that there is less certainty that capital in the future will be efficiently deployed, and consequently less certainty about the profit oulook. This doesn't mean that one should not invest in Heartland though. It just means that you should use a method other than the 'Buffett Growth Model' to evaluate the business.
SNOOPY
The Heartland hunger for new Capital
Quote:
Originally Posted by
Snoopy
1/ If you look at the EBIT to Interest Expense Ratio when Heartland was formed my post (8477) you can see that their position was very marginal back in FY2012/FY2013. The threat of a recapitalisation that would provide breathing room at a big discount to the current share price back then and since has been omnipresent.
2/ Despite bluster about capital returns over the last couple of years, the real situation required Heartland to make a cash issue of shares late in CY2016. A check of the constantly declining equity ratio (my post 8478) has hinted that eventually a recapitalisation was going to be required. Heartland got the recapitalisation plan away at a very good price. But that good price was never assured before the event.
Financial Year |
Number of New Shares Issued during FY |
Total Shares on the Books EOFY |
Net Money Raised from Shares Issued During FY |
2012 |
88.704 m |
388.704m |
$54.946m |
2013 |
0 m |
388.704m |
$0m |
2014 |
75,562 m |
463.266m |
$64.774m |
2015 |
6,624 m |
469.980m |
$9.163m |
2016 |
6,579 m |
476.469m |
$6.798m |
2017 |
13.659+ m |
499.165+ m |
$20.0m + |
Total Cash Raised |
|
|
$155.681m + |
For those who need some more convincing about what I am saying, the table above lays out the 'new capital' that has been poured into Heartland from its formation. Some years the new capital injection was modest, via the dividend reinvestment plan. Most years the capital required was significant. In only one year was no new capital needed. By showing the whole picture, I am hoping to put the bed the idea that, for the ambitions that Heartland has, Heartland has 'excess capital'.
In all years since Heartland has become a bank (FY2013 onwards), Heartland has satisfied Reserve Bank requirements for capital. But having a buffer on the minimum capital required, and having enough capital to allow Heartland to realise their business ambitions are different things. Some of this 'new capital' is being put toward the digital strategy. The effectiveness of this deployment while promising is yet to be seen! Because of the nature of the growing Reverse Mortgage business this is likely to be cashflow negative until a steady stream of these loans starts to mature. So yet more capital will be required for a while. None of this is meant to be a criticisim of Heartland's strategy going forwards. I am merely pointing out the cashflow implications for the near and medium term.
Any readers still believe that Heartland has 'plenty of capital' and won't be requiring more?
SNOOPY