Customer Concentration Test FY2016
Quote:
Originally Posted by
snoopy
I am rather overdue for our once a year peak into customer ‘asset distribution’ and ‘asset quality’. Our concentration test is that:
Highest single new customer group exposure (as a percentage of shareholder funds) <10%
Regional Risk
From AR2015 note 18b, the greatest regional area of credit risk in dollar terms is Auckland, with $830.027m worth of assets. This represents:
$830.027m/ $3,250.468m = 26% of all loans
this is slightly up on FY2014. But i don’t rate that concentration of loans in Auckland as being an issue. Particularly so when ‘Auckland’ is such a varied catch all group.
Industry Group Risk
From AR2015 note 18c, the greatest 'business group' risk in dollar terms is agriculture, with $537.286m worth of assets. This represents:
$537.286m/ $3,250.468m = 17% of all loans
this is slightly up on FY2014, when agriculture was
$469.020m/ $2,906.596 = 16% of all loans
Both these figures are quite high and trending in the wrong direction for FY2015. Given that Heartland is nominally a specialist agricultural lender I wouldn't be too concerned. But if agricultural loans go above 20% of the total (or dairy representing about half the agricultural loans above 10%), then I would sound an alarm bell. This situation will need careful watching when the FY2016 result details are released imo.
Industry Group Risk
From AR2016 note 18c, the greatest 'business group' risk in dollar terms is agriculture, with $628.202m worth of assets. This represents an increase of $90.916m over the previous year.
$628.202m/ $3,461.292m = 18% of all loans
Regional Risk
From AR2016 note 18b, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $888.080m worth of assets. This represents:
$880.080m/ $3,461.392m = 25% of all loans
The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 12.5% in numerical terms over the year, outstripping the growth of the previous largest region Auckland which only grew by 2% in gross loan amounts (Auckland still covers 24.5% of all loans) . This is a significant change for all other years where Auckland has been the largest market. Given 'Agriculture' loans have grown by 17% over the year, this 'growth' could reflect the compounding of agricultural interest charges into existing loans. According to AR2016 p7, dairy represent 7% of Heartland's total loan book.
0.07 x $3,461.392m = $242m
At an interest rate of 8%, assuming no interest was actually paid, this would increase the value of the Heartland loan book by:
$242m x 0.08 = $19.3m
Since the actual agricultural loan balance increased by $90.9m, we can assume that more net new agricultural loans were taken out, rather than just rolling over the dairy loan book. This is very much a contrast to traditional market leader ANZ.NZ who kept their total rural loan book static over the similar period. Looked at just in agricultural terms, you could say that Heartland are compounding their own problems for the future. But because the loan book in total has grown, reducing Heartland's relative reliance on Auckland is probably a positive.
The multi-year picture is shown below:
|
2012 |
2013 |
2014 |
2015 |
2016 |
Largest Regional Market |
Auckland (30%) |
Auckland (30%) |
Auckland (25%) |
Auckland (26%) |
Rest of North Island (25%) |
Largest Industry Group Market |
Agriculture (24%) |
Agriculture (21%) |
Agriculture (16%) |
Agriculture (17%) |
Agriculture (18%) |
SNOOPY
EBIT to Interest Expense ratio FY2016
Quote:
Originally Posted by
Snoopy
Updating for the full year result FY2015:
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) = $260.488m - $68.403m= $192.085m
Interest expense is listed as $126.041m.
So (EBIT)/(Interest Expense)= ($192.085)/($126.041)= 1.52 > 1.20
Result: PASS TEST
More progress here. A steady improvement from the FY2014 figure of 1.44
Updating for the full year result FY2016:
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) = $265.475m - $68.872m= $196.603m
Interest expense is listed as $118.815m.
So (EBIT)/(Interest Expense)= ($196.603m)/($118.815)= 1.65 > 1.20
Result: PASS TEST
The historical picture of this ratio is tabulated below. Despite the shakey start, the trend is very pleasing.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Target |
EBIT/ Interest Expense |
1.15 |
1.22 |
1.44 |
1.52 |
1.65 |
>1.2 |
SNOOPY
Tier 1 and Tier 2 Lending Ratios FY2016
Quote:
Originally Posted by
Snoopy
I am a little overdue with this 'annual update, but better late than never.
Heartland has announced its intention for Heartland Bank to complete an issue of Tier 2 capital issue in FY2016, provided that market conditions remain favourable. An issue of Tier 2 capital would (in the absence of any other use) allow Heartland to return capital by way of a share buy back which would have a positive impact on ROE and EPS. This statement implies that at EOFY2015 30th June 2015) , all capital within Heartland was Tier 1 capital. It is nice to get confirmation of this, because this has been my assumption for several years. The awkward thing about this new Tier 2 capital is that it will make next years equivalent calculation more difficult!
$2,879.134m of loans are outstanding. 20% of that figure is:
0.2 x $2,879.134m = $575.8m
Heartland has total equity of $480.1m which is still below the 20% of loan target.
Result: FAIL TEST
Putting a number on it, the actual capital to loan ratio is:
$480.125m / $2,879.134m = 16.6%
This is down from the 17.6% of last year and now nearer the 17% equity that Heartland had when Governor Wheeler originally approved Heartland as a bank. Wheeler has of course slackened Heartland's requirement for capital since then. But the raw figure is not very encoraging, if progress is what you were seeking.
The promised capital note issue never happened. So once again this calculation is straightforward with all 'Tier 1 and Tier 2 capital' being shareholder equity.
Total Heartland Equity at balance date was $498.341m,
Total Heartland liabilities at balance date were $3,048.840m
So: Equity / Total Liabilities
= $498.341m / $3,048.840m = 16.3% < 17% (*)
Result: FAIL TEST
Note that I have changed my equity target for Heartland to the 17% equity (down from my 20% target) that Heartland had when Governor Wheeler originally approved Heartland as a bank. I had previously used 20% as the figure appropiriate for a more marginal finance company without a strong history. Even so, Heartland has did not have the amount of equity on the books to support a loan book of the current size in my judgement. However the December 2016 equity raising has no doubt addressed this issue for now.
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Target |
Total Tier Capital/ Loan Book |
19.3% |
17.7% |
17.6% |
16.6% |
16.4% |
>17% |
SNOOPY
Not expecting future returns to be a s high as prior - but never mind
Once a pretty dodgy finance company always a pretty dodgy bank then Snoopy !
You were right to never invest in it.
Best Wishes
Paper Tiger
Underlying Gearing Ratio FY2016
Quote:
Originally Posted by
Snoopy
The underlying debt of the company (borrowings removed) according to the full year (FY2015) statement of financial position is:
$46.020m + $7.869m = $53.889m
-----
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:
$3,359.259m - ($2,862.070m +$24.513m + $329.338m) = $143.348m
We are then asked to remove the intangible assets from the equation as well:
$143.348m - $51.119m = $92.229m
------
Now we have the information needed to calculate the underlying company debt net of all their lending activities:
$53.889m/$92.229m= 58.4% < 90%
Result: PASS TEST
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 recivables that are loaned ultimately sit.
According to the full year (FY2016) statement of financial position the debt excluding borrowings is:
$42.099m + $6.754m = $48.853m (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:
$3,571.181m - ($3,113.957m +$8.384mm + $236.435m) = $188.405m (2)
We are then asked to remove the intangible assets from the equation as well:
$188.405m - $57.755m = $130.650m
----
Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities:
$48.853m/$130.650m= 37.4% < 90%
Result: PASS TEST
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Target |
Underlying Gearing Ratio |
20.2% |
14.7% |
40.5% |
58.4% |
37.4% |
< 90% |
SNOOPY
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
This one is about semantics
Quote:
Originally Posted by
Snoopy
Iceman. What I wrote was:
"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."
This last quote is exactly the same point as PT was making in his 'PPS'. I don't believe anyone reading that could interpret what I wrote as " HBL needed capital to survive "
SNOOPY
You can not cherry pick a little part of your entire post (including the quote and especially including the embolden parts) and try and wiggle out of it.
The semantics of your posts are unambiguous.
Best Wishes
Paper Tiger
This one is about taxonomy
Quote:
Originally Posted by
Snoopy
PT, if you really believe that, perhaps you might like to explain why back in FY2014 (the last reported year with a substantial increase in new capital and when the drp was operating) as shown in AR2014 (p20 'Statements of Changes in Equity') the new capital (including $48m worth of new shares issued as part of the "Seniors Money International" acquisition) along with $7.231m from the DRP are added up together when summing the 'Total Equity'.
Or in non-technical speak, how it is possible to add two things together to form one total when they are not the same class of thing?
SNOOPY
This one is definitely about taxonomy and we need to delve into classes and sub-classes.
Or maybe hierarchies would sit better in your mind?
But in this case we have equity and it's assorted sub classes: share capital, retained earnings and a positive plethora of reserves.
Let us ignore the glib 'if there are the same why are then on different rows then?' reply and let us follow the money.
It is after all, all money.
So where did the dividend reinvestment plan stuff come from?
From the dividends paid !
And where did the dividends paid come from?
From the retained earnings !
Read the table and you will also notice the morphing of many other sub-classes.
So maybe it is a bit of the old semantics as well then!
Best Wishes
Paper Tiger
This one is about wisdom & experience
Quote:
Originally Posted by
Snoopy
From an investments perspective there are two broad questions to ask:
1/ How well is Heartland performing?
2/ What level of risk is being taken to extract that performance?
To answer 1/ I use my 'Buffet Point' criteria. There is nothing weird or unusual about looking at 'Return on Shareholder Equity' and 'Earnings Per Share' as measures of performance. These are well established measurement yardsticks. However, it does not matter what the performance of the bank is if the risks taken to achieve that performance are so high that shareholders can expect 'an equity bail out' at the next broader financial market hurdle. And this is where all the rest of my tests on 'equity ratios' and 'liquidity' come in.
To directly answer your question I am not trying to 'prove' anything. My aim is to produce the information so that others can take it in and comment (or not) on what they see as any implications.
Ultimately it would be nice to know if Heartland is a good investment prospect or not, as well as have something more than 'gut feel' to back that up.
Given Heartland now have five years of solid results under their belt, it would be hard to disagree with that. But what does being a "good well run company" really mean? If the share price suddenly drops, does that mean the company is no longer well run?
SNOOPY
But your tests and/or your interpretation of the results are failing you Snoopy!
Are you sure that you are actually applying the correct tests in the correct way?
If the share price drops, all other things being equal, then you have a better risk/reward ratio for a purchase.
Best Wishes
Paper Tiger
This one is about it being complicated
Quote:
Originally Posted by
Snoopy
Because so much water has gone under the bridge...
...Given this, I am not even sure if the concept of "Growth Capital" being distinct from "Reserve Capital" has any meaning.
SNOOPY
There is too much equity, where you are not earning enough rewards;
There is too little equity, where you are taking too much risk;
and there is the Goldilocks zone :t_up:.
But that is just part of the story.
Best Wishes
Paper Tiger
Buffett Point 4a/ FY2016: Net Profit Margin history
What we are looking for here is the ability to raise margins at above the rate of inflation over some time period longer than two years back to back.
Financial Year |
Net Sustainable Profit (A) |
Gross Interest Revenue (B) |
Net Profit margin (A)/(B) |
2012 |
$26.606m + 0.72($5.642m + $3.900m) =$30.476m |
$205.142m |
14.9% |
2013 |
$6.912m + 0.72($22.527m+ $5.101m)= $26.804m |
$206.349m |
13.0% |
2014 |
$36.039m |
$210.297m |
17.2% |
2015 |
$48.163m - 0.72(0.588m) = $47.743m |
$260.488m |
18.3% |
2016 |
$54.164m - 0.72(1.136m) = $53.346m |
$265.475m |
20.1% |
Result: Pass Test
SNOOPY
Buffett Point 4b/ FY2016: Gross Interest Margin history
What we are looking for here is the ability to raise margins at above the rate of inflation over some time period longer than two years back to back.
Financial Year |
Interest Income (A) |
Interest Expense (B) |
EOFY Finance Receivables (C) |
Gross Interest margin [(A)-(B)]/(C)] |
2012 |
$205.142m |
$121.502m |
$2,078.276m |
4.02% |
2013 |
$206.349m |
$110.895m |
$2,010.376m |
4.75% |
2014 |
$210.297m |
$101.221m |
$2,607.393m |
4.18% |
2015 |
$260.488m |
$126.041m |
$2,862.070m |
4.70% |
2016 |
$265.475m |
$118.815m |
$3,118.957m |
4.70% |
Result: Pass Test
When examining most companies profitability I like to look at the 'Net Profit Margin', as I have done in "Buffet Point 4a". Being a bank, the 'goods sold' are really money. So I thought that maybe looking at the gross interest margin was more relevant? To some extent it doesn't matter as both tests earn a 'pass' mark for Heartland.
What is interesting is that the 'Net Profit Margin' looks to be improving faster then the 'Gross Interest Margin.' 'Net Profit' takes into account head office and branch costs and advertising expenses. "Gross Interest Expense' does not. The fact that the 'Net Profit Margin' is improving faster then the 'Gross Interest Margin' is an indicator suggests to me that 'successful control of costs' is very much part of Heartland's success in this area.
SNOOPY