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Heartland cuts 2013 earnings guidance, taking distressed assets in-house, sees growth in 2014

Wednesday 5th June 2013

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Heartland New Zealand, which gained bank registration in December, has cut its earnings expectations after deciding to take the management of distressed assets in-house. It was more upbeat about growth in 2014.

The Christchurch-based lender expects net profit of $7 million in the 12 months ending June 30 after taking an $18 million charge on writing down the value of loans and investments and to cover the risk of holding some of those assets over a longer timeframe, it said in a statement. Excluding the charge, profit was likely to be about $25 million, just ahead of the $21 million to $24 million guidance it gave shareholders at last year's annual meeting.

Heartland expects the decision will remove 'noise' from future earnings, and forecast net profit of between $34 million and $37 million in 2014 due to cheaper funding costs, lower impairment charges, cost reductions and asset growth.

The impairment comes from a decision to take over the management of the $139 million non-core property portfolio previously held by Pyne Gould Corp's Real Estate Credit unit. The portfolio will be split into three classes where 'performing' assets are held, 'acceleration' assets are exited within 18 months, and 'extend' assets are held for up to five years in the expectation they will improve.

The lender expects the majority of the assets will be sold over the next 18 months.

"The new strategy provides Heartland with greater flexibility to manage the property portfolio and to best balance an exit strategy with maximising shareholder value," it said. "While the cost is uncertain, recognising a write-down upfront removes the potential for property losses to detract from underlying earnings in the future, and if not realised, can be written back."

RECL, which was set up by Pyne Gould's George Kerr to ring-fence its toxic assets in the wake of the finance sector collapse, was paid $11 million upfront to manage the portfolio amortised over five years, and Heartland will write off the remaining $6 million of the fee, Heartland said.

The Pyne Gould unit will prepay the maximum compensation of $26.75 million to Heartland as a result of the agreement being ended through a transfer of an $11 million Westpac bond and loans and property assets making up the balance.

Chairman Bruce Irvine said the $18 million impairment charge and $6 million fee write-off won't affect the board's decision on Heartland's final dividend. The lender paid a special dividend of 1.5 cents per share in December, and has said future payouts would be based on its after-tax profit, subject to maintaining a prudent level of capital.

Heartland said it plans to put in place a share buyback programme to help manage its capital base, and will announce more details before the scheme is implemented.

The shares were unchanged at 79 cents yesterday, and have gained 14 percent this year. The stock is rated an average 'buy' based on three analyst recommendations compiled by Reuters, with a median target price of 78 cents.

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