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Heartland shares rise to 2-year high, debt rating affirmed after taking control of bad loans

Wednesday 5th June 2013

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Heartland New Zealand shares rose to a two-year high and its credit rating was affirmed by Standard & Poor's after the lender decided to take over the management of distressed assets and wear the cost upfront.

The shares jumped 7.6 percent to 85 cents, the highest level since February 2011, after the Christchurch-based bank cut its annual profit guidance to $7 million in the 12 months ending June 30, reflecting an $18 million impairment on the distressed assets. The company previously forecast earnings of $25 million.

The stock is rated an average 'buy' based on three analyst recommendations compiled by Reuters, with a median target price of 78 cents.

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 market is looking at the forward earnings guidance" and what can be achieved by taking the one-off costs now, said Matt Goodson, who helps manage $650 million of equities and property holdings at Salt Funds Management. "The market had been worried about the value of those property assets" and this provides a "reasonable degree of certainty."

As well as the charge on its non-core property portfolio, Heartland will write off $6 million in management fees after deciding to take over the management of the $139 million non-core property portfolio previously held by Pyne Gould Corp's Real Estate Credit unit.

International rating agency S&P affirmed Heartland's BBB- investment-grade rating with a negative outlook, saying the bank's "projected risk-adjusted capital ratio after the write-downs will remain more than 15 percent over the medium to long term."

That supports S&P's current 'very strong' assessment of Heartland's capital and earnings, and the current issuer credit rating, it said.

Heartland's non-core 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.

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 remainder 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.

Pyne Gould, which helped found Heartland through the merger of its Marac Finance unit with the Southern Cross and Canterbury building societies, said the termination of the agreement will cause a one-off gain in net profit of some $7.8 million. Its shares gained 3.4 percent to 27 cents.

Heartland 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 a first-half dividend of 2 cents in April, 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.

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