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Heartland's 1H profit dampened by restructuring, accounting changes

Tuesday 19th February 2019

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Heartland Group lifted first-half profit 6.5 percent with growth from its Australian reverse mortgage unit, business lending and its Open-for-Business digital lending platform particularly strong.

The group reported a net profit of $33.1 million for the six months ended December, up from $31.1 million. The latest result was dragged down by the $900,000 cost of listing on ASX, adverse currency movements of $1.2 million, and a one-off impact of a new accounting standard covering impaired loans.

Chief executive Jeff Greenslade said the group is lowering its full-year net profit guidance to $73-75 million from $75-77 million. Although Heartland could have achieved the bottom end of the previous guidance, that would have meant sacrificing investment in growth.

The “responsible” course is that it’s better to invest to achieve long-term goals, Greenslade told analysts on a conference call.

If Heartland achieves the middle of the new range, annual net profit will be up about 10 percent.

Total receivables grew nearly 12 percent to $4.2 billion during the six months.

Heartland restructured last October, taking its Australian reverse mortgage book out of Heartland Bank so that it won’t be constrained from growing by Reserve Bank of New Zealand regulations.

The Australian business book grew 25.5 percent, or by $89.4 million, to $755.5 million in the six months while the New Zealand reverse mortgage business grew 10.7 percent, or by $24.6 million.

About 70 percent of new business in Australia comes through mortgage brokers. The recent final report from Kenneth Hayne’s royal commission has recommended that lenders cease paying trail commissions and that upfront commissions should also be phased out with brokers charging their customers fees instead.

Greenslade said he expects that will reduce the amount of business Heartland does through brokers in Australia and that the company “will accelerate that by going direct.”

Heartland is essentially the only remaining operator in that market in Australia after Westpac and Macquarie Bank both withdrew in late 2017. Commonwealth Bank of Australia and its subsidiary, Bankwest, withdrew from Jan. 1 this year.

Greenslade said Heartland plans to start advertising in Australia. The reverse mortgage product hasn’t been advertised on television for many years but Heartland’s experience in New Zealand is that its phones run hot whenever it advertises on television here.

Of the direct business Heartland currently does in Australia, 93 percent is generated online.

The reverse mortgage business in New Zealand is almost entirely through direct channels.

Heartland’s Open-for-Business lending grew 56.2 percent to $115.4 million and its motor lending rose 16.3 percent, or $79 million. Lending through 13.3 percent-owned Harmoney rose 44.3 percent to $43.7 million.

Receivables from Heartland’s business relationships, a part of the business the company is managing down, fell 20 percent, or by $65.3 million, while rural lending fell 4.5 percent, or by $15 million, to $645.5 million.

Greenslade said that reflects “a fantastic season for sheep and beef farmers” which enjoyed plenty of rain and grass growth and so were able to fatten their own animals before sending them directly to abattoirs.

With drier weather now, Heartland is expecting a better second half, he said.

Greenslade said Heartland will make a submission to the Reserve Bank on its proposed new bank capital levels but he doesn’t expect this will have a major impact on Heartland.

Heartland Bank’s capital at Dec. 31 was entirely equity and was 13.25 percent of risk-weighted assets after it repaid its tier 2 capital last October.

Total regulatory capital fell from 14.12 percent at June 30, reflecting that repayment, while tier 1 equity fell from 13.71 percent as the bank’s lending increased.

Greenslade indicated that retained earnings and capital from the dividend reinvestment plan should be sufficient to meet the 15 percent tier 1 capital level that the central bank is targeting with a five-year phase in period.

Heartland’s shares are down 1 cent at $1.33 and have dropped about 15 percent since the restructure.


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