Heartland - TSB Synergy Benefits

[Basil]

What do you think ?

[Red Baron]

What do you think ?

Zhey hedged zheir 'integration cost zaving bet', by carefully leaving out any costs related to computer system integration!

RB

[Shareguy]

Insert from Craigs

Merger synergies and transaction costs
HGH estimates merger synergies of $34m to be realised over three years. This does not
appear excessive given TSB's high CTI ratio of over 65%, and pro-forma merged CTI ratio of
approx. 60% (see figure 4 below). $34m of synergies would bring the pro forma CTI to the
low-50% level which we think appears more achievable based on HGH's run-rate and existing
targets.
These synergies do not include technology related items, which is surprising given we would
expect IT costs could be a material source of opex savings. HGH management indicated they
have yet to decide on which IT system will be used by the merged company, although we
think it is likely the HGH system will be chosen given 1) it is a relatively new Oracle-based
system compared to TSB which we understand is an in-house development, and 2) the TSB
products (mainly retail mortgages) appear simpler to integrate than the peculiarities of
reverse mortgages, livestock lending, and MV loans.
One-off integration costs of $34m are also expected to be incurred over three years.
HGH also indicated $7m of transaction costs to be reported in FY26 and a further $8m of
transaction costs in FY27, with the most of the $8m in FY27 contingent on the deal
proceeding.


 

[Left Field]

What do you think ?

I think you are searching for evidence via this rather poorly designed survey that your negative views of the HGH/TSB merger are correct.

The Challenger acquisition in Aus has proved beneficial for HGH and in the fullness of time the HGH/TSB merger is likely to be a good move too.

In the months ahead all will be revealed by the market - not by a dubious survey like this.

[Shareguy]

Thought this was good. Salt have skin in the game in their long/short fund.

https://youtu.be/1zZI50E7Qsc?si=eljlM-bHYMXzIZPy

[LoungeLizard]

I was highly critical of HGH's move into Australian banking. It was ill-timed and not enough due diligence. That might turn out to be ok, but initially my fears were realised.

 I am less worried about their move into NZ retail banking, but still worried. On the positive side, I see this as a natural evolution from being predominantly a rural lender to a more visible high-street bank, albeit still a small fish in the pond. I would have preferred they had done this first, then thought about getting into OZ.

 My biggest concern is that HGH's management have a large credibility gap with the smaller investor. Their series of capital raises favoured institutions and every single one left retail investors worse off. Their forecasts for growth were hopelessly over-optimistic. The other thing is their technical competence. They made a bit of a mess with Challenger and the jury is out whether they can really bring the synergy's into fruition. Maybe TSB's expertise will be of help in this regard.
The share registry is also going to balloon out - can they generate the revenue to preserve or enhance eps and dividends. Answer: don't know.

All up, I support the move but I'm waiting to get more detail before I decide to jump in.

[Left Field]

Interesting to see how Basil is misrepresenting the findings of his dubious survey on the other channel

Here's what he says


Interestingly in a poll on the other channel most people think HGH will either get next to no synergies or only 25-50% of what they're trying to achieve. That's a poll mate, not just my opinion. Have you actually attended an annual meeting and met management and members of the board ? I have and I was REALLY unimpressed. Anyway, good luck to holders, you're going to need it.

Talk about misrepresentation. Another finding could equally be;   -  65% think that there will be some synergies!

[Basil]

Not a misrepresentation at all. 15 of 22 people expressing their opinion think there will be next to no synergies or 25-50% of them. That's a very clear majority of 68% !

Looking at the weighted average
8 people think they won't be able to get much at all (the meaning of that vote in the poll could be interpreted to mean 0-25% of the synergies and that's certainly what I was getting at when establishing the poll) and the mid point of 0-25% is 12.5% so that's 8 x 12.5% = 100

Next rung up 7 people think they will get 25-50%, mid point is 37.5% so that's 262.5

Next rung up 6 people think they will get 50-75%, mid point is 62.5% x 6 = 375

Finally only one person thinks they will get 100% of synergies = 100

Total score 100 + 262.5 + 375 + 100 =, 837.5 from 22 votes = average score of 38%.

Statistically, based on a mid point analysis of 22 votes to date, on average people think HGH will get only 38% of the synergies they're aiming for.

The fact that you are calling it a dubious survey speaks for itself in terms of your clear bias.
If you want to frame the survey another way, start your own poll.

[Basil]

Maybe consider this leftie before asking yourself if their previous expansion has been a sucess.

I have had a look at the financial statements for the year ended 31 March 2022, divisional information, see here https://api.nzx.com/public/announcement/397408/attachment/377176/397408-377176.pdf and Heartland Australia made $30.1m Net Profit before tax (normalised $21m after tax). There were 592.912m shares on issue at that point.

Three years later after two deeply discounted capital raises to acquire Challanger Bank and self fund Australian banking operations they made $42.5m Net profit before tax ($29.8m NPAT) from their Australian banking operations. Yes profit was higher so in your opinion this is a success but here's the problem. In 2025 after the capital raises there were 945.207m shares on issue ! https://api.nzx.com/public/announcement/457176/attachment/450037/457176-450037.pdf

Heartland issued a whopping 352.3m extra shares to achieve a net profit after tax increase of just $8.8m on Australian operations giving EPS of only 2.5 cps on all those extra shares. Let that sink in...

Keep in mind EPS was 16.1 cps in 2022 before this process began and only 4.14 cps for the group in 2025, but that was still more than the 2.5 cps earned in Australian banking on the extra share issuance so the extra share issuance was definitely EPS dilutive for the group.

From an earning per share basis, (which is all that really counts), the massive share issuance to self fund Australian lending has been a huge failure and had a massive negative effect on group earnings per share. Just as well it will be completely different with TSB bank...or will it ?

[Left Field]

The fact that you are calling it a dubious survey speaks for itself in terms of your clear bias.
If you want to frame the survey another way, start your own poll.

Basil I spent a successful part of my career in the market research industry and I can tell you your questionnaire is dubious and designed to get the answers you wanted.

In effect you have biased the vote/responses by giving several dubious % options on one side of the Q..... versus only one  response for your sought after response.

A much more accurate Q and suggested responses would have been.

Do you think their will be synergies achieved by HGH in the proposed TSB/HGH merger ? (or words to that effect)
Yes
No
Undecided.

Simple

[BlackPeter]

Not a misrepresentation at all. 15 of 22 people expressing their opinion think there will be next to no synergies or 25-50% of them. That's a very clear majority of 68% !

Looking at the weighted average
8 people think they won't be able to get much at all (the meaning of that vote in the poll could be interpreted to mean 0-25% of the synergies and that's certainly what I was getting at when establishing the poll) and the mid point of 0-25% is 12.5% so that's 8 x 12.5% = 100

Next rung up 7 people think they will get 25-50%, mid point is 37.5% so that's 262.5

Next rung up 6 people think they will get 50-75%, mid point is 62.5% x 6 = 375

Finally only one person thinks they will get 100% of synergies = 100

Total score 100 + 262.5 + 375 + 100 =, 837.5 from 22 votes = average score of 38%.

Statistically, based on a mid point analysis of 22 votes to date, on average people think HGH will get only 38% of the synergies they're aiming for.

The fact that you are calling it a dubious survey speaks for itself in terms of your clear bias.
If you want to frame the survey another way, start your own poll.

Hmm- statistically seen are 22 votes obviously ways too less, even if this would be a random selection of people (which it clearly is not). If people would be randomly selected and understand and know and agree with your process (and the questions are clear and correct), even then the error tolerance would still be over 20%.

But hey - the Australian extension took a bit more time and money than management had thought (though I still think,it makes sense). Will this apply to the TSB-HBL merger as well? Who knows. They say about SW projects, that they typically need 220% of the originally planned resources. But whatever the number, we all know that projects with limited analysis, unclear input parameters and working in a fast changing envioronment in average always take significantly more time than originally planned. Just check the execution of any political promise ;

I think the idea to make the bank more sizeable with this merger has clear benefits, but no doubt - there are risks and there will be issues, and it depends on the quality of board and management, how well they resolve them.

I think we heard about your idea of the management - and clearly - everybody sharing your views has sold the shares a long time ago. But lets face it, your views are, similar to any project plan, sometimes right and sometimes wrong. So, why don't we just let them do the thing and see whats coming out?

PS: still holding and appreciating the recent SP development ... SP ways above MA50 and MA200 - hey, isn't this good, is it?

[winner (n)]

Basil notes Heartland issued a whopping 352.3m extra shares (since 2022)

And this years profit of around $85m is less than they making 5 years ago ...hmmmm

[Basil]

Basil notes Heartland issued a whopping 352.3m extra shares (since 2022)

And this years profit of around $85m is less than they making 5 years ago ...hmmmm

Sounds like EPS of about 9 CPS, even less after  so called normalisations for FY26. EPS was 11 CPS a decade ago in 2016.  RBNZ inflation calculator says that should be just over 15 CPS now.  Hmmm  A lost decade due to Australian expansion misadventures or is there something even more seriously wrong here ?

[Ferg]

A lost decade due to Australian expansion misadventures or is there something even more seriously wrong here ?

There is something more seriously wrong.  The more reverse mortgages they sell, the more the operating cashflows per the P&L run negative.  I am not referring to funding the Balance Sheet side of things; the issue sits in the cash transactions that impact the P&L.  Using a warehouse facility does not address the P&L cash gap, nor does bundling up RM loans and on-selling them via a MBS/CDO type securitisation.  Those methods impact the Balance Sheet and do not address the growing operating cashflow shortage in the P&L from reverse mortgages.