HGH - Heartland Group Holdings

[winner (n)]

Treasury forecasts pretty dire ..and they were prepared before last weeks poor GDP print

They say -

Unemployment has increased and expected to now hit 5.2%
Wage growth is slowing

That's not good news for Hesrtland

On the other hand dairy prices were up again overnight

[Basil]

And a worry is that we can no longer rely on Jeff 'doing what we said we would do'

That mantra is no more

Yes, I here where you are coming from.  The number of so called one-off major items they are taking below the profit line as extraordinary items has never been higher and is getting quite disconcerting.  Really stretching the credibility of so called "normalized" profit.  Despite a strong GDT auction result overnight HGH busted down through multiyear support at $1.50 to finish at a new multi year low of $1.48 
Brought up the chart for the last 6 months, pretty clear downtrend...you'd have to be very brave to be applying new capital here at this point.

[winner (n)]

HGH share price sharply down ....started to slide when Willis started outlining how gloomy thing were

Closed at 148

[Left Field]

Let us know when you are buying again Winner.

[snapiti]

posts meant for KPG thread

[Buzz]

Chart has three support lines converging on $1.44 though below that is vague around $1.30ish. Who would've thought you need seasick pills to be invested in a bank! The past six years have been a gut wrenching roller coaster for holders, but a bonanza for momentum traders.

[Basil]

Just curious, genuine question (above the pay grade of a semi-retired suburban accountant), can anyone explain in plain english, (not Te Reo or gobbledygook tech speak), what is this "de-designation of derivatives" that they are taking below the line as an extraordinary item ?
Don't all banks use derivatives to manage / hedge risks and isn't the gain or loss on them just a normal operating item ?  What am I missing here or is it that Jeff is just trying to pull the wool over our eyes with another way of smoothing the profit ?  Extract from most recent announcement follows

Heartland now expects NPAT to be in the range of $93 million to $97 million, excluding any impacts of fair value changes on equity investments held and the impact of the de-designation of derivatives. Excluding the impact of the (non-cash) post-COVID-19 overlay and Challenger Bank NPAT, the range is $108 million to $112 million, reflecting Heartland's underlying operational performance. The guidance range was previously $116 million to $122 million, excluding any impacts of fair value changes on equity investments held, the impact of the de-designation of derivatives, and any costs related to the acquisition of Challenger Bank.

[snapiti]

Just curious, genuine question (above the pay grade of a semi-retired suburban accountant), can anyone explain in plain english, (not Te Reo or gobbledygook tech speak), what is this "de-designation of derivatives" that they are taking below the line as an extraordinary item ?
Don't all banks use derivatives to manage / hedge risks and isn't the gain or loss on them just a normal operating item ?  What am I missing here or is it that Jeff is just trying to pull the wool over our eyes with another way of smoothing the profit ?  Extract from most recent announcement follows
I am not sure Basil, no doubt creative accounting to make the bottom line look better....broke the 1.50 support level, currently one would only buy at current levels if they thought growth was going to return one way or the other

[Fiordland Moose]

Just curious, genuine question (above the pay grade of a semi-retired suburban accountant), can anyone explain in plain english, (not Te Reo or gobbledygook tech speak), what is this "de-designation of derivatives" that they are taking below the line as an extraordinary item ?
Don't all banks use derivatives to manage / hedge risks and isn't the gain or loss on them just a normal operating item ?

Fortunately I think only a tiny fraction of accountants will ever have to encounter hedge accounting, and I don't think there really is a way describe it in plain english though I'll do my best. TLDR: In FY22 HGH recorded a $16.7m accounting gain on a handful of swaps that were retained and not sold/settled in cash - the gain simply reflected a change in accounting classification) and the de-designation is the accounting reversal of that gain in subsequent periods. There is no change in the cash interest received or the cash interest paid. HGH have been hedge accounting for a long time and this is the first time ever the accounting classification for some of them were changed (and was and will continue to be a nil cashflow item). Note that HGH didn't look to include the gain in underlying earnings in FY22.

I did a bit of a write up on it on ST when it happened - post 16128 - or below
https://www.sharetrader.co.nz/showthread.php?8425-HGH-Heartland-Group-Holdings&p=978750&viewfull=1#post978750

Like all banks & financial institutions, HGH funds via shorter term debt but can lend via longer term loans. This causes an interest rate mismatch which is managed economically using interest rate swaps to ensure margin is protected and cash volatility is limited. Hedging is common in a range of industries and you often see a gain or loss on derivatives where they have been settled in cash or as its revalued. But for certain activities, when a hedge is taken out for a specific contract (say to cover the capital borrowed to write a loan) where the principal, duration & repayments are known it is to be taken under hedge accounting rules, which pairs the contracted interest expense to the contracted income (or underlying activity), as there is no need for the hedge to revalue (it retires naturally on repayment). There are strict rules on what qualifies for hedge accounting - the purpose of the hedge and the corresponding activity (IE HGH's borrowing) have to be explicitly documented at the time the hedge is taken out so the accounting between the two can be paired going forward, and going forward the hedge needs to work as documented in order for it to remain qualified for hedge accounting (IE - if you made a fancy new product, documented it, but the outcome deviated for better or for worse it could no longer qualify).

HGH have been hedge accounting for some time but in FY22 was the first time ever where swaps were removed from hedge accounting classification. They recognized a $16.7m gain on interest rate swaps where were used to economically hedge the interest rate risk on fixed rates with terms longer than 12 months. A portfolio of swaps were put into cash flow hedge accounting relationships with their premium saving products, with the underlying risk hedged on 3 month BKBM. Those products are traditionally priced at a margin above 3 month BKBM but the deposit market in FY22 was quite bizarre and banks were able to achieve the margin on premium saver products below zero at various points. This was a very positive, albeit rare and unprecedented, development - and one at odds with the documented strategy put in place for the hedges when they were taken out.

Given the point above, a hard line interpretation of the accounting standard required the cumulative cash flow hedge reserve balance to be recognised in the income statement - this is the start of the de-designation. The balance reflected the present value of the future income benefit these particular swaps would generate over the coming financial years.

This left the company with a number of options, with the primary ones being: settle the swaps (in cash) and enter into new ones and placing those into new accounting relationships (madness given how well in the money the swaps were) or retain those swaps and leave them without an accounting relationship.

As the hedges will provide significant economic benefit to HGH over the coming years ($16.7m) they decided to retain the hedges but leave them outside an accounting relationships. This is because as the derivatives settle in cash, interest income is booked, as is underlying, core operational earnings.

The consequence of there being no accounting relationship is that the derivative has no place to revalue, as the cash flow hedge reserve was taken to the P&L  in FY22. Therefore revals must go through the income statement. As it was a rare (first time) accounting anomaly (that happened to work out well) that didn't arise due to say trading derivatives, heartland treated the event as a non underlying gain in FY22, and do not consider its unwind in future periods to be representative of core underlying earnings.

They could have settled the swaps, taken out new ones, and entered those into the accounting relationship and there would be no impact on hedge accounting gains or losses, but the business would be $16.7m poorer in cash for it.  There is no change to the cash interest received or the cash interest paid despite the change in accounting policy.

The majority of the gain's unwind was recorded in FY23. Per the FY23 annual report, only $7.7m remains subject to unwind across FY24 and FY25. I'm not sure how it'll be phased but I assume maybe $5m with the tail in FY25.

I think it's very fair for investors to be wary of normalisations and good practice to start at statutory NPAT, give the normalisations a good eye over and only add them back if they are convinced its a bonafide non operating or non-recurring expense. Personally I think the gain in FY22 was a bit of a fluke and so therefor should its accounting reversal. But there is a lot to be said for businesses / industries where you see stat npat, understand it, and leave it alone. A lot of the new accounting rules post GFC (including new expected credit loss provisions and hedge accounting) are good initiatives and make institutions safer but do alter the resemblance of NPAT to underlying cash, and banks were already hard enough to pin down on core cash earnings. Not nearly as bad as retirement villages! 

Sorry long post and won't be of interest to many, including possibly accountants lol

[winner (n)]

Jeez talk of a capital raise made me wonder how our Greg is thinking

Maybe having to pump more millions into both heartland and Oceania after Christmas

Little wonder he hasn't been taking the DRPs ....needs the dollars

Whatever Greg can afford it but I'm sure he rather be spending on other ventures ..or buy a few more horses and have real fun

[Basil]

Brilliant, thanks very much Fiordland Moose.  I suspect you are the only one on here that could have explained it that well.  Much appreciated.

[SCOTTY]

Maybe Greg quite happy taking a long term view of business opportunities but sorry to be limited to a 10% maximum holding in HGH 🤔

[winner (n)]

Brilliant, thanks very much Fiordland Moose.  I suspect you are the only one on here that could have explained it that well.  Much appreciated.

(

All this de-designation stuff seemed to come about after 'discussions' with the auditors a couple of years ago....as they said at the time

In the financial year ended 30 June 2022 (FY2022), Heartland took a one-off gain in relation to derivatives that were de-designated from hedge accounting relationships due to a change in interpretation of applicable technical accounting standards which Heartland was advised of during the audit of its FY2022 financial accounts."

Changed auditors since lol

[Red Baron]

Like all banks & financial institutions, HGH funds via shorter term debt but can lend via longer term loans. This causes an interest rate mismatch which is managed economically using interest rate swaps to ensure margin is protected and cash volatility is limited. Hedging is common in a range of industries and you often see a gain or loss on derivatives where they have been settled in cash or as its revalued

Aren't all ze derivatives 'marked to market' on ze balance sheet at balance date, as market eenterest vrates change (i.e. are revalued by ze market)?

<snip>
HGH have been hedge accounting for some time but in FY22 was the first time ever where swaps were removed from hedge accounting classification. They recognized a $16.7m gain on interest rate swaps
<snip>
The consequence of there being no accounting relationship is that the derivative has no place to revalue, as the cash flow hedge reserve was taken to the P&L  in FY22. Therefore revals must go through the income statement.
<snip>
This was a very positive, albeit rare and unprecedented, development - and one at odds with the documented strategy put in place for the hedges when they were taken out.

'Virst time ever.'  'Vrare and unprecedented'.   Zo not reflective of ze business going vorwards (or backvards)?

I have ze zame attitude to hedging adjustments in accounts to zhat of allied vighter pilots crossing ze vestern vront.   Both must be 'completely taken out.'

heartland treated the event as a non underlying gain in FY22, and do not consider its unwind in future periods to be representative of core underlying earnings.

Vhat Heartland theenk, zhould be ze zame as vhat Heartland zhareholders theenk!

RB

[lorraina]

Not the sort of outlook we want for the market and HGH,however we have been there before and are still here.!!

the Treasury also opened a box of surprises - detailing a grim economic forecast compounded by inflation, global issues and the cost of building.