HGH - Heartland Group Holdings

[lorraina]

ps.HGH's market share of Aussie   REL is 43%.Think that is already an outstanding success.
An excellent foundation to build on.

PS ATM,EBO,FRE,MFT appear to be outstanding successes in Aussie.

[LoungeLizard]

Early Challenger Bank AU deposit market experience
exceeding Heartland expectations
• Challenger Bank is actively raising deposits ahead of
being acquired by Heartland Bank and will continue to do
so. This will enable Heartland to optimise the advantage
of a lower cost of funds post-acquisition completion.
• Recent success of Challenger Bank in the AU deposit
market has exceeded Heartland's expectations.
• In the seven-week period commencing 8 January 2024,
retail deposit growth of $528 million was achieved, at a
rate which is 1.34% lower than Heartland Australia's
current cost of funds.

Looking as though HGH have Challenger Bank moving forward  on the right track very quickly.
ps.HGH's market share of Aussie   REL is 43%.Think that is already an outstanding success.
Challenger Bank fast growing deposits are proving HGH made the choice.

I'd like to have a look at what makes up that figure. Looks suspiciously high, given that one of the reasons Challenger was off-loaded was that it wasn't, for years, able to attract sufficient funds. All of a sudden, in 7 weeks they attract 1/2 billion in new deposits? Assuming of course they are "new" deposits and not a migration of existing funds in Stockco and the reverse mortgage business's. Bit naughty if that is the case. 

[KW]

ps.HGH's market share of Aussie  REL is 43%.Think that is already an outstanding success.
An excellent foundation to build on.

PS ATM,EBO,FRE,MFT appear to be outstanding successes in Aussie.

Is it really a success when every single one of its major competitors have publicly said they are not interested in offering reverse mortgages, and in fact have deliberately exited that market?  HGH's competition is the Govt who doesnt look to make money out of it.  If the market was a prime opportunity, the Big 5 banks would be all over it like flies on shit. 

[Basil]

Its capital intensive KW...I believe that's why the big banks have exited the market.

[lorraina]

HGH have and continue to do very well in this very stable fast growing market.[Profitable for HGH],thanks to the Aussie banks kindness of exiting the sector.
Aussie Govt has added creditability to the REL market.
This is HGH's tenth year in RELs.
And yes there were a great number of detractors when HGH bought into the sector.

.

[lorraina]

Its capital intensive KW...I believe that's why the big banks have exited the market.

The progressing of REL loans took too long for the big banks.Takes a few weeks from start to finish.
 

[LoungeLizard]

Volume switching places. Sellers now out-number buyers 2:1. Looks to me like a continuation of the down-trend coming up.

[Left Field]

Volume switching places. Sellers now out-number buyers 2:1. Looks to me like a continuation of the down-trend coming up.

And closing today at $1.15. The firm downtrend remains in place.

[Basil]

You guys must be loving this.  The old I told you so....yeah, well, save that for 12 months time and we'll see who's right.  I still believe that $1.13 cum the 4 cent divvy, ($1.09 ex divvy), was either the bottom or very close to it.  Regional US banks up 2% overnight, sign of something to come here ?
The shrillness of the naysayers' calls tells me we're at extreme pessimism and frankly, provides great encouragement regarding this deep value purchase.

[entrep]

Two side of the same coin I say @Basil. I don't think anyone was claiming you were telling them "I told you so" when the price was going up and you were bull-posting.

Posts from bulls and bears are equally valid as long as there is some logical backing behind them. You had backing as the price was pumping and the bears also have backing now as the price is falling.

I would urge you to not be so defensive. An echo chamber is helpful for no one.

[Fiordland Moose]

Its capital intensive KW...I believe that's why the big banks have exited the market.

Basil's right but I suspect it's less to do with the fact that the reverse mortgage businesses NIM is more often than not capitalised rather than received in cash (which I wrote about a page or two back). It's all to do with the RBNZ/RBA risk weighting of asset classes and the big 4 banks status as a DSIB (domestic systematically important bank) in which they are required to hold a prudential capital buffer over and above all the other registered banks in NZ.

Interest income from HGH's reverse mortgage book is most often capitalised to the receivables balance rather than paid in cash. That's understandable given the nature of the lend (but a very valid concern that cash NIM is decreasing as a proportion of reported NIM). That compares to traditional big bank lending where its more often received in cash. So HGH's RM business is more working capital intensive than traditional lending, which for all intents and purposes is mortgage lending, which tends to be paid in cash.

From a capital / capex perspective, there are two issues.

First, and the lesser consideration, is RM loans actually have quite a significantly shorter shelf life than a traditional mortgage. From an origination to fully paid off perspective, a home loan is about 20-30 years on average. The HGH RM life is about 6-7.5 years. So the face value of the loan is actually paid off faster in the RM business. That's good.

But the big issue is central bank mandated risk weighting of assets. Within the disclosure statement of all NZ registered banks you'll find a schedule showing the risking weighting and subsequent capital / cash required to be held on hand and not lent out or distributed for each type of asset at varying LVRs.

In a nutshell, mortgage lending, particularly non investor mortgage lending, is the lowest game in town. The lower the better, which means banks can have less capital tied up as a reserve for the bad stuff happening and lend the excess out or pay out in dividend.

For RM's in NZ, a loan taken out below a 30% LVR has a risk weighting of 40%, with a sliding scale of 100% at or above an 80% LVR. HGH's RM book has a 44.6% risk weighting (in which they must hold a minimum of 8% on balance sheet), a decline from the 50% the year prior (the RBNZ positively made some concessions in their latest consultation on RWA for RMs). HGH's weighted average RM LVRs are very low - with a 9.6% weighted average origination LVR and total weighted average of 22.8%.  By way of comparison, if HGH was to lend to a homeowner on a 79% LVR, the risk weighted assets for that would only be 35%!

The ANZ's mortgage book has something like a 17% risk weighted average. So they simply don't have to keep as much capital relative to heartland. and that really matters to the ANZ, and the other big three, because they are DSIBS, so they must keep an extra DSIB buffer over and above all the other banks. So that's why they dont do RMs, because the prudential buffer compounds the additional RWA% for the RM business.

that and lorraina is right....RMs are a specialist, bespoke product. Financial advice must be taken. There is a long lead time to getting the loans written. They aren't as vanilla as a traditional mortgage. Banks hate that...they want mass market template lending.

Ironically though, for HGH,  reverse mortgages have the effect of lowering the overall RWA % and attendant capital requirements for heartland. Unrated corporates lending (of which NZ HBL has over $2bn of exposure), require a 100% risk weight. So RMs are far more capital efficient than traditional business lending. I'm just working off the NZ disclosure statement (as AU isn't yet a bank), but the mix of RM as a% of the total book drove down the overall risk weighting 300bps in 1H24. That's good. Sadly, cashflow still suffers as a result.

[Fiordland Moose]

I'd like to have a look at what makes up that figure. Looks suspiciously high, given that one of the reasons Challenger was off-loaded was that it wasn't, for years, able to attract sufficient funds. All of a sudden, in 7 weeks they attract 1/2 billion in new deposits? Assuming of course they are "new" deposits and not a migration of existing funds in Stockco and the reverse mortgage business's. Bit naughty if that is the case. 

You are co-mingling things...ie stockco doesn't have deposits to shove into challenger. Challenger bank can raise deposits but historically struggled to find a purpose or niche to lend into and get receivables. They had a valuable banking license but no strategy or business from which to use it.  Heartland isn't buying challenger bank to buy its book, its bank mgmt team, its niche or strategy. it's buying it to get its banking license so it can raise retail deposits and refinance its massive, inefficient, wholesale funding structure with cheaper retail deposits. It's not buying a business; it's buying a fund raising channel. that's it, clear and I hope simple.

The problem with just looking at a NIM % saving (134bps or whatever it was) doesn't tell us much about the CaC or customer acquisition cost to obtain those funds. It's very well and possible they spent up big on adwords, brokers, etc to obtain those funds. We just dont know how efficient it has been.

Challengers loss attributed to heartland in the guidance provided for the balance of the year isn't because challenger bank is a loss making pig on its lending....which was my fear before the 1H release....it's because challenger went ahead and raised half a billion of in new deposits and paid interest to the depositors but didn't lend it out and thus received no income (doesn't take a banking professional to figure out why that combination will have lost money)...they did so when heartland agreed to underwrite the cost of raising those deposits so when the purchase was settled they could use those already raised deposits to refinance the wholesale funding of the existing heartland australian book at a significantly lower cost of funds, which ought to have the effect of materially increasing NIM for the group in future periods.

the challenge (excuse the pun), is weighing up the $ NIM and NPAT growth from that, divided by the incremental shares issued as part of a capital raise, given how large the capital raise could be, how low the current market cap is, and the all important effect on earnings and dividends PER SHARE. It's possible something may have made good sense and was EPS/DPS accretive at $1.80 is no longer the case at $1.15 given the dilution. Haven't done the sums yet.

[Fiordland Moose]

an oldie but a goldie on the RM business, from 2019
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HGH/327018/290747.pdf

Heartland Australia's RM marketshare has come a long way.

[LoungeLizard]

You are co-mingling things...ie stockco doesn't have deposits to shove into challenger. Challenger bank can raise deposits but historically struggled to find a purpose or niche to lend into and get receivables. They had a valuable banking license but no strategy or business from which to use it.  Heartland isn't buying challenger bank to buy its book, its bank mgmt team, its niche or strategy. it's buying it to get its banking license so it can raise retail deposits and refinance its massive, inefficient, wholesale funding structure with cheaper retail deposits. It's not buying a business; it's buying a fund raising channel. that's it, clear and I hope simple.

The problem with just looking at a NIM % saving (134bps or whatever it was) doesn't tell us much about the CaC or customer acquisition cost to obtain those funds. It's very well and possible they spent up big on adwords, brokers, etc to obtain those funds. We just dont know how efficient it has been.

Challengers loss attributed to heartland in the guidance provided for the balance of the year isn't because challenger bank is a loss making pig on its lending....which was my fear before the 1H release....it's because challenger went ahead and raised half a billion of in new deposits and paid interest to the depositors but didn't lend it out and thus received no income (doesn't take a banking professional to figure out why that combination will have lost money)...they did so when heartland agreed to underwrite the cost of raising those deposits so when the purchase was settled they could use those already raised deposits to refinance the wholesale funding of the existing heartland australian book at a significantly lower cost of funds, which ought to have the effect of materially increasing NIM for the group in future periods.

the challenge (excuse the pun), is weighing up the $ NIM and NPAT growth from that, divided by the incremental shares issued as part of a capital raise, given how large the capital raise could be, how low the current market cap is, and the all important effect on earnings and dividends PER SHARE. It's possible something may have made good sense and was EPS/DPS accretive at $1.80 is no longer the case at $1.15 given the dilution. Haven't done the sums yet.

Good points FM. Its hard though not to escape the conclusion, from the risks you have outlined, that this was a $50m gamble on buying "a fund raising channel" regardless of the potential downside on NIM, legacy costs, NPAT, EPS etc. Similarly, the cap raise needed to fund the purchase had a huge negative effect on shareholder wealth and the next one could be similar.
Perhaps it will all come right but the new risk profile and lower yield of HGH 2.0 doesn't interest a conservative investor like myself. Those that have stuck with HGH, bought in at $1.80, will literally have to wait years to just breakeven. If patience is a virtue, HGH investors are going to have to be saints  

[Basil]

the challenge (excuse the pun), is weighing up the $ NIM and NPAT growth from that, divided by the incremental shares issued as part of a capital raise, given how large the capital raise could be, how low the current market cap is, and the all important effect on earnings and dividends PER SHARE. It's possible something may have made good sense and was EPS/DPS accretive at $1.80 is no longer the case at $1.15 given the dilution. Haven't done the sums yet.

I appreciate your thoughtful and well articulated posts and you may have a good point here, as does KW that there's an existing downtrend and I have a lot of respect for both your opinions and acknowledge there's  risks buying at this point, but that doesn't change my fundamental thesis that no matter whether you view this on a price to NAV basis, on a standalone forward PE basis or on a comparative peer group analysis, HGH has never been cheaper.

This isn't without risk, (the yacht anchored next to me in the Hauraki Gulf yesterday was named "Risky Business" maybe that's a sign lol)..but at the same time from long experience I know the market dislikes uncertainty and sentiment has never been worse towards Heartland.  Further, I strongly believe we've been scraping along the bottom of the economic cycle for a while now and while acknowledging there's still some way to go, hopefully as cental banks around the world start easing I think we're set for a slow recovery starting later this year or early 2025.  It's always darkest before the dawn. 
At the end of the day, I am investing about two thirds of previous profits made on good calls on HGH before so it's all free carry.  What risk others are prepared to take based on their experience with HGH is up to them but I'm very content with my track record and size of my current position on this one.  There's room to lift that by another 100,000 if the price is right which will also be free carry.

I'm always happy to read well-articulated intelligent posts on any stock, both negative and positive but highly repetitive trolling comments is pollution I would rather filter out.   I think I'm well placed to know the difference.