New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Heartland Group Holdings / Equity Bottom-Up

Heartland Group In the Heart of the Storm

UNDERPERFORM
We initiate coverage of Heartland Group Holdings (HGH) with an UNDERPERFORM rating and target price of NZ$1.35. HGH faces Net Interest Margin (NIM) pressure, slowing receivable loan growth, an increasing cost to income ratio and elevated impairment expenses, in our opinion. We also believe there are number of regulatory, competitive and economic headwinds ahead. This is corroborated by discussions with reverse mortgage brokers, car finance companies, competitors and industry&nbsp;experts. Currently HGH holds just 1%&nbsp;of total bank assets in New Zealand, while in comparison the four largest Australian banks hold a combined 89% of the New Zealand market. HGH has a higher funding cost than peers and&nbsp;focusses&nbsp;on providing nicher, higher risk products with higher yields.&nbsp;This is evidenced by generating the highest NIM across banks operating in New Zealand.&nbsp;Our ROE driven target price implies a lower P/BV multiple than HGH is currently trading on.&nbsp;


Downward NIM pressure driven by yield compression and securitisation funding...


We believe that competition will put downward pressure on&nbsp;HGH’s ability to maintain yields in divisions that are currently exhibiting high returns on equity (ROE). The Australian reverse mortgage market has been subject to increasing competitive pressures evidenced by the entry of Legal &amp; General. This followed exits by the largest Australian banks given the reputation risk associated with mis-selling the product. Additionally, we estimate&nbsp;HGH's recent securitisation&nbsp;to cost 3.5%–4.0% applying further NIM pressure. However, this could be partially offset by the RBNZ Funding for Lending program, which if&nbsp;mirroring the&nbsp;RBA's&nbsp;Term Lending Facility in Australia, would provide 5% of funding for banks in NZ. Accordingly, the RBNZ would be taking on additional credit risk in the form of collateral, which may mean funding is limited for HGH given its product mix and elevated risk profile.


ROE suppressed&nbsp;by increasing cost to income ratio and elevated impairment expense ratio


HGH has invested heavily in a digital strategy in recent years, raising its cost to income ratio and lowering ROE.&nbsp;While this should theoretically lower HGH’s cost base, we believe earnings accretion to be highly uncertain.&nbsp;We believe HGH would experience a significant increase in&nbsp;non-performing loans in the event of a further downside economic scenario. This is partly due to HGH's relationship with Harmoney, where&nbsp;HGH absorb any credit losses incurred through Harmoney yet hold no direct control over the business. Given the risk profile of Harmoney (loans charged up to 40% interest) we see this as an oversight by HGH.&nbsp;


Tightening regulatory frameworks a manageable headwind for HGH


While implementation of the RBNZ’s capital adequacy requirements has been delayed, we do not expect HGH to struggle to meet capital targets. However, regulatory risks remain if the RBNZ up-weights the risk weighting of reverse mortgages. We see additional regulatory risk around high-interest personal lending.



Jamie Foulkes
jamie.foulkes@forsythbarr.co.nz
+64 4 491 2217





Ashton Olds
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Heartland Group: In the Heart of the Storm