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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Heartland Group Holdings / Equity Bottom-Up

<h2>Heartland Group (HGH)</h2>
<h3>Impacts to HGH regarding the RBNZ’s latest monetary policy statement</h3>
The RBNZ’s Financial Stability Report released today (25 November 2020) corroborates our view that a prolonged period of stimulatory monetary policy is likely in its current form to create a number of headwinds for HGH. Our negative view is further underpinned by 1) sustained ultra-low interest rates which will likely continue to apply pressure to HGH’s NIM (Net Interest Margin) through reduced retail interest rates, 2) HGH not participating in the RBNZ’s Funding for Lending Program (FPL) - expected to be implement early December 2020, and 3) competitors (the big four NZ banks) receiving funding at OCR, decreasing the average funding cost of the New Zealand banking industry, further widening the funding gap between HGH and competitors.
<ul>
<li>Management has confirmed that HGH will not be participating in the RBNZ’s Funding for Lending Program (FLP).</li>
<li>In its Financial Stability Report, the RBNZ stated ‘Banks with high proportions of funding from retail sources, including most of the smaller banks in New Zealand, would see greater NIM compression as their funding costs would not fall by as much as the interest rates they would be able to earn on their assets’.</li>
<li>This is highly supportive of our on-going thesis of HGH’s NIM compression, (refer to our report ‘In the Heart of the Storm’, 19 October).</li>
</ul>
Funding for Lending details
On 11 November the RBNZ announced its&nbsp;Funding for Lending&nbsp;program&nbsp;(FLP)&nbsp;with details summarised on page 19&nbsp;of the report&nbsp;<a href="https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Monetary%20policy%20statements/2020/mpsnov20.pdf?revision=f5f62295-9f98-4dcc-8dc7-ad1b8b12a7ad" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Monetary%2520policy%2520statements/2020/mpsnov20.pdf?revision%3Df5f62295-9f98-4dcc-8dc7-ad1b8b12a7ad&amp;source=gmail&amp;ust=1606353925341000&amp;usg=AOvVaw2K2LbU9bXqlOouKRBJbeb4" rel="noopener">https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Monetary%20policy%20statements/2020/mpsnov20.pdf?revision=f5f62295-9f98-4dcc-8dc7-ad1b8b12a7ad</a>&nbsp;which will be implemented in early December 2020. We expect the four large NZ banks to participate.
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.2&amp;permmsgid=msg-f:1684293374066169712&amp;th=175fcfe662c21770&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ-HCkm8NMZzbCWq97ud6zmpsUxv3l5HC1_GnsdAML01i14hR7n2kGk74xwkFMnI7P3Y7qZRW14D4ByGGMIvpddKGGhZAZTeO_yKqzWM3CcqL1uzfUgKINjU_3o&amp;disp=emb" width="547" height="452" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Additional snippets:
1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Harmoney escrow
<ul>
<li>HGH released a statement on 19 November highlighting Harmoney’s listing of which it owns 8.44% of listed shares and also highlighted HGH’s escrow position (which we assume to be for a year).</li>
<li>We would view any sale of its stake in Harmoney as a positive for HGH given the profit/loss sharing agreement between the companies and the elevated impairment expenses generated by Harmoney’s unsecured lending platform.</li>
</ul>
2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Competitor MFT credit risk commentary
<ul>
<li>MFT (motor vehicle dealers), 23 November 2020: ‘For the year ended 30 September 2020, profit after tax has decreased by 55%’… ‘The COVID-19 pandemic has seen a further reassessment of credit risk in 2020 resulting in an increased allowance of $4.5m for forecast deterioration in credit risk as the global economic uncertainty continues into 2021.’</li>
<li>This is broadly supportive of our view that HGH and other smaller New Zealand finance companies have taken a number of years to see impairments levels recover from recessions historically and will likely see elevated impairment expenses post COVID-19.&nbsp;&nbsp;</li>
</ul>
Jamie Foulkes&nbsp; Analyst, Equities
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.3&amp;permmsgid=msg-f:1684293374066169712&amp;th=175fcfe662c21770&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ-3Qa8TbDz1Du-iT3wgL92nVS9UfiswR-wVS3fZ0nfpHNppiUZrkMp1ULLXO77L9_EFgMF-hmq345CQ2YCekaRrWs5KsXKY8iB9joGME0gtt2eJFBiVo8tlptk&amp;disp=emb" class="editor-image img-responsive"></figure>
 M: +64 20 4196 2993 |P: +64 4 914 2217 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Heartland Group (HGH)
Impacts to HGH regarding the RBNZ’s latest monetary policy statement
The RBNZ’s Financial Stability Report released today (25 November 2020) corroborates our view that a prolonged period of stimulatory monetary policy is likely in its current form to create a number of headwinds for HGH. Our negative view is further underpinned by 1) sustained ultra-low interest rates which will likely continue to apply pressure to HGH’s NIM (Net Interest Margin) through reduced retail interest rates, 2) HGH not participating in the RBNZ’s Funding for Lending Program (FPL) - expected to be implement early December 2020, and 3) competitors (the big four NZ banks) receiving funding at OCR, decreasing the average funding cost of the New Zealand banking industry, further widening the funding gap between HGH and competitors.

Management has confirmed that HGH will not be participating in the RBNZ’s Funding for Lending Program (FLP).
In its Financial Stability Report, the RBNZ stated ‘Banks with high proportions of funding from retail sources, including most of the smaller banks in New Zealand, would see greater NIM compression as their funding costs would not fall by as much as the interest rates they would be able to earn on their assets’.
This is highly supportive of our on-going thesis of HGH’s NIM compression, (refer to our report ‘In the Heart of the Storm’, 19 October).

Funding for Lending details
On 11 November the RBNZ announced its&nbsp;Funding for Lending&nbsp;program&nbsp;(FLP)&nbsp;with details summarised on page 19&nbsp;of the report&nbsp;https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Monetary%20policy%20statements/2020/mpsnov20.pdf?revision=f5f62295-9f98-4dcc-8dc7-ad1b8b12a7ad&nbsp;which will be implemented in early December 2020. We expect the four large NZ banks to participate.

Additional snippets:
1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Harmoney escrow

HGH released a statement on 19 November highlighting Harmoney’s listing of which it owns 8.44% of listed shares and also highlighted HGH’s escrow position (which we assume to be for a year).
We would view any sale of its stake in Harmoney as a positive for HGH given the profit/loss sharing agreement between the companies and the elevated impairment expenses generated by Harmoney’s unsecured lending platform.

2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Competitor MFT credit risk commentary

MFT (motor vehicle dealers), 23 November 2020: ‘For the year ended 30 September 2020, profit after tax has decreased by 55%’… ‘The COVID-19 pandemic has seen a further reassessment of credit risk in 2020 resulting in an increased allowance of $4.5m for forecast deterioration in credit risk as the global economic uncertainty continues into 2021.’
This is broadly supportive of our view that HGH and other smaller New Zealand finance companies have taken a number of years to see impairments levels recover from recessions historically and will likely see elevated impairment expenses post COVID-19.&nbsp;&nbsp;

Jamie Foulkes&nbsp; Analyst, Equities

 M: +64 20 4196 2993 |P: +64 4 914 2217 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

HGH Impact RBNZ Financial Stability Report