Heartland Bank Limited

Wednesday 22nd April 2015

Heartland New Zealand Limited (HNZ) listed on the NZSX 1st February 2011 following the merger of CBS Canterbury, Southern Cross Building Society and MARAC Finance Limited. Heartland subsequently acquired PGG Wrightson Finance Limited (PWF) from PGW as a strategic addition to the Heartland Group, completing the positioning of Heartland as a stable and diversified financial services provider. The Heartland Group includes a banking arm, being Heartland Bank Limited (Heartland) and Heartland Financial Services Limited (HFSL), which provides insurance product and associated financial services. The banking business is Heartland’s core business, with the strategy being to serve the needs of New Zealanders by providing credit to the productive sector, a sector critical to the success of the New Zealand economy.

Heartland’s key focus is the provision of financial products and services to:

• Small and medium sized enterprises (SME’s);
• Rural sector (particularly livestock and working capital finance); and
• Families that own and manage these businesses and other parts of the household sector where Heartland has a relative advantage.

Heartland has differentiated itself by taking a different lending focus, and unlike other banks in New Zealand, is not heavily focused on residential property lending.

Heartland delivered a strong first half performance, with core asset growth driving a net profit after tax (NPAT) of $23.5m for the half year ended 31 December 2014, up 41% from the previous corresponding half year ended 31 December 2013. Earnings for the half year resulted in a return on equity of 10.2%. This is up from approximately 9.0% for the full year ended 30 June 2014. Earnings per share increased by 25% to $0.05 (after rounding) compared to $0.04 in the previous corresponding period.

The credit rating for Heartland Bank Limited was upgraded to BBB (outlook stable) during the half year with Fitch Ratings citing the bank’s improved asset quality and improved earnings as key contributors to the upgrade.

Heartland’s total assets increased by $670.08 million, or 26.9%, from $2.49 billion at the end of the previous corresponding period. There was an $816.59 million increase in net finance receivables which was largely due to the acquisition of the HER mortgage business for $710.1 million.

Cash and cash equivalents and investments decreased by $83.3 million from $178.53 million to $95.22 million at 31 Dec 2014 as liquidity was used to fund the growth in receivables.

Borrowings increased by $580.11 million from $2.07 billion to $2.65 billion at 31 June 2014. This was largely due to the acquisition of the HER mortgage business, and also due to shareholding in harmony Corp and Ora HQ Limited.

Net operating income (NOI) was $70.12 million for the period, an increase of $11.1 million (or 18.9%) as compared to last period. Operating costs were $33.52 million for the period, an increase of $1.11 million as compared to the previous period.

The directors of Heartland resolved to pay an interim dividend of 3.0 cents per share compared to 2.5 cents per share in the previous period, an increase of 20%.

BUSINESS PERFORMANCE – HEARTLAND’S CORE BUSINESS DIVISIONS

Business: NOI was $19.5m (6.5% increase) above the previous period ended 31 Dec 2013, driven primarily by lower cost of funds. In the Business division, this growth was driven by providing the right product mix to serve customers’ long term capital investment requirements as well as their short term working capital needs.

Rural: NOI was flat at $11.75m and reduced marginally compared to previous period $12.11m, as the benefit of lower cost of funds was offset by a reduction in receivables. Heartland aim to achieve growth through the continued development of specialist products and building on the strength of its distribution channels. Livestock finance is just one example of its specialist product strategy, enabling farmers to purchase livestock by way of a loan secured against the livestock itself, rather than farm assets.

Retail & Consumer: NOI was $37.47m compared to $26.44m in the previous corresponding period. The Seniors Finance business has now been fully integrated following completion of the acquisition in April 2014 and the business contributed well to the earnings in the half year.

Property: NOI was $0.38m compared to $1.4m in period ending 31 Dec 2013.

Heartland’s Board stated that over the past four years, they have consolidated the business and achieved key strategic milestones. Now the Company is beginning the next phase of its evolution and focused firmly on growth with the review of strategic direction and long term growth strategy which will lay the foundation for the next three years.

For the current financial year, the Company is confident that it will achieve the forecast NPAT of $46.0m to $48.0m. Strong asset growth is expected to continue for the remainder of the financial year as Heartland continue to develop new initiatives to achieve and maintain a leading position in its core markets. Strong focus is on new product development, particularly in the Household division where Heartland believe significant opportunities are available to leverage its existing customer base and grow market share with new customers.

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