Heartland Posts $23.6M Full Year Profit

Heartland Posts $23.6m Full Year Profit

8:30am, 28 Aug 2012 | FLLYR

NZX and Media Release

HEARTLAND POSTS $23.6M FULL YEAR PROFIT

28 August 2012

Achievements for full year
• Financial targets met: guidance achieved; balance sheet strengthened and liquidity improved
• Integration completed culminating in successful rebranding to Heartland
• Acquisition of PGG Wrightson Finance supported by a successful capital raising
• Investment grade credit rating reaffirmed and outlook improved to ‘stable’

Milestones going forward
• Bank registration objective
• Acceptable and sustainable earnings
• Dividend policy and payments

FINANCIAL PERFORMANCE

Heartland New Zealand Limited (Heartland) (NZX : HNZ) today announced a net profit after tax (NPAT) of $23.6m for the full year ended 30 June 2012, up $16.5m from $7.1m for the previous year ended 30 June 2011. NPAT for the period under review included a one-off $3.4m tax benefit, which was in addition to the previously reported one-off deferred tax benefit of $6.2m. Excluding this subsequent one-off $3.4m tax benefit, Heartland’s earnings of $20.2m were in line with guidance of $20.0m-$22.0m.

Net profit before tax (which excludes the one-off tax benefits) for Heartland was $20.3m for the full year ended 30 June 2012, up $8.7m from $11.6m for the previous year ended 30 June 2011. Earnings Per Share was $0.06 calculated on weighted average shares.

Net profit before tax for the second half of the year was $14.7m, up from $5.6m in the first half, an increase of $9.1m or 163%. The improvement in this half was driven by improved margins and reduced costs.

Balance sheet
Heartland’s balance sheet grew during the period.
• Net finance receivables were $2.1bn at 30 June 2012 compared to $1.7bn at 30 June 2011. The increase was largely due to the acquisition of PGG Wrightson Finance Limited (PWF) on 31 August 2011. Net finance receivables remained unchanged at $2.1bn from 31 December 2011 to 30 June 2012, as “core” asset growth in the Business, Rural and Consumer divisions was offset by reductions in Non-Core Property, and Retail (where the mortgage book declined), in what remains a competitive environment.
• Cash and cash equivalents reduced from $267.2m at 30 June 2011 to $89.7m at 30 June 2012, as excess liquidity that was held in the lead-up to the expiry of the Crown guarantee was utilised as planned.
• Borrowings increased from $1.8bn at 30 June 2011 to $1.9bn at 30 June 2012, due to the acquisition of $408.8m of deposits from PWF and the assumption of these obligations by Heartland. This was offset by the reduction in liquidity and repayment of the $92.3m PWF Bond.
• Share capital increased by a net $54.9m due to the capital raising associated with the PWF acquisition in the period. Total equity was $374.8m at 30 June 2012 compared to $296.4m at 30 June 2011, which was an equity ratio of 16% to total assets (up from 14% at 30 June 2011).

Net Tangible Assets (NTA) increased from $270.1m to $343.7m (following the capital raising and PWF acquisition) – on a per share basis NTA was $0.88 at 30 June 2012 compared to $0.90 at 30 June 2011.

Net Operating Income (NOI)
NOI increased to $94.9m in the year ended 30 June 2012, up from $70.5m in the preceding year ended 30 June 2011. The increase in NOI was mostly attributable to:
• The acquisition of PWF on 31 August 2011; and
• Lower cost of funds, both through lower funding margins and a reduction in surplus liquidity held.

NOI increased by $5.1m to $50.0m in the last six months of the financial year compared to the first six months of the financial year.

Costs
Operating costs increased by $19.9m to $65.6m for the year ended 30 June 2012 compared to the prior year ended 30 June 2011. This is due to six months of MARAC costs and six months of Heartland costs being included for the year ended 30 June 2011, whereas twelve months of Heartland costs and ten months of PWF costs are included for the year ended 30 June 2012.

Notwithstanding this, operational efficiency improved, with average operating expenses as a percentage of NOI reducing from 80% in the six months through to 31 December 2011, to 60% for the six months through to 30 June 2012. This was delivered through both cost reductions and improvements in NOI.

Impairments and revaluations of investment properties
Impaired asset expense was $5.6m for the year ended 30 June 2012, down from $13.3m for the year ended 30 June 2011, due to the continued benefit of the Real Estate Credit Limited (RECL) management contract and improvement in the quality of the core book, in particular the Business book. The RECL Agreement was regarded as fully utilised as at 30 June 2012 – the future value of expected claims has reached the $30.0m limit.

Investment properties held on balance sheet increased by $21.0m to $55.5m during the year as Heartland sought to improve its security position. A $3.9m decrease in the fair value of these investment properties occurred as at 30 June 2012.

Net impaired, restructured and past due loans over 90 days were $90.5m, which was 4.4% of net finance receivables as at 30 June 2012 – down from $100.7m or 5.9% as at 30 June 2011.

The level of impaired, restructured and past due loans are due to the legacy non-core property books and will continue to reduce as a percentage of total assets as lending in the core business grows and the non-core book runs down.

The net impairment ratio on the core business is relatively consistent with the prior year at 1.3% as at 30 June 2012, compared to 1.2% as at 30 June 2011.

Taxation expense
Heartland benefited from one-off tax benefits of $9.6m in the 2012 financial year. A law change resulted in a one-off deferred tax benefit of $6.2m as previously advised, and a $3.4m gain resulting from utilising historic tax losses of MARAC Financial Services Limited. Heartland expects taxation to be normalised in the 2013 financial year.

Funding and liquidity
Heartland Building Society’s (HBS) (Heartland’s principal operating subsidiary) liquidity was $448.5m as at
30 June 2012, which consisted of cash, liquid assets and unutilised available funding lines. This was $152.6m more than the minimum level of liquidity required under HBS’s Trust Deed.

Investment grade rating reaffirmed
On 6 December 2011, Standard & Poor’s (S&P) affirmed HBS’s investment grade credit rating of BBB- and improved the ratings outlook to ‘stable’. The investment grade rating underpins the strength and strategy of Heartland.

BUSINESS PERFORMANCE – HEARTLAND’S CORE BUSINESS DIVISIONS

Business
The receivables book grew by $63.9m to $540.2m during the year ended 30 June 2012. NOI increased by $3.7m to $21.0m from the prior year. The current lending pipeline looks strong with continued growth expected in the next financial year.

Rural
The receivables book grew by $402.6m to $478.6m during the year ended 30 June 2012, primarily due to the acquisition of PWF and growth in livestock lending. NOI also expanded significantly from $1.6m to $19.1m. Outside the PWF acquisition, book growth was minimal in the year, due to debt reduction in the sector and lower than expected turnover in livestock. The pipeline is solid, however converting undrawn limits to loans was challenging in the 2012 year. Notwithstanding this, growth is expected in the 2013 financial year aided by a new rural livestock lease product launched during the period.

Retail and Consumer
The receivables book fell by $47.6m to $954.8m during the year ended 30 June 2012. NOI increased by $4.4m to $45.1m from the prior year. The mortgage book (primarily residential) was impacted by a competitive market and reduced by $68.4m. This was offset by motor vehicle receivables growth of $20.8m. This trend is expected to continue.

NON-CORE BUSINESS

Property
The property market remains difficult for loan recovery and Heartland’s investment properties are subject to valuation risk.

Total non-core property assets reduced from 30 June 2011 by $26.9m to $160.2m at 30 June 2012.

Non-core property was made up of net receivables of $104.7m and investment properties of $55.5m. RECL2 manages the ex-MARAC non-core property. As noted earlier, the RECL Agreement was regarded as fully utilised as at 30 June 2012 – the future value of expected claims has reached the $30.0m limit.

PEOPLE AND CULTURE

During the financial year, the business successfully rebranded to Heartland, and transitioned onto one core banking system. These initiatives signify completion of integration, and position the organisation to move forward with a shared vision and a clear focus on the goals ahead. Heartland’s vision is to provide the essential funding needed by the businesses and farms that form the productive sector and the families they support, which are critical to the local economy. This helps New Zealand communities prosper and thrive, creating sustainable wealth for all.

LOOKING FORWARD

Bank registration
Heartland notes that a key objective is ultimately to create a New Zealand owned and controlled banking group, with its parent company listed on the NZSX. The process is ongoing and the information exchanged, and discussions held, between the Reserve Bank of New Zealand (RBNZ) and HBS in the course of the process are confidential. However, as the market is aware, HBS has engaged with RBNZ regarding its application for registered bank status, certain necessary intermediate steps have been completed and the formal determination process has now begun. For fuller information, we refer to Heartland’s NZX release of 10 August 2012.

Performance update
Heartland expects to provide profit guidance for the year ending 30 June 2013 at its AGM on Friday 2 November 2012. Whilst trading conditions remain challenging given economic conditions generally, Heartland expects a continual improvement in underlying performance in the year ahead.

Dividend policy and payments
No dividend was paid or is to be paid by Heartland in, or in respect of, the 30 June 2012 financial year. Heartland’s Dividend Policy will be outlined at the AGM.

ENDS

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