Heartland Bank looks to raise up to $125m

Heartland Bank is looking to raise up to $125 million. Photo / Stephen Parker

Heartland Bank is considering raising up to $125 million through an unsecured subordinated note in a bid to meet increasing capital requirements and fund future growth.

The bank’s parent company Heartland Group Holdings made the announcement as it released its first half results showing a net profit of $48.7m for the six months to December 31, a 2.4 per cent increase on the same period in 2021.

Net interest income rose strongly at the bank, increasing from $123.9m to $138.9m while lending and credit fee income also increased from $4.57m to $6.6m. But operating expenses were also up from $57.3m to $63.5m.

Impaired asset expenses also rose from $8.54m to $9.24m. Unlike other financial firms, Heartland’s net interest margin fell 34 basis points to 3.97 per cent.

The results were also affected by a number of significant one-off items including a $2.4m fair value loss on its investment in Harmoney shares, a $3.6m loss on legacy hedging, and a $1.9m interest expense on a bridging loan it took out when it acquired StockCo Australia which has since been repaid.

Heartland Group chief executive Jeff Greenslade said its first half was affected by rising inflation and the cost of living and 2023 was expected to have similar challenges.

“Notwithstanding these pressures, Heartland’s loan portfolios have performed well. Overall credit quality remains good, benefitting from Heartland’s continued move towards higher quality and lower risk assets.”

Greenslade said its reverse mortgage portfolios had remained resilient to economic conditions but it had experienced an increase in arrears in its motor lending portfolio.

Motor lending arrears increased from 3.17 per cent as of June 30, 2022 to 3.99 per cent as of October 31, 2022 although it had since fallen back to 3.73 per cent.

“Heartland is focused on supporting its vulnerable customers and those who may be experiencing temporary difficulties. In response to the rising interest rate environment, Heartland intentionally delayed passing the full impact of these increases on to some borrower customers, and did not pass the full increase onto New Zealand or Australian reverse mortgage customers – this was believed to be the socially responsible approach.”

Greenslade said it had also been supporting customers affected by the recent flooding and severe weather in the North Island and was offering deferred loan repayments, interest-only payments, additional funding or other solutions.

Heartland Group said its New Zealand business Heartland Bank was also considering making an offer of up to $75m with the right to accept oversubscriptions of up to an additional $50m to New Zealand investors and certain overseas institutional investors. The notes would have a 10-year maturity and qualify as Tier 2 capital for Heartland Bank’s regulatory capital requirements.

The amount of capital required by banks is set to increase as part of Reserve Bank requirements.

Heartland Bank’s regulatory capital ratio reduced to 13.15 per cent at the end of December, down from 13.49 per cent, after it paid out a dividend following restrictions on this being eased.

“Heartland Bank continues to operate significantly in excess of regulatory minimums and is well positioned to meet the RBNZ’s future higher capital requirements.”

It is required to have a core capital ratio of 11.50 per cent and a total capital ratio of 16 per cent by July 2028.

“In order to accelerate this journey, diversify its capital base and accommodate future projected growth, Heartland Bank is considering an offer of Tier 2 Capital notes.”

Full details of the offer would be released in mid-March.

Heartland Bank chief executive Leanne Lazarus said it expected its second half to be similar to the first.

“Having navigated the challenges of the operating environment we are very clear around areas of growth and the opportunities within that and managing our margins. Our key really is driving efficiencies throughout the bank.”

She said it was nearing the completion of a core system upgrade that would allow it to accelerate its automation, particularly in its middle and back office.

Unlike larger banks it doesn’t have a call centre operation. Lazarus said its middle and back office staff handled customer queries. But more customers were getting information via the bank’s app which meant it was getting fewer calls.

“We are removing the friction out of what they are having to deal with so that creates efficiencies for us and more of a seamless experience for the customer.”

It did not use artificial intelligence technology at the moment but was considering it. “We do have some robotic process automation but it’s of very limited use. This is an area where we have to accelerate.”

So far the bank had held off passing on the full official cash rate rise to its borrowers but Lazarus said that was something it would have to look at closely this year.

“We have to look at each time what’s the cost of funds and what can we pass on. If we have to pass it, we will have to pass that on but it’s really looking at the full picture in terms of cost of funds, what’s the margin, what’s our growth and what’s our customer proposition?”

The bank was focused on moving to higher quality loans and had pulled back on unsecured lending which meant it was turning down more of those loan applications than in the past.

“We are really comfortable with contraction in the unsecured business.”

Chris Flood, deputy chief executive of Heartland Group, said it was anticipating strong loan growth in the second half and would need to continue to grow its deposit book to fund that.

The group had moved out of some wholesale funding and had ramped up its retail deposits.

“At this point in the cycle, it is attractive for Heartland and it’s good for our customer base so it makes good sense.”

Heartland will pay an interim dividend of 5.5cps the same as what it paid in the first half of its 2022 financial year.