Maiden profit of $7.1 million for Heartland

The finance company aiming to become a bank posted a maiden annual profit of $7.1 million. Photo / Thinkstock

Heartland New Zealand Ltd., the finance company aiming to become a bank, posted a maiden annual profit of $7.1 million, after booking $6.8 million in one-time charges for its first year of operation, NZX listing costs, and the proposed acquisition of PGG Wrightson Finance Ltd.

Comparisons with previous periods were "meaningless" because it was a transition period, and the board will be updating its full-year profit forecast for the year ahead of between $20 million and $24 million at the end of the September quarter, managing director Jeff Greenslade said.

This would take into account early contributions from PWF and a $5 million-to-$6 million one-off tax benefit, which was disclosed yesterday.

Net operating income for the period was $70.6 million, driven largely by the low-margin consumer part of the business, with the business and rural divisions "in varying stages of development", while "challenging" trading conditions saw annual net receivables drop slightly to $1.7 billion.

A presentation accompanying today's NZX announcement shows the PWF acquisition is essential to realising Heartland's desire to become a "balanced" lender in the rural, small and medium business and consumer markets.

The current asset mix shows only 4% of net receivables comes from rural loans, whereas the post-PWF loan book will be 22% concentrated in rural lending. Its property loan book - a primary source of ongoing high levels of impaired assets - will be wound back to around 7% of the total Heartland portfolio.

Management is focusing on exiting the "legacy property development book" to satisfy credit rating agency Standard & Poor's, which has affirmed an investment grade rating of BBB-, but with negative outlook because it wants faster action on impaired lending.

Heartland warns that a faster realisation of non-core property lending could result in reduced earnings, along with the cost of exiting the government's retail deposit guarantee scheme - a process for which the organisation is ahead of schedule.

With assets of $2.1 billion and an equity ratio of 14%, Heartland's underlying financial position was "strong" and well in excess of regulated capital ratio requirements.

Earnings per share on the integrated group were 2 cents. No dividend has been declared, with first dividends still targeted in the 2012/13 financial year. Heartland shares fell 1.79% to 55 cents in NZX trading this morning.

Impairment charges of just over $30 million have been recognised in each of the past two years, although net impaired assets showed a slight improvement between the half and full years. Some $69 million in "specifically impaired" assets was declared at June 30, compared with $79 million at Dec 31.

However, the Real Estate Credit Ltd. arm of what was formerly Marac, the largest part of the combined Heartland group, "remains at risk" on its non-core property assets.

The overall security position has been improved by bringing $34 million of property assets onto the Heartland balance sheet, the group says. Net impaired assets stood at a 5.9% as a proportioned of net finance receivables at balance date.

Meanwhile, retail deposits remain stable at $1.6 billion, with reinvestment rates above target and recovering after dipping earlier this year, and more than half of Heartland's investors voluntarily moving to non-guaranteed deposits or terms that extend beyond the expiry of the government guarantee scheme, in December this year.

"The quality of the retail deposit base has progressively improved with the purging of 'hot money' or guarantee chasers, and is now significantly more loyal and stable," said Greenslade. "This purging will continue but growth in new depositors bodes well for the future."

While cost of funds is tracking lower, this is being offset by the cost of holding surplus liquidity in advance of the guarantee scheme ending.

(BusinessDesk)