The company reiterated its guidance for full-year net profit of $77m to $80m, which would be between a 4.6 per cent and 8.7 per cent increase on the previous year.
Heartland shares rose as much as 4.3 per cent to $1.93 after the announcement and then eased to $1.88 from $1.85 yesterday.
Managing director Jeff Greenslade had emphasised at the November annual meeting that he wanted the company to lift its return on equity, which rose by 165 basis points in the latest six months to 11.7 per cent.
Reflecting the low interest rate environment and the need to hold more cash through the Christmas/New Year period, net interest margin eased 7 basis points to 4.27 per cent.
That's considerably higher than the mainstream banks – ASB Bank, for example, reported net interest margin of 2.13 per cent in its first-half. It also reflects the niche nature of Heartland's business in providing services such as motor finance, reverse mortgages and digital lending to small businesses through its Open 4 Business platform.
Net operating income grew 16 per cent to $118.6m while costs grew at a much faster 26 per cent pace to $54.6m, reflecting increased spending on marketing and higher compliance costs as well as changes in accounting standards.
That meant Heartland's cost-to-income ratio rose to 46 per cent from 42.5 per cent in the year-earlier first half. Greenslade said an element of that was one-off in nature and that he expected the CTI ratio to settle in "the low 40s" longer-term.
Charges against profit for bad debts fell 32 per cent to $9m, reflecting improved collection processes and because of accounting standard changes.
Motor finance remained Heartland's largest profit centre with net operating income of $30.1m but it grew just 6.8 per cent, much slower than other parts of the business such as O4B, which was up 54 per cent at $6.6m, and Australian reverse mortgages, which was up 41.6 per cent to $16.6m.
Greenslade said the motor finance business is driven by both sentiment and employment and, while employment is very strong, "the newspapers aren't the most cheery things to read at the moment in terms of what's happening in the world."
He noted that during the GFC, sales volumes of motor vehicles slumped. When the economy started to grow again, demand soared from those who had held onto their existing vehicles for longer than usual and then began to replace them at the same time.
Heartland extended the O4B platform to Australia in November in a pilot to ensure the product is tailored to suit the Australian market.
Greenslade said Heartland is seeing "very similar metrics" in the Australian market and that both countries are "very dependent on small business and weighted towards the small end of small business."
Both borrowing requirements and impairments are proving very similar to New Zealand.
The New Zealand reverse mortgage business lifted net operating income by 26.4 per cent to $13m, intermediated business lending rose 27.7 per cent to $10.1m, livestock lending was up 20.2 per cent to $3.4m and income from lending through the Harmoney platform rose 16.3 per cent to $11m.
The one area where net operating income went backwards was Heartland's relationship banking for business and rural customers which fell 16.7 per cent to $23.3m.
While that had previously been a core part of Heartland's operations, banks have increasingly been encroaching on that in recent years, causing Heartland to back away from that part of the market, Chris Flood, chief executive of Heartland Bank, told analysts on a conference call.
"We do keep a weather eye on this part of the market," and it will be interesting to see how the major banks' react to the new bank capital requirements, Flood said.
From July 1, the major banks will have seven years to lift total minimum capital to 18 per cent and the smaller banks, including Heartland, to 16 per cent from 10.5 per cent currently.
Heartland's total capital at December 31 was 12.9 per cent. Greenslade said the changes wouldn't impact his company until 2022 and are not having a material impact on the bank.
