Heartland Bank increased first-half profit 14 per cent as the NZX-listed lender's loan book grew at the same time as it benefited from cheaper funding costs.

Net profit rose to $29.1 million, or 6 cents per share, in the six months ended December 31 from $25.6m, or 5 cents, a year earlier, the Auckland-based company said in a statement. The bank's loan book grew 7.1 per cent to $3.33 billion, with rural and business loans expanding at a faster pace than household lending. Profit was ahead of Forsyth Barr analyst James Bascand's forecast of $28.1m.

Interest income edged up to $135.8m from $134.3m, while interest expenses fell 9.7 per cent to $56.8m, with deposits growing 10 per cent to $2.51b. Still, Heartland's net interest margin (NIM) shrank to 4.44 per cent from 4.52 per cent due to higher levels of early car loan repayments and a reduction in more profitable livestock loans.

"Heartland expects to maintain its NIM for the remainder of FY17 through a combination of changes to asset mix (with livestock trading conditions improving), re-pricing of selected existing loans, increasing new business rates and focusing on lower loan size and higher earning rate lending," the bank said.


Heartland generates higher margins than its rivals by limiting its exposure to the residential mortgage market, where it struggles to compete with the scale of the four large Australian-owned banks, and instead targets more profitable lines of business, such as auto loans and rural lending. The country's banks faced a margin squeeze last year as appetite for home loans outpaced their ability to fund that through term deposits, meaning they had to source funding with more expensive wholesale credit lines overseas.

NZX-listed Heartland lifted its annual earnings guidance, saying net profit was likely to be at the upper end of its previous projection of $57m to $60m in the year ending June 30.

The board declared an interim dividend of 3.5 cents per share, payable on April 7 to shareholders on the register at the end of trading on March 24. That's up from 3 cents a year earlier, but less than the 3.8 cents Forsyth Barr's Bascand was forecasting.

The company also said it will double the size of a share purchase plan to $20m because of "strong interest" shown by investors and the bank's "desire to provide its loyal retail shareholder base with an opportunity to make a meaningful further investment". The offer allows shareholders on the register on February 20 to buy up to $15,000 of shares at a 4.6 per cent discount to the average trading price between March 6 and March 10, or a $1.46 per share cap, which is what institutional investors paid in a placement in December. The shares last traded at $1.57 and have gained 45 per cent over the past 12 months.

Heartland's business banking segment lifted first-half profit 27 per cent to $17.3m as net operating income advanced 9 per cent to $23.1m. Net loans grew 5 per cent to $947.5m, due in part to a drive to boost loans to small and medium-sized business via online channels. Impaired loan costs shrank 36 per cent to $1.6m.

The rural segment's profit rose 9.6 per cent to $11.4m on a 6 per cent gain in net operating income to $13.8m. Lending grew 12 per cent to $618.6m across all key sectors, including dairy, sheep and beef, horticulture and viticulture, while impairment charges were little changed at $375,000.

The bank's households division, which covers retail and consumer and reverse mortgages, increased earnings 9.3 per cent to $31.7m on a 7 per cent gain in net operating income to $45.5m. Consumer loans grew 7 per cent to $879.1m, but had limited impact on income growth due to "lower earning rates on motor vehicle and personal loans". Reverse mortgages in New Zealand grew 5 per cent to $379.7m and in Australia by 9 per cent to $472.2m.

Heartland boosted lending through the Harmoney platform 69 per cent to $62.1m, which is part of its strategy to deliver more services via online channels.


The bank yesterday announced it took a 25 per cent stake in online small and medium-sized business lender Fuelled, which it today said cost less than $1m. Heartland has provided a $2m committed debt facility to Fuelled to speed up its plans to launch in Australia.

This story has been corrected. It initially said Heartland's share purchase plan would let shareholders buy up to $52,000 of shares instead of $15,000.