Patrick Smellie: Heartland Group reveals record profit and $200m capital raise

Heartland Group Holdings plans to raise $200 million in new capital off the back of a record financial result. The listed financial firm which owns Heartland Bank and a reverse mortgage business spanning both New Zealand and Australia posted a net profit of $95.1m for the year to June 30, 2021. That was up $8.1m on the prior financial year. On an underlying basis its net profit was $96.1m - up $8.2m on the prior year. Heartland also revealed an equity raise made up of a $130m underwritten placement and a $70m non-underwritten share purchase plan to shareholders in New Zealand and Australia. The company said it would use the new capital to repay an A$158m acquisition finance facility it took out to fund its recent purchase of StockCo Holdings 2 Pty and StockCo Australia Management Pty and to provide additional growth capital for its existing businesses. Its gross financial receivables rose 15.3 per cent over the year to $765.9m, pushing its return on equity up 21 basis points to 12.1 per cent. But its net interest margin was squeezed down 19 basis points to 4.16 per cent. Heartland's cost to income ratio fell 3.2 percentage points to 43.6 per cent while its impairment expenses also fell from 0.31 per cent of average receivables to 0.25 per cent. The company will pay a final dividend of 5.5 cents per share - taking its final dividend to 11cps - on par with its prior financial year. Acquisitions Heartland chief executive Jeff Greenslade said it was looking for further opportunities for growth in Australia and had entered into a non-binding memorandum of understanding with Avenue Hold to buy it and its subsidiary Avenue Bank. Avenue Bank is a restricted authorised deposit-taking institution (ADI) which means it may conduct banking in Australia for a limited time subject to certain conditions but it was seeking to become a full ADI. Any acquisition would be subject to regulatory approvals. Heartland had made an initial subscription of A$5m of capital in Avenue Hold but its due diligence review was continuing. "Completion of any transaction is expected to be conditional upon a number of matters (which may include Heartland securing acquisition funding, Heartland being satisfied as to the likelihood of Avenue Bank progressing to being a full ADI, Avenue Hold shareholder support of the transaction, receipt of all necessary regulatory approvals (including from APRA and the Reserve Bank of New Zealand (RBNZ)), and the absence of any material adverse change)." If it goes ahead the earliest the transaction would be completed would be the last quarter of FY2023 and may not be until the first half of FY2024. Year ahead Greenslade said the current economic environment presented challenges around rising inflation and interest rates tempered by low unemployment flowing through to business and consumer confidence. "To a meaningful extent, Heartland is insulated against these challenges due to expected levels of growth in reverse mortgages (driven by demographics) and livestock (driven by global demand for protein)." He said the large number of residential mortgages in New Zealand coming off fixed rates should support ongoing growth in its home loan business. "There is optimism that market share gains in motor and asset finance are available to underpin growth in markets that have seen some supply disruptions and a decline in confidence. "Similarly, Heartland's focus on parts of the rural market that are under serviced by larger banks, has the potential to offset the ongoing exit of larger rural relationship loans. However, this must be weighed against decreasing confidence levels in some sections of the market." While Heartland had released its Covid-19 overlay it had adopted an economic overlay of $8m to cover for a potential downside scenario. "Alongside this, the portfolio mix has shifted towards higher quality loans, with a strong increase in particular of reverse mortgages, which are expected to continue to perform very well." It would also be an important year for its Australian business with the first year of StockCo Australia as part of the group and progress towards Heartland becoming a bank in Australia. Heartland forecast net profit for FY2023 to be in the range of $109m to $114m. - Tamsyn Parker, NZ HeraldSee omnystudio.com/listener for privacy information.