Heartland Group Holdings Limited (HGH) Earnings Call Transcript & Summary

[Foreign Language] Good afternoon, ladies and gentlemen, and welcome to our AG ASM. I was just speaking to Bruce from the Shareholders' Association. There haven't been too many AGMs that are in person this year. So it's good to have the numbers coming along. And we've also got an online meeting running contemporaneously with this. My name is Geoff Ricketts. I'm Chair of Heartland Group, and a warm welcome to shareholders and guests present today at our 2020 Annual Shareholder Meeting. Welcome also to those shareholders who are joining us, as I said, through our online meeting. I'll provide you with instructions on how to vote and ask questions as we progress through the meeting. If you encounter any issues, please refer to the virtual annual meeting online portal guide or phone the help line (0800) 200 220. Since a quorum is present, I'll declare this meeting open. And as a courtesy to everyone, could you please make sure your phone is on silent. In the event of emergency, please immediately evacuate the building to the nearest fire stairs. There's that door at the end there, and the stairs go down to the lobby, Gate G. And otherwise, on this side, it's through the door as you came in and straight off to that, there's a main stairs that go down to the ground floor in the lobby. Once you're in the lobby at Gate G, you move out into the car park and stand by the P5 sign, which is a designated meeting point, Eden Park, and Heartland staff are there to help you must remain in the assembly area at P5 until the fire services given the all clear. I'll now outline the agenda of the business of today's meeting. As Chair of the Board, I'll shortly introduce you to the Board of Directors and the strategic management group. I will then take you through the formalities of the meeting before I provide a high-level overview of Heartland's performance and activities in the 2020 financial year. This will be followed by an address from Heartland's Chief Executive Officer, Jeff Greenslade. He will provide you with a more detailed performance overview of our business and an update on Heartland's current strategic objectives. Jeff's address will be followed by a presentation by Laura Byrne, our Chief of Staff, covering the progress we have made in our sustainability strategy. These features will be concluded by the members of our Rangatahi Advisory Board who will be presenting one of their key initiatives, a financial literacy app aimed at high school students. The Rangatahi Advisory Board is a group of Heartland employees aged under 35. So obviously, I'm not a member, and who have been appointed to assist with some of Heartland's strategic initiatives by providing their unique insights into our people and customers and to the diversity of perspectives of our senior leadership team and the Board. Following this, there will be an opportunity to answer any questions you may have concerning Heartland's performance, strategy or operations. I encourage shareholders who are attending the meeting online to send questions through as soon as possible to assist us with answering as many of these as we can. Thereafter, I'll move to the formal business of the meeting, including voting on the 2 resolutions before you today. I'd now like to acknowledge our directors, and I will ask each of them to stand as I introduce them. I will begin by introducing the Heartland Board of Directors followed by the Heartland Bank Board of Directors. Jeff Greenslade, our Chief Executive Officer, Jeff has been this role since Heartland [indiscernible] in 2011 and is a Director of both Boards. Ellie Comerford, we should have a photo of Ellie up here. Ellie is -- has -- sorry, was appointed a Director in January 2017. Ellie is a Director of both boards, but given COVID-19, she is joining us online from Australia today where she is based and very helpful to us in relation to our Australian activities. I can't see a photo emerging, but she's listening, Ellie, aren't you?

Yes. Thank you.

Thank you. Good. Sir Christopher Mace. Chris has been a Director of Heartland since its establishment. Greg Tomlinson, our Deputy Chair of the Heartland Group. Greg was appointed a Director of Heartland in March 2013 and is supported by the Board later in the day for his reappointment as a Director. Bruce Irvine, our Chair of the Heartland Bank Board. Bruce has been a Director since establishment. John Harvey has been Director of Heartland Bank since establishments. Kate Morrison has been a Director of Heartland Bank since March 2019. And Shelley Ruha was appointed Director of the Board in January this year. For myself, I've been a Director of Heartland since establishment, and I'm on both boards. Interesting to note that of our 8 non-Executive Directors, 4 were there at establishments and 4 have been appointed since establishment. In addition to Jeff Greenslade, other members of Heartland strategic management group are also present today up here on the stage with the Board. We have Chris Flood, our Chief Executive Officer of Heartland Bank; Keira Billot, Chief People and Culture Officer; Laura Byrne, Chief -- Group Chief of Staff; Andrew Dixson, Chief Financial Officer; Michael Drumm, Chief Legal and Bank Risk Officer; Grant Kemble, Group Chief Risk Officer; Sarah Smith, Chief Technology Officer; and Lydia Zulkifli Chief Digital Officer. All good. Moving on to other formalities. Proxies and postal votes returning to the business of the meeting. I advise that all valid proxies and postal votes received from shareholders within the prescribed time limits have been admitted. I can confirm that a total of 787 proxies and postal votes have been accepted. This represents just over 182 million shares or 31.21% of shares of the total shares on issue. And I can say that all resolutions before us today support 89% of those are supported by proxies. I would now like to outline the meeting procedures. This is a meeting of Heartland Group Holdings shareholders. Accordingly, while our guests are very welcome to witness the proceedings of the meeting participation and shareholder discussion, and the business of the meeting is confined to our ordinary shareholders present in person or by proxy or by authorized representative. Turning to voting proceedings. In regard to the voting procedures for today's meeting, all resolutions will be decided by a way of a poll. This is in line with the practice increasingly adopted by listed companies and is the preferred method of the NZX and the New Zealand Shareholders' Association. By having resolutions decided by way of a poll, we are counting all postal votes, proxy votes and votes on the floor and online. Each resolution we put to the meeting, for those shareholders attending the meeting here in person, you should have received a voting card on registration. I will allow time for questions and discussions on each resolution, and then I'll ask you to mark your voting card. You will need to keep your voting card with you until all resolutions have been voted on. Our share registry Link Market Services will then move through the room with ballot boxes and collect your voting cards. If you need to leave the meeting before the end, you may place your voting cards in one of the ballot blocks at the exit. Online. For those shareholders attending the meeting online, you will be able to cast your vote using your electronic voting card received when your online registration is validated. To vote, you will need to click get voting card within the online meeting platform. You will be asked to enter your shareholder or proxy number to validate. Please then mark your voting cards in the way you wish to vote by clicking for, against or abstain. Once you have made your selection, please click submit vote at the bottom of the card to lodge your vote. As I said before, any difficulties, please phone help line (0800) 200 220. Voting will remain open for 5 minutes after the conclusion of the meeting. Notice of meeting. The Notice of Meeting calling the annual shareholder meeting was dispatched to shareholders on the 30th of October 2020. The notice outlined the formal business of the meeting and also provide background information on each resolution to be voted on. The minutes of the last Annual General Meeting held on the 12th of November have been approved and confirmed by directors. As is our custom, copies are available at the shareholder registration table for perusal should any shareholder wish to do so. I'll now move on to my address. So first of all, just the introduction. It's approximately a year since our last Annual General Meeting. And the ensuing year has presented us with, as you would appreciate, unprecedented challenges. The global economic and social consequences of COVID-19 have been profound. From Heartland's perspective, our priorities are to continue supporting our customers and ensuring the health and well-being of our employees. And I'm very proud of the manner in which Jeffrey Greenslade, the management team and the Board have responded to such challenges and mitigating the impacts on the business and planning for the future. As an essential service, we quickly accepted the challenges of COVID-19, we adapted. And in my view, we have emerged stronger from that. Fortunately, we entered into COVID-19 in a strong financial position, and I'm pleased to report that Heartland achieved a net profit after tax of $72 million for the financial year ended 30 June 2020. The net profit after tax is after allowing for an economic overlay of $9.6 million pretax, which Heartland applied to its potential credit losses in the future in response to the ongoing uncertainties relating to the COVID-19 pandemic. This $9.6 million is in addition to our normal provisions, which we feel were very adequate. The adjusted net profit after tax, which excludes the economic overlay, is $78.9 million. Overall, this is a solid result, reflecting the strength of your business. The year in review. Heartland grew its financial receivables by about 5% to $4.6 billion during the year as a result of strong performance across Reverse Mortgages, Business Intermediated, Motor, Open for Business and Harmoney. We also achieved a number of key strategic milestones including the launch of the banks digital platform for residential mortgages, the establishment of a first-of-its-kind long-term funding structure to support the growth of Heartland's Australian business, particularly Reverse Mortgages and the launch of new products to support our customers who were affected by COVID-19. COVID-19 has reinforced our strategy of transforming our business through digitization. Heartland Bank was once again named Canstar's 2020 Bank of the Year - Savings for the third consecutive year, and its Reverse Mortgage product was awarded the consumer trusted accreditation for the fourth year in a row. We made significant progress on our sustainability journey. And as I said before, Laura Byrne, our group Chief Executive, Chief of Staff, will present that to you shortly. Credit ratings. During 2020 and more recently in October 2020, Heartland's rating agency, Fitch, affirmed the investment-grade credit ratings for Heartland and Heartland Bank of BBB and Heartland Australia at BBB- with the outlook remaining stable for all 3 companies. Heartland Bank remains one of only 2 Australasian banks to have no reduction or adverse change in its rating or outlook since January 2020 despite economic impacts of COVID-19. Dividends. Heartland paid a fully imputed final dividend of $0.025 per share on the 9th of October 2020. Together with the interim dividend of $0.045 a share, the total dividend for the year was $0.07 per share. This compares with a $0.10 per share paid in the financial year 2019. Importantly, the reduction was not reflective of performance, but a caution given at the time the uncertainties of COVID-19 and the fact that at the same time, the Reserve Bank imposed a restriction on banks paying dividends. So we couldn't pay a dividend up from the bank to Heartland Group Holdings to distribute to you as shareholders as a net impact of that. On the 11th of November, earlier this month, the Reserve Bank announced that the restriction on banks paying dividends will continue until at least the 31st of March 2021 so as to support the stability of the financial system. This restriction only applies to distributions from Heartland Bank and does not apply to Heartland's Australian operations. This year, those Australian operations enabled Heartland to distribute the final dividend that I mentioned earlier. While the Reserve Bank restrictions on the distribution of the dividends to shareholders is [ annoying ] for shareholders, shareholders can take comfort on the fact that its bank's retained earnings continue to accumulate as we're not able to pay dividends. The group remains capable of declaring an interim dividend at the half year in line with the previous usual interim dividends, should the performance and conditions be supportive. Once the Reserve Bank restrictions are removed, subject to the usual prudential considerations, a return to our historic payout ratios is to be expected. I'd like to touch on conduct and culture. Ensuring our conduct and culture drives fair outcomes to our customers is a core focus of everything we do in Heartland. This is reflected in our values, Mahi Tika or do the right thing. The Financial Markets Authority and the Reserve Bank of New Zealand completed their review of conduct and culture in the New Zealand retail banks in November 2018. Their findings focused on the industry as a whole. And unlike Australia, they found no evidence of widespread misconduct. Each bank received recommendations specific to them, and for Heartland, these recommendations form the basis of our conduct and culture work plan. During the year, we made significant progress towards completing that conduct and culture work plan. This included the development of new policy and training and resources to help our employees identify and support vulnerable customers. We also implemented a formal responsible lending policy, bringing together our responsible lending principles for use by our credit team, sales teams and our intermediaries. Heartland's code of conduct was refreshed to provide more useful framework for our people and intermediaries to make good decisions. And we enhanced our employee training to ensure the integration of good conduct and culture across all content. We also streamlined our complaints policy and processes to -- and enhance our customer feedback channels. Turning to supporting our communities. Heartland is in a privileged position to make a positive contribution to the communities in which it operates. We do this through Heartland Trust, which is an independent registered charitable trust that is closely supported by Heartland. It is a shareholder in Heartland and receives dividends which it distributes. During the year, the Heartland Trust made grants totalling $452,000 to support our communities, including in areas of education, sports and financial literacy. The Heartland Trust continues to be a sponsor of the InZone Education Foundation, a charitable trust that aims to enhance the educational outcomes for Maori and Pasifika Youth. A number of InZone students have participated in the Manawa Ako internship program we offer and are now working in permanent roles at Heartland or have continued on and tertiary education. This year, Heartland Trust also provided funding to support a Kupe Leadership Scholarship, a program which aims to develop future leaders who are committed to New Zealand and to creating a successful future in this country. The Kupe Leadership Scholarship was administered by the University of Auckland. It provides scholars with financial support, a personal mentor and participation in the University's leadership program. Bringing together our focus on financial literacy and te reo Maori, the Heartland Trust also provided a ground to MoneyTime. MoneyTime is an online financial literacy program designed for students aged 10 to 14 in order for them to be provided with the skills and knowledge they need to become financially independent. The grant was made to MoneyTime to assist with the design and creation of a te reo Maori version of the program. Heartland Trust also continued to support -- its support for the Auckland Reader's & Wirter's Festival, the Auckland City Mission, the special children's Christmas party and the number of women's first XV Rugby teams. Turning to the outlook. The Board has confidence in Heartland's ability to continue achieving strong growth and profitability while continuing to support our customers through any future COVID-19-related issues. Heartland expects its net profit after tax for the year ending 30 June '21 to be in the range of $83 million to $85 million. I wish to conclude my address this afternoon by expressing my thanks and gratitude to my fellow directors for their wise counsel and support during a difficult year. Thank you, Jeff Greenslade, Chris Flood and all the executive team who continue to provide strong leadership for Heartland through their diverse set of skills. They certainly manage COVID well. I think our management of the COVID-19 pandemic highlighted the resilience of our employees and also our organization. The efforts of our Heartland people all over were exceptional. On behalf of the Board and the executive team, I wish to thank them for their hard work, adaptability and compassion for our customers during this year. Last but not least, I would like to thank you, our shareholders and customers for supporting Heartland, and it's good to have some of you here today in person. We appreciate the confidence you place in us, and we look forward to continuing the delivery of strong shareholder returns. Thank you very much, and I'll now ask Jeff Greenslade to address you.

[Foreign Language] Welcome, everybody. I'm Jeff Greenslade, the Chief Executive. And I guess I stand before you after a very interesting year. Clearly, the coronavirus pandemic has dominated overshadowed the last financial year, and it continues to be the major preoccupation of everything we do locally and globally. However, I am proud to report that we continue to meet that challenge. And alongside achieving some really good strategic and financial objectives. And in my address, first, I want to take you through our response to the COVID crisis, then update you on some of the progress we've made in our market-leading digital strategy before giving you some financial updates and some updates on some of the strategic thinking that we've been doing lately. So to begin with COVID. As an essential service, Heartland continued to operate during the lockdowns in both alerts 3 and 4 to support our customers. Our initial response focused on contacting our consumer, SME, that small- to medium-sized businesses and our larger business customers to offer support. Alongside this, particularly in the first lockdown in the first week, we had to put in place the logistics to get 450 people capable of working from home. And at this point, I'd just like to start and pay tremendous gratitude to our staff, how proud I am and I know my team are of how they responded in a very difficult situation when they, like everybody else, had families, had concerns and yet we had to work on and contact our customers. To give you an idea what was happening in the first days of lockdown, normally, we might get 200 inbound calls, we're getting something like 10x that coming in. And what happened is that people rose the occasion. We have Matapono. Mahi Tika, do the right thing. And our people, no matter what their actual job was got on the telephone and contacted our customers to give them the reassurance that they needed. So in a very short space of time, we had literally contacted all of our business customers and a huge number of our consumer customers, offering them a range of support whether it was interest holidays or principal reductions and so forth. We also built a new website functionality to allow our customers to contact us remotely. And this was during a time when we had, again, people either doing this from home or small skeleton staff at work trying to make this happen. In fact, I think the smaller skeleton was, I think, myself, Chris Flood and Laura Byrne, my lonely Friday night drinks was 3 -- 450 still in the office, someone had to do it. During that process, of our consumer customers, $143 million worth of lending equivalent, took up an offer of support. And in SME and business areas, $510 million of loans took up some form of support. As of today, 98.6% of our consumer customers and 99.6% of our business customers have returned to normal conditions or have adopted a new product that we've launched called Heartland Extend. Harland Extend is a product that we developed not just for COVID, but to provide flexibility, reflecting the realities of running a small business, where the cash flows come and go as we're trying to tailor the cash flow requirements of the loan to meet their actual business cash flows. It's a product which we are offering not just to our own customers, but more broadly. So what we're seeing very quickly is a return to quite considerable normality and stability. And I think it's true to say that the resilience of the economy has defied expectations and the same is true for our customer base. And I think that reflects, clearly, the effectiveness of the support measures that the government put in place, particularly from our perspective, the IRD administered loan to small businesses. That made an enormous and very quick positive impact on a struggling sector in the first weeks of the lockdowns. I think also, it's fair to say it reflects the quality of our own portfolio. And while so far this crisis has not been as bad as initially feared, we do remain prepared for the possibility of any deterioration. And as the Chairman mentioned, we have an economic overlay of $9.6 million, and that remains available should we need it. And I'd also add that, that's on top of a buffer of existing general provisions, which together amounts to $62.7 million, which is available to meet losses that may arise from any particular cause. And one thing I'd say about so far in this crisis, and I've been through a number of financial crisis, I can get -- well the hairdo to prove it. Two things. I've never encountered the forecast being so badly wrong, both in terms of the timing and the degree of adversity. We've seen nothing like the slump in GDP, house prices, unemployment, nothing like what we were told to expect. And secondly, when it comes to financial crisis, I've never seen so much money around in what is supposed to be a financial crisis. Usually, the definition of a financial crisis is that there's no money. So this one is very unusual in that regard. Turning now to our digital business, something we're very proud of because Heartland Group is in essence, a financial technology business that has a bank, and digitalization is at the core of everything we do. And digitalization is presently dedicated to making our products and services available on a smartphone. The smartphone is either the only or it's the fastest-growing channel for all demographics, whether it's communication, entertainment and now increasing for commercial and financial transactions. And also through something called an application programming interface or, as I prefer to remember it as an API, this technology has now made it much more cheap for this medium to be used for electronic interactions. This means, in essence, that the cost acquiring new customers of onboarding them and processing them has become very, very low. This makes the potential to reduce our ongoing costs or more particularly our marginal costs, which is very new in banking. As a consequence, areas where previously we had no competitive advantage, such as in residential mortgages, they are now open to us. And through our digital platform, Heartland is now able to offer market-leading rates, 1.99% for 1 year and 2.5% as a floating rate. And these applications are simple and accessible, can be filled out and approved within minutes. When people ask me, just a year or so ago, this sort of thing was just beyond contemplation that we would be in the residential mortgage market. My Board is constantly telling me that, "Weren't you the guy that said we can never be in residential mortgages. What has changed?" And this disruptive technology has made it so much more available because it's cheaper for us to participate. And when people ask me, how are we able to do this? My response is more like, I don't understand why the big banks can't because this technology is coming, digitalization has already made big inroads into the non-bank financial sector, and now it's coming for the banking industry. And we are facing a world where there is greater choice and where customers want what they want and they want it now and they don't want any for us. And that is the challenge that we are constantly faced with in our business. And during the course of the year, we extended our digital reach to more customers. In addition to the residential mortgage platform, we also launched a digital platform for Sheep and Beef these are platforms which unashamedly can only be accessed online. There is no telephone, there is no people. You have to do everything online, and we're now targeting the rural sector to see where the farthest receptive to the idea of getting a cheaper, faster loan by doing it online. We've added motor to alongside our business and deposit digital platforms that already exist. As the Chair alluded to, our deposit platform in particular was a remarkable thing to have during the lockdown, enabling customers to access our products and services despite the alert levels restrictions on in person interactions, where we've got facial recognition, otherwise known as biometrics, and electronic document signature known as DocuSign, which allows people effectively to onboard themselves from their homes and become a depositor. Similarly, we were the only people able during the height of the alert 3 and alert 4 lockdowns to be able to transact with motor vehicle dealers. And during the recent extended lockdowns in Victoria, we were also able to use our platforms to allow retirees to access reverse mortgages. So increased investment will incur this area, both in terms of the technology and the associated marketing because we really see is the future of our business going forward. Now I'd like to give you a bit of a financial update, which is something which we don't normally do. But given the current uncertainties, we have decided to give you an update on our performance as of the end of October, which is the first 4 months of the year. It's not our usual practice but we think it's appropriate in the unprecedented circumstances that we find ourselves in. So as at the end of October, which is 4 months of -- the first 4 months of FY '21, net profit after tax is tracking at $29.9 million versus a full year guidance of $83 million to $85 million. What we're seeing behind that result is margin and costs have been maintained. So our net interest margin and cost-to-income ratios are both in line with our expectations. Overall, however, our balance sheet growth has been flat, driven mainly by repayments from the noncore relationship lending area, which we expect, but also from Open for Business and Harmoney, which we believe has been driven by some of the measures that the government has made cash available to those sectors. That, plus low interest rates means that we think we're seeing greater rates of principal repayments than we would normally expect. However, against that, we're seeing very good growth in Business Intermediated up 13%, Motor up 11.5% per annum, Reverse Mortgages up 4.4% and 11%, respectively, in New Zealand, Australia and for Australia, excluding the FX impact. Livestock is down, but that's due to seasonality business. So I guess a game of 2 halves there, but we are very pleased to see that good growth coming from those areas like Motor and Reverse Mortgages and Business Intermediated. Impairments today have been much lower than anticipated, tracking well below our budget. Arrears are down year-on-year. And this reflects, obviously, some releases due to repayments but also an improving we're profile noticing within our portfolio and the reduction of nonperforming loans. So just to repeat the economic overlay that we took in FY '20 of $9.6 million has not been utilized at all. But despite all the slight stability that we're seeing, there are many commentators that maintain that the economic ramifications are yet to come. It's going to be next year or the year after. So therefore, we are not going to abandon caution. And due to this remaining uncertainty, notwithstanding the fact that we are currently running ahead of our forecast run rate in terms of profitability, we don't propose as yet to make any revision to our guidance of $83 million to $85 million for FY '21. More recently, Harmoney, in which we have a shareholding, successfully concluded in an initial public offering in Australia. The listing and the subsequent trading prices are at a material premium to our book values, our carrying values. So we will be making a reassessment of the fair value of that equity investment as part of our preparation for the financial results for the half year. If so, this may impact on the guidance range. Turning now to some of the strategic thinking we have been doing. The great thing about lockdowns. It does gives you a lot of time to contemplate and reflect. And at our FY '20 results, we announced that we -- the Board had asked the management to think about ideas around optimizing value within the group. This review is ongoing. But the preliminary picture that emerges is that the group could be seen as comprising 4 distinct businesses: New Zealand banking, Motor finance, fintech, which is primarily based around our Open for Business platform and Australia Reverse Mortgages. Further, it would appear that each business unit has both differing return profiles and differing growth opportunities. 3 of the 4 component parts are not typically found within our traditional bank structure. That said, the group is regarded by the market as a bank and benchmarked against a group of Australasian peers, including the major banks. Against which, it does perform very well in terms of a number of metrics over the last 5 years, we have outperformed that group of peers. Each of our businesses have material opportunities to scale. And at times, it appears that Heartland has been discounted due to lack of scale. So in the past, we have successfully pursued scale and it's something that we should continue to do so both organically and inorganically. Finally, the possibility of structuring the group's or the bank's Motor business as a separate entity under the back is something that may assist in highlighting any intrinsic value, which may not be reflected in the current bank-based benchmarking. And this could also lead to flexibility and efficiency in terms of access to and cost of capital. So no conclusions have been reached yet, and all of this is consistent with our overarching strategic objectives of one, getting more scale and banking; secondly, expanding in Australia; and thirdly, digitizing everything we do. So in conclusion, I would like to thank the people of Heartland for their exceptional efforts in what you -- I'm sure you'll agree has been an extraordinary year. [Foreign Language] And I'd also like to thank my executive team for their contribution in a very trying year. And thank you also to our shareholders. [Foreign Language]. I will now hand you over to Laura Byrne, our Group Chief of Staff, to provide an update on Heartland's sustainability initiatives. Thank you.

Thank you, Jeff. [Foreign Language] I'm Laura Byrne, and I'm the Group Chief of Staff at Heartland. I've just celebrated my seventh year as part of the Heartland whanau. And during my tenure, I've held a variety of roles, first joining as General Counsel in 2013. I now have the pleasure of leading a number of our back office teams as well as responsibility for various strategic projects across the group. Furthering Heartland's sustainability goals is one of my key areas of focus. We believe that the New Zealand financial system should serve the long-term needs of society, the environment and the economy. We are privileged to be the guardian of your, our shareholders' funds. For us, sustainability means ensuring that the business you invest in is both profitable in the short term but can also continue for generations to come. And so social equity, environmental conservation and economic prosperity are the 3 pillars of Heartland's sustainability framework. The framework operates to ensure we are meeting the increasing expectations of businesses and maintaining our social license to operate. Today, I wish to share with you some of the initiatives we have underway, particularly in relation to acting as kaitiaki of our environment. And also the work we are doing to create an internal culture of inclusivity and equal opportunity at Heartland. Heartland is proud to be a member of climate of the Climate Leaders Coalition, a group of organizations who have joined together to promote business leadership and collective action on the issue of climate change. Since joining the coalition, we have started to measure our greenhouse gas emissions with our baseline year being 2019. Through this process, we discovered that our biggest emission sources are, unsurprisingly, our vehicle fleet, air travel, waste to landfill and electricity usage. And work is underway to set a reduction target that we will work towards over the next 5 years. Some of the initiatives we already have underway to reduce our emissions include transitioning our fleet to electric or plug-in hybrid electric vehicles, reducing our paper-based communications and encouraging greater adoption of video conferencing to reduce business travel. While the environmental impact of our operations is important, our potential to make a positive impact extends into our products and services and how we can encourage and support New Zealand transition to a low-carbon economy. So alongside reducing the environmental impact of our operations, we are actively looking at the wider environmental impact we can have. Turning now to the work we're doing for our people to create an environment that is fair, inclusive and supports the well-being of our employees. This year, we were proud to become a Living Wage Employer, being one of only a small number of NZX listed companies to do so. The Living Wage concept refers to the hourly wage of worker needs to pay for the necessities of life and to participate as an active member of their community. As a Living Wage Employer, we have committed to paying all of our employees at least the current living wage, 15% more than the minimum wage. We also recognize the efforts of our people in achieving our financial results this year by awarding recognition payments to over 90% of our staff, including special awards to those who made a significant contribution to Heartland's internal culture during the year. A key area of focus for Heartland is to be an employer of choice for Maori. Maori are underrepresented in the financial sector. We want to have a positive impact on the quality and access to financial services for Maori, and we are genuinely committed to improving the way we serve and engage with Maori. This year will be the fourth consecutive year of our Manawa Ako internship program which we established in 2017 to provide opportunities for the next-generation of Maori and Pasifika to experience working in the financial sector and a corporate environment. Since its inception, 50 interns have participated in the Manawa Ako program and almost 20 of these interns have continued an employment with Heartland. Our Manawa Ako internship saw us being recognized as a finalist for the 2020 Diversity Awards. Over the past 5 years, we've made great strides in addressing the gender balance at Heartland. Our strategic management group is currently made up of 4 females and 5 males. Across our key leadership roles, 46% are held by females and 54% of my males. This is as a result of a number of initiatives we have in place to ensure proactive enrolled development of females at Heartland, together with a focus on recruiting and promoting more women into senior roles. Almost half of Heartland's workforce is aged 35 and under. This insight was the genesis for the creation of Heartland's Rangatahi Advisory Board, a group of employees, age 35 and under with the main purpose aimed to diversify the perspectives of the strategic management group and the Board by providing unique millennial and generation Z insights on our people, customers and strategic initiatives. They are not the voice of the future business, they are the voice of today's business, and it should come as no surprise to any of us that the Rangatahi Advisory Board are passionate about social, environmental and economic sustainability. The current members of our Rangatahi Advisory Board are joining us today to share with you one of the key initiatives they have created being a financial literacy program aimed at school levers age 16 to 18. It's my pleasure to hand you over to Rangatahi Advisory Board to take you through their presentation. Ian and Veronica, welcome to the stage.

Good afternoon. My name is Ian, and this is Veronica. We're speaking to you on behalf of the Rangatahi Advisory Board, who, as you know, are here today. We're a diverse group of Heartlanders aged 35 and under, and we work across different areas of Heartland, meaning we each bring something different to the group. 46% of Heartland staff are aged under 35, and we think it's fundamental to embrace and leverage the thoughts of this demographic to further strengthen our business strategy. Some of the areas we are contributing to include customer experience, brand positioning, products, target markets, and we have 3 initiatives on the go at the moment. The first one, sustainability; the second one, developing our younger people. And our key focus is rocket, which is a financial literacy project for young people. Veronica will take you through rocket now.

Rocket is a platform that is available for anyone to use that forms a part of the wider financial literacy program that will include school visits and presentations to school levers aged between 16 and 18. Rocket was conceptualized by the Manawa Ako internship program in 2019. It was born out of an identified gap in education for school levers moving into the real-world and not having a firm grasp on how money and finances really work. In essence, many school levers are financially illiterate. Rocket has been created by Rangatahi for Rangatahi, and will cover areas of knowledge that we believe young people may be interested in, but also areas that are commonly misunderstood or are confusing. Through the sharing of knowledge, we want to help young people avoid common mistakes and pitfalls that result from not being fully informed on financial matters. Rocket is a tool that will help students to gain the awareness and knowledge needed to make more informed financial decisions. Heartland believes in giving back to the community and empowering the next-generation of consumers to make informed choices. In turn, this will provide greater exposure for the Heartland brand in the community and assist with becoming an employer of choice for Rangatahi. We're very excited to show you Rocket for the first time now. [Presentation]

Thank you all for your time and attention today. Members of the Rangatahi Advisory Board will be around at the conclusion of this meeting if you'd like to take a further look or ask any questions you might have about Rocket. Thank you.

We have the Rocket generation. Thank you very much, Rangatahi. And I think that the financial literacy program is a great program to start with. I mean, as we know, in the community, there's a lack of financial literacy with a lot of young people. So I think if we can help there, you're helping everyone for life, really. It's a bit like the old story, you can give someone a fish or you can teach them how to fish, giving them a fish gives them a meal, teach them how to fish, gives them food for life. So I see it in that sense and I applaud what they're doing. All right, ladies and gentlemen, before opening the meeting to questions, I advise that Matthew Pritchard of KPMG, the company's auditors, is present today and is available to answer any questions relevant to the conduct of the audit and the preparation and content of the auditors' report for the year ended 30 June 2020. This year, we also invite shareholders submit questions prior to the annual meeting. And I'll now address some of those general themes arising from the questions received. After that, I'll provide you with an opportunity to ask any questions you may have.

So of the question submitted quite a few raised the issue of dividends, which both Jeff and I have addressed to an extent. But just repeating that the dividend decrease was not reflective of performance of Heartland but of caution, given at the time of the uncertainties concerning COVID-19 and at the same time, the Reserve Bank imposed restrictions on bank dividends to Heartland Group Limited from Heartland Bank Limited, so that tied our hands in any event. The continued growth, however, on Heartland's Australian operations enable us to continue to distribute earnings derived from those assets held outside Heartland Bank. And what for the future? If and when the Reserve Bank lifts the restriction on banks paying dividends and hopefully, in March 2021, we will be able to revert to the usual dividend levels that we've paid beforehand, and that's our intent, subject, of course, to conditions at the time. The second question we received a couple of questions on why has Heartland share price being subdued during the financial year? Well, the reason for that is partly COVID but also the point Jeff Greenslade touched on that Heartland is perceived by a bank and benchmarked against its Australasian peers, including the 4 major banks. The big 4 banks were tarnished as a result of the Australian Hain inquiry, and Heartland was grouped with them, notwithstanding that the FMA and the RBNZ New Zealand did not find the same level of evidence of widespread misconduct in New Zealand, and indeed, Heartland in the [ Jarden ] report, as Jeff mentioned, has outperformed the benchmark banks over the last 5 years and is the fourth out of 9 in the last 12 months in terms of shareholder returns. But I think what once people adopt the view that we are different to the main banks, we deal on specialized products reverse mortgages. We deal in motor vehicle finance, and our digital business means we don't have the legacy of branches and systems that they have. So over time, it takes a while to train the market to understand quite what you are -- we're doing our best. So I open up the floor for questions, first of all. And after the floors questions, we'll pass to any online questions, which Michelle will be taking for us. So any questions or floor on any of the 4 addresses you've had? New Zealand Shareholders' Association, waiting for a microphone.

Thank you. I'm Bruce [ Bark ] I'm a shareholder and proxyholder for the Shareholders' Association. My first question is around digitization of everything you do and increased spending on technology. That's great. Your Board in the report shares its skill set in various factors, and the last one is in technology. What are you doing to improve that?

Sorry, I didn't quite get the question, just the last part.

The expertise of the Board, as you show in your annual report, it shows the score for technology expertise is 3.5, which is the lowest of your...

Okay. Okay. Well, we don't know everything. We do have a lot of young members. And most of the Board are pretty literate in relation to technology and support of, Jeff's being a big driver of that. Jeff, do you want to comment further?

I think there's 2 aspects there to be -- just to sort of make that distinction. There's what I call under the bonnet technology skills and that would be 3.5. And for myself, probably even less than that under the bonnet. The technology skills we are more interested in is aligning technology with customer behaviors and preferences. And in many ways, for example, we have the best audience, which should probably go to as a bunch of 70-year olds. Because 70-year olds are our reverse mortgage customers, all of them our depositors and saying to them, what do you want out of technology? That's the sort of technology we want more of is understanding what people want, the technology -- someone else can come along and build that once you know what the customers want.

I think I should also say that the Board is very supportive. I mean we don't want to follow the model of the big 4 banks by having lots of branches and those sort of things. We're aiming to be a digital bank. We get the concept, we look around the world and see what's happening. So we are fully -- the Board is very supportive. I think you'll find no resistance. It would be fair to say that management get and moving on the digital journey. I think it's a good analogy you did, over the bonnet, under the bonnet.

My second question is around consolidation. You speak of a time of consolidation in the industry. Do you have any plans for any acquisitions? If so, do you have sufficient funding for that for acquisitions.

Yes. We're were very interested in bolt on, both bolt-ons and significant consolidation of the industry, but it takes time. And we're looking for opportunities and considering opportunities, but nothing we can say is locked in yet.

And money?

And money? Well, the market supports us some money. We can sell books of mortgages. There's all sorts of ways of getting money.

Just one thing to repeat there is that -- remember, we have a 2 tiered structure at a holding company out of banks. So we have the flexibility to raise money in a number of areas. So we can leverage the group. We can put things into sister companies. We can raise equity. We can borrow within the bank. So we have a number of opportunities to raise funding.

And last question is Open for Business back in business again?

Yes, it is, very much so. But I suspect a lot of our would be customers are getting their $10,000 from the government interest-free at the moment. So we meriting business yes. Thank you. Any other questions from the floor? We have a question from online. When you talk of optimized value in Heartland's existing business, which parts of the business you think the most valuable, which are the least? Do you want to answer that, Jeff?

[indiscernible] from floor. The Chief Executive mentioned that the balance sheet growth was flat as a result of increased principal repayments. Can you please comment on that, given that interest rates are so low? Why are people paying back principal?

I think a lot of our clients think about how much debt servicing they've got per month. So if you think about -- they -- in their mind, they've got $500 to spend on debt servicing. So when interest rates go down rather than $500 dropping $450, they continue to pay $500 because that's what their household budget is based on and $50 goes into principal. That's what we're seeing typically around our customer base. To answer the other question, we had another question around -- an online question.

That's not here.

The strongest or the weakest business. Well, I'm not sure if I'm allowed to say that, but we've got some really strong businesses, got some good ones. But we have said that there are some areas like business relationship, those larger loans, which are probably less attractive than others. But everything else is first equal.

I think the other question going back to repayments because of the government loans, like the IRD loan for small businesses and being interest free. Naturally, if you've got to think about it for 5 minutes that you better have a loan, you don't pay it [indiscernible] you do it [indiscernible] So that's another area where we have repayments. Then there's debt consolidation, some people who got creditor debt and card debt mortgages, will go to their bank and roll it all up into one bundle. There's that sort of issue. Particularly, I think in the COVID-19 times, people are focusing on some of those opportunities to hopefully reduce their costs by consolidation. Sorry, yes.

Just in regards to your investment in Harmoney, is that a passive investment? Or is that an active investment? Like are you just -- are we passengers for the ride? Or you're actually have sort of more involvement in the running of the company. Are we lending any money to it, that sort of thing? I just want a bit of flavor about what the plan is for that.

Well, I think it's -- we're active in the sense that we are a lender for Harmoney. So they solicit loans, borrowers, and they need to fund to support that loan to the borrowers, and we fund those for certain classes of risk. So we are actively involved with them. And that's why we're originally involved with them. We fund part of their book for them.

Are we ever going to be at risk of being taken over by anyone else.

We're always at risk of being taken over.

I'm thinking mainly of the bank inside the bank, must be attractive to somebody around the world.

Well, we'd like to keep it. I think it's good. But that would be for the main Board to decide because we own 100% of it, and we see that as a big part of our business and an important part of our business. So we haven't put the for-sale sign up.

A shareholder. Is there any update on Jarden's optimization of value within the group? More specifically, would Heartland consider a primary listing in the ASX, which seems to support more the fintech and go ahead companies?

Well, we're considering everything that we've discussed with them, but there's nothing dramatic that we're going to do right now, I don't think.

The things I touched on at the end were some of the thinking coming out of that review. We're working with them on.

I don't think we learned anything new, Jeff, did we? I mean, we look -- we had different perspectives on what we're already thinking about, is the way I'd put it. We might have [indiscernible]. Any other questions? Question from online.

The next question is from a shareholder, James [ Arch ]. Will lower interest rates result in Heartland's margins being squeezed or reduced?

Well, look, we get it on both sides of entry. Lower interest rates, our cost of funds goes down, and the loan to the customer goes down in the proportion. So normally, we're keeping our margins pretty well. Do you want to add?

Yes. So if you look at the last couple of years, our margin has come down from something like 4.4 to sort of 4.3, but that's more driven by the mix of lending we're doing, which is, as we do more reverse mortgages, which are lower margin, then that brings the margin down, but we're comfortable with that because reverse mortgages are return on capital. So at the moment, we're seeing margin contractions more explainable through the mix of lending that we're doing.

And the second part of the question, which is we've got an aggressive mortgage loan campaign, which would create pressure for us. As Jeff said in his address, I mean because we can onboard those mortgages digitally, we don't have any cost of onboarding. It's done online, and we've given the borrower, the benefit of those efficiencies. Any other questions? Here we go. You better keep the microphone.

Jenny [indiscernible], shareholder. There's -- you've had a bit of a review with the financial markets, and there's a change to the conduct bill. Will the banks and New Zealand ever get together and actually offer a branch where anyone from any bank can go to and conduct their business. That's the first thing. And the second thing is get together a fund that actually pounces on all those loan sharks that do not comply with the legislation and just bombard government and do something about it.