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

Good day, everyone, and welcome to the Heartland Group Full Year Results for 2022. [Operator Instructions] I would like to turn the conference over now to Mr. Jeffrey Greenslade. Please go ahead, sir.

[Foreign Language] Good morning, and welcome to the Heartland's FY '22 results. I'm Jeff Greenslade, the Chief Executive of Heartland Group. I'm joined by a number of executives in the room. I have Chris Flood, who is the Deputy Chief Executive of the Heartland Group; Andrew Dixson, the group's Chief Financial Officer, Michael Drumm, the group's Chief Operating Officer; and Leanne Lazarus, who recently appointed Chief Executive to the bank. Before I get on to the results in detail, I just want to make some observations around our strategic vision in the context of results. This vision is anchored in our objective of best or only products and has 4 elements. Firstly, business as usual growth. And I'm pleased to report that during the course of FY '22, we grew by 15%, which is well in excess of system. Secondly, to provide frictionless service at the lowest cost. During the course of the year, we increased the number of our mobile app users by 120% and our cost-to-income ratio continued to decline. Expansion in Australia. We grew market share and reverse mortgages for 29% to 33%. And finally, acquisitions. We completed the acquisition of a $250 million livestock of StockCo and have recently made an investment in Avenue Bank of $5 million, which is the beginnings of our pathway to an aspiration of ultimately becoming a bank in Australia. So in terms of our [indiscernible] digitalization in Australia have been the key things we performed extremely well. Turning now to Page 7, which shows you a bit of a wagon wheel on the results. Reported NPAT was $95.1 million, an underlying since it was $96.1 million, so just slightly above the upper end of guidance. And that was driven by that strong balance sheet growth of 15%. Total balance sheet growth was 23.5%, but that includes the StockCo acquisition. In terms of the quality of that growth, it was just to incept some of the key metrics that we look to. Firstly, we did see a decline in our net interest margin which was 4.16% at the end of the year. Perhaps more accurate measure is the monthly average, which is 4.24%. But nonetheless, the margin was down. Why was that? There are 3 key contributors to that. Firstly, due to the introduction of CCCFA, where we saw lending slowing down or ceasing in some areas, particularly in Motor. We were saying no to a lot of our customers that we would normally say yes to continue to be at the lower end of the credit quality scale. So the Motor book has shifted towards high quality, but it also comes with a lower margin. Secondly, the weight of growth in reverse mortgages and online mortgages, very high-quality loans are low impairments, but lower margins has dragged down the average. And thirdly, there has been elements of mismatch in timing and that our deposits reset much faster than our loans do in an environment of increased interest rates that does work against us. So that explains the net debt element will right itself over time. Secondly, our cost-to-income ratio. The headline rate reported was 43.6%, which was down on the previous year. The underlying rate with 2.5%, also down on the previous year by about a 5%. So what that really means is that we achieved a 5% efficiency gain during the course of the year, which is something that we're pleased about. Impairments, an underlying sense remained reasonably constant and underlying impairments were 29 basis points versus 31 a year before. On the note of impairments, I just want to spend a few moments before I hand over to Andrew to go through the numbers in a little bit more detail just on the credit environment. What did we see during the course of the year, and how do we shape up for the coming year? During the course of the year, in dollar terms, our impairments went up and that build was a function of growth. However, in a percentage sense, it went slightly down, and that is a reflection of that -- of the changed mix that I alluded to, not just in Motor, but across the entire book. We were seeing more reverse mortgages, more online mortgages, the introduction of a large livestock book, which comes with loan impairments and the runoff of higher impairment books such as our personal lending book. So we've seen a rewriting of risk in the book, which has derisked it somewhat. During the course of the year, we carried the COVID-19 overlay of $9.6 million, and the Board has decided to release that. It was not utilized at all. However, given some of the economic uncertainty coming down the line in terms of the coming year, we have decided to create an economic overlay of $8 million to cover the risk concentrations, the larger loans that we have in areas like asset finance and business relationship. So going forward, clearly, we see the macroeconomic conditions challenges. We've documented the impact of high interest rates, high inflation rates. However, that remixing of our book, the reshaping of our book puts us in a more resilient position than we've been in the past. And on top of that we have the additional buffer of an economic overlay. I will now hand over to Andrew, who will take you through those results in a little bit more detail.

Thank you, Jeff, and good morning, everyone. So I'm on Slide 11, which bridges net profit after tax from the financial year 2021 with that of the financial year 2022. And this was presented on both the reported and underlying basis, adjusted for the impact of the StockCo Australia acquisition, which was effectively neutral to profit after tax for the year. And with the underlying result also excluding the impact of other one-off items in each financial year. I will talk to those as I run through the individual components. So firstly, net profit after tax, which, on a reported basis, was $95.1 million for 2022. That was an increase of $8.1 million or 9.3% higher than the prior year. On an underlying basis, NPAT was $96.1 million for 2022, which was an increase of $8.2 million or 8.3% higher than the prior year. Stepping through the components, net interest income -- reported net interest income was $250.1 million, which includes a $1.9 million NPAT -- sorry, net contribution of StockCo Australia and related acquisition impacts. Underlying net interest income was $248.3 million, which was an increase of $14.7 million or 6.3% higher than the prior year. And this was driven by 2 factors. Firstly, the continuation of strong net interest margin, which was 4.16% for the year, combined with Heartland's largest year of asset growth in its history. FX grew $1.4 billion, with receivables, excluding the impact of FX, growing $1.1 billion. The acquisition of StockCo, which was completed on the 31st of May 2022, contributed $387 million to this receivables' growth. Excluding this, underlying receivables grew $766 million or 15.3%. Jeff will break this out on the upcoming Slide 14. While continuing to be a strong metric for the half and the full year [indiscernible], net interest margin was down from the 4.3% level it has historically and consistently operated. Just recapping on some of the factors that contributed to the reported reduction. Firstly, a derisking of our balance sheet, with the receivables composition shifting towards highly secured, lower-yielding and lower risk assets such as home loans and reverse mortgages in favor of unsecured higher-yielding, higher-risk assets such as personal loans and unsecured SME lending. Secondly, the unintended effects of changes to consumer credit legislation, which caused some disruption to our service proposition, particularly in home loans and also Motor, which resulted in a mix change in the motor portfolio. Again, towards lower-yielding but high-quality assets at the new and near-new end of the market. Generally, [indiscernible] pricing assist in the Australian reverse mortgage market, which caused some NIM compression later in the financial year as it coincided with the commencement of tenfold rate rising, which flows through to our cost of funds. Also a small lag in the immediacy of cost of funding impacts over passing those impacts on to customers. And this was compounded by the pace and quantum of the interest rate rising. Finally, the quality of leverages. Much of our growth for the second half of the financial year came in the latter months, particularly in May and June, which obviously elevates the denominator of the calculation without realizing the full benefit of the income. And as Jeff noted, and there's an indication, a pure monthly average of receivables on our net interest margin would have been 4.24%. So overall, we can expect some continued volatility in reported net interest margin with further changes in asset mix and the continuation of interest rate rises. However, we expect StockCo Australia to contribute positively to net interest margin for the full year impact. Moving on to other operating income. On both the reported and underlying basis, other operating income was largely flat year-on-year. Reported was down $0.2 million, while underlying was up $0.2 million compared to the prior year. Reported other operating income includes some significant one-off impacts. There are 2 in particular. Firstly, a $16.7 million gain from hedge accounting impacts of interest rate swaps, which are used to economically hedge interest rate risk on the fixed rate loan -- fixed rate loan, sorry, with terms longer than 12 months. Our portfolio of these swaps were put into hedge accounting relationships with our premium savings products with the underlying risk being hedged being 3 months BKBM. These products are traditionally priced at a margin above 3-month BKBM. However, market anticipation during FY '22 caused us relationship with that margin at times being below 3 months BKBM. Heartland interpretation of the accounting standard has required a cumulative cash flow hedge reserve balance to be recognized in the income statement. To be clear, the group actively manages interest rate risk by entering into derivative contracts to hedge against movements in interest rates, which is economically very effective, and this accounting treatment has been our standard practice in the past. There is, however, some symmetry in economic hedging and hedge accounting. This gain effectively brings forward that which would have flowed through over the next 3 years. Secondly, a $12.7 million net fair value loss on Harmoney -- 10% equity investment in Harmoney Corporation, and this compared to a $3.9 million fair value gain in the prior year. The magnitude of the movement was caused by a reduction in the fair value price share of AUD 1.9 in the prior year, down to AUD 0.71 per share. Following an across-the-board softening in equity markets with financial technology and non-bank dividend stocks, in particular, at very hard. Operating expenses. Reported operating expenses were $116.8 million, which was a decrease of about $900,000 on the prior year. And this includes the impacts of StockCo Australia acquisition and the following one-off items. In the prior year, one-off expenses of $6.9 million would have incurred, being $4.3 million of voluntarily accelerated amortization on the software assets, $1.7 million of legacy suspense account provisioning and write-offs and about $900,000 of nonrecurring staff expenses. In the current period, one-off expenses consisted of $3.4 million of nonrecurring staff expenses -- of nonrecurring expenses, I should say. There was $2.9 million of voluntary amortization of intangibles that are no longer expected to derive future economic benefits, $1 million of nonrecurring staff expenses, and this was partially offset by $500,000 of recovery of suspense account items that were previously provided for. So after taking these items into consideration, underlying operating expenses were $111.4 million, up $0.6 million or 0.6% on the prior year, and this was primarily due to $2.8 million higher IT and communication expenses driven by software amortization and licensing costs as a result of our continued investment in technology and digital capability. And this was offset by lower staff expenses with a lower FTE carried across the year. As previously flagged and indicated on the upcoming key performance measures slide, our cost-to-income ratio has continued its downward trajectory, decreasing to 43.6% on a reported basis, whereas underlying CTI has decreased to 42.5%. Finally, impairment expense. Reported impairment expense was $13.8 million, a decrease of $1.2 million and an impaired asset expense ratio of 0.25%. Underlying impairment expense was $15.7 million, an increase of $0.7 million and an expense ratio of 0.9%, down 2 basis points from the prior year of 31 basis points. We should note in the prior year that the first half of the financial year, the impaired asset expense ratio was low at 19 basis points due to the significant amount of COVID variation that occurred in that half. So the underlying for this financial year is actually on that basis even very low. The key impacts from reported to underlying this is a $9.6 million COVID overlay taken in FY '20 has not been utilized and has been released in full. Now that we have certain view of the impacts of this pandemic on our borrowers, we have taken an $8 million economic overlay to provide further resilience against the continued economic uncertainty resulting from rising interest rates and high inflation causing cost of living pressures. The reduction in underlying impairment is reflected in both the general derisking across our portfolio of assets with a higher potential risk profile by unsecured consumer [indiscernible] being replaced with low-LDR, highly secured assets such as reverse mortgages and online home loans, which now constitutes 3% of our portfolio. Asset quality has also improved across the portfolio, and this is evidenced by the percentage of Heartland's receivables that attract a lifetime expected credit loss provision, reducing from 6.32% as at June 30, 2021, to 3.92% as at June 30, 2022. Finally, provisioning coverage remains very strong. Heartland's total provisions as at June 30, 2022, were $52 million with a coverage ratio of 1.24%, and this is a reduction from the coverage ratio of 1.61% as in the prior year, but it's reflective again of the improved quality and mix of Heartland's portfolios. Moving on to Slide 12, key performance measures. So underlying number, which we have spoken to, which does exclude StockCo Australia impact, decreased from 4.35% to 4.6%. On both the reported and underlying basis, the cost-to-income ratio has continued its downward trajectory. The reported cost-to-income ratio was down 3.2 percentage points to 43.6%, while underlying was 42.5%. Underlying CTI as a measure of the efficiency of digitalization has been continuously decreasing over the last 2 financial years. In the most recent half, it was down to [ 41.9% ]. Finally, nonperforming loans and impaired asset expense have returned to more normal levels after the historic lows due to the previously noted remediation efforts and strong growth in the lending portfolio, although still remain below pre-COVID-19 levels due to the previously mentioned shift in portfolio mix and improved quality. Moving on to Slide 13, shareholder return. Return on equity of 12.1% increased 21 basis points on the prior year, with underlying return on equity very strong at 12.6% which is a 59 basis point increase on an underlying basis. Earnings per share also increased $0.161 per share, which was up $0.012 per share on the prior year, and that represents EPS growth of 8.1%. Pleasingly, we have announced a fully imputed $0.055 per share final dividend, providing a continuation of persistently strong dividend yield of 7.1% and a payout ratio of 68%, which is in line with the average of the past 3 years. We will cover capital in more detail later in the deck. The dividend reinvestment plan has been suspended for this dividend due to the proposed equity raise. I will now turn it back to Jeff to cover foreseeable growth and a summary.

Thank you, Andrew. So I'm on Page 14, and just a few things to call out here. Firstly, the spectacular growth that we're getting in reverse mortgages in both New Zealand and Australia, you see a large dollar amounts and the percentages very, very impressive. What we're seeing is, with the decline in property prices, say, in Auckland and Melbourne and Cydney, we've seen the level of repayments beginning to decline. The inference we take on that is that we saw repayments peaking when -- property prices were picking when people saw those prices as a reason to bring forward decisions that they would have made a few years later in terms of downsizing. And then, secondly, we see, with household expenditure being put under pressure through inflation, more demand for the product. So pipelines for both countries are looking very strong. If you move to the other end of the waterfall chart to online or home loans, online mortgages, very proud of what we've achieved in a very short space of time, $223 million of mortgages, where we've been able, at times, to offer market's best rates. And why is it? Why can't a bank like partner offer better rates than major banks? And it all comes down to some of the things which we've been talking about already in our cost-to-income ratio. And when drilled down to this product, our cost-to-income ratio in an online mortgage is very, very low. The cost of us writing a mortgage is probably 1/5 or 1/6 of what it is for a major bank. And that difference really allows us to compete despite their size and other advantages in terms of cost of funds. Next, that you'll see additional lending was down quite considerably that the Harmoney channel is no longer providing us with opportunities there, not uncomfortable from a risk point of view to see that personal book wind down in the current environment. Next, there is Motor, Chris will talk to this. Of course, I explained to you 7% is not normally as good as we would expect. And I think Chris here will tell you [indiscernible] rate is to blame here and we're hoping for better growth next year. Otherwise, I will leave the risk of those performances for Chris to discuss. Moving now on to Page 16. I've covered most of the strategic elements contained there, except for a couple of -- I just do want to call out remembering that the growth we have is largely fueled by deposits, and we have made some fantastic gains in terms of our deposit raising both in terms of launching new products, and the volume that we've been able to raise and also being awarded the best savings bank in New Zealand, once again in terms of our savings products. Turning now to sustainability, where we have 3 pillars: environmental conservation, social equity and economic prosperity. That's something that is very important for us in terms of our sustainable performance, our ability to discharge our social responsibility in order to be in business. And I'll ask Michael Drumm who is taking responsibility for environmental sustainability to summarize our achievements.

Thanks, Jeff. So in terms of Europe environmental sustainability, we've made some strong progress in reducing our own greenhouse gas emissions. We've got a target of over 35% level reductions by FY '26, and we already had a 31% production level, which is pleasing, in the most recent GHG reporting period. We continue to make strong growth towards achieving that target, for example, through the replacement of our own fleet with hybrid alternatives, which is currently underway. We've also seen in our own portfolio, a shift towards newer and lower emissions vehicles and assets. So for example, the percentage of hybrid or EVs under through our Motor portfolio, has continued to rise throughout the year with our key partners' production of those vehicles steadily and increasing. We're also undertaking a body of work in advance of the mandatory Climate-Related Disclosure project, which comes into force from FY '24 onwards. Now that regime is going to require us to report on, amongst other things, our own customers' GHG emissions. So I'll pass it back to Greenslade.

Thank you. So during the course of the year we achieved our Rainbow Tick. We continued our Manawa Ako program for Maori and Pasifika intern as school leaders. We had to run that remotely given the lockdowns, but another successful year, another large intake in a growing alumni now that we have all of former interns going back over 6 years, which is becoming a fantastic pool for us to breed talent. Matapono, which has been relaunched during the course of the year, and we're very pleased to see that 93% of our staff recognized and identified with our matapono. There's still work to be done there. As you can see, we have disclosed our gender gap at 23% and 25% for both Harmoney and Pasifika, respectively. So some work's still required there. We're very proud of what we've achieved in terms of contributing to the economic prosperity of New Zealanders, particularly the seniors demographic, giving the ability through our reverse mortgage is a little bit of retirement enability. We've also delivered value to younger New Zealanders through our market-leading online mortgages. And we've delivered shareholders return of 66.9% versus the industry average of 56.7% to our shareholders. Turning now to Pages 18 and 19. I want to just spend a bit of time on our acquisition in Australia and also go over plans for Australia. So during year in May, we acquired StockCo for AUD 154 million, which brought our estate book of around about AUD [ 350 ] million based mainly around beef livestock lending in Australia. It's a product we like. We have that experience in New Zealand. It really fits with our best or only strategy. And we see the potential with our support for StockCo to increase market share being provided support economically by us, and we see there's an opportunity there. And also for reasons I'll mention in a moment, in terms of our broader aspirations for Australia, we can see the opportunities to kick on and look to broaden our reach into some of the bank sector lending into the crazier markets in Australia. It's a relatively simple product, really the dynamics around the acquisition of the livestock at a price at farm gate, the weight gain and then that managed against the commodity price for the beef. So it's a business that in terms of distribution and onboarding lends itself to digitalization. So we do expect also to give them some operating efficiencies in terms of what we can bring to them. Turning now to Australia in a broader sense. Our exploration is ultimately to become a bank in Australia. And why is that, and why do we think we will be successful? I'll answer the second question first. We are already successful in Australia. We are running digital-only strategy in Australia based around reverse mortgages and their livestock, and that has been successful. However, it has been so much successful that our biggest challenge is now becoming funding of that book. So becoming a bank in order to access a wider and deeper long-term pool of funding is something that is of a strategic imperative. It will allow us to unlock the full potential of the lifestyle lending being supported by a bank. As I mentioned earlier, we'll give them reach into all sorts of markets that they currently tend to deepen and having a bank license will underpin the future of our growing reverse mortgage business in Australia. But we just don't want to be any sort of bank, we want to be a digital bank. And we spend a lot of time looking at opportunities in Australia, looking at buying existing banks, looking at starting a bank or looking to jump into a restricted bank during the course of the application to become a bank. We chose the third of those options, we decided that was the fastest and cheapest pathway to becoming a bank. Changing an existing bank, we decided, was going to be very time-consuming and costly. And similarly, starting a bank would probably take us around about 3 years. So what we have at the moment is a bank -- restricted bank that's established, has all the throw-works in appropriate place as it has an organization and will, importantly, has a core system that is operational. So that is the choice that we've made and Avenue bank, we're very delighted with what we have acquired, at this stage, a $5 million investment, but a pathway subject to being comfortable around a number of things that we will move to 100%. We want to be a digital bank in Australia, and we think Avenue provides us with that opportunity. We also see the opportunity in Australia to differentiate ourselves in 2 ways, apart from being digital, being a profitable digital bank. And that gives the ability for us to expand and grow and also to be differentiated around the best of only strategy that we are currently operating. I will now hand over to Chris Flood, who will go through the divisional reports. Before I do, I just wish to congratulate Chris on his new position as Deputy CEO. He will be responsible for growth across our businesses in both countries. I'm looking forward to seeing the results of that, but also like to thank Chris for his contribution as a -- as the Chief Executive of the bank. And I also welcome Leanne Lazarus, who has joined us to be the new Chief Executive of the bank. We're very delighted and indeed lucky to have some of the Leanne's caliber in our organization. She has extensive backgrounds in banking in all facets in capital and leasing in Australia and offshore. And amongst other things brings a very strong demanding understanding of how banks operate, and we look forward to seeing more efficiencies coming through under her new leadership. Chris?

Thank you, Jeff, and good morning, everyone. I'm on Page 21, reversing mortgages portfolio analytics. I guess the first thing to call out on that page is there's growth that Jeff mentioned earlier. And that's a product of increased awareness and greater acceptance of this product, supported very much by Heartland's advertising, and we can see the strong growth achievement on both sort of advertisement. I guess the advertising great awareness, combined with the compelling demographics we saw when we acquired the business in 2014, means we're now really starting to realize the potential it dignified back in 2014 when we purchased the book. Specialist teams remain critical part of the service proposition that drives fulfillment and mitigates conduct and operational risk. And I know the quality of the book, which is largely behavioral, and then I mean borrowers only borrow what they need rather than what they're eligible for, and that's, as you can see, that reflected a couple of ways. The average origination at LVR on both sides of the advertisement is the low. As is the average LVR of the book now. I also note that only 6 of the over 13,500 loans that are active have LVRs of over 75%. Turning now to Page 22 and 23, which is the New Zealand and Australian books. Heartland is the largest provider of reverse mortgage loans in both New Zealand and Australia. In Australia, the federal government's promotion of your own product, which is narrower and more targeted than our own, helps with awareness and acceptance of the product. Industry awards in both countries supports Heartland's advertising and product expansion broadens access to the addressable market. Except the travel, the historical needs of borrowers remain the same. However, we're also experiencing an increasing number of people retiring with modest levels of debt and we expect that trend to continue. New Zealand pipelines are up 67% year-on-year, while Australia's pipelines are up just over 15%. So again, we anticipate a very strong year ahead. The other thing that Jeff mentioned is cost of living increases. And we also expect to see that drive our regular monthly advance that we provide and that's growing both in volume and the number of customers that are linked with that option. Turning now to Page 24 and Open for Business, which was Heartland's first digital platform, and as Jeff noted earlier, it means the SME sector. Since the COVID lockdowns of 2020, we have taken a cautious approach to the sector and continue to do so in the current economic environment. We're comfortable with the book contraction that occurred last year and expect only modest growth in the year ahead. We also expect growth would be weighted towards the second half of the financial year. Turning now to Page 25, and Asset Finance. I note the strong growth achieved in the last financial year. And also note, we expect that to be maintained, in the current financial year, notwithstanding the current [ October '20 ] economic conditions that we're experiencing. Growth will be driven by continued market share gains at a distributor, dealership and partnership level. Remember, this is our intermediate strategy, and we work with other groups to promote our product. But we note the continuation of the strong pipelines and good levels of inquiry, firstly, in the logistics sector. We also know the supply chain constraints that hamper performance in the last financial year continue to improve. Lastly, planned digital development will support further scalability of this business unit. Turning now to Page 26, in Business, which includes the historical relationship book that continues to run down will be refinanced. It also includes a growing full bank lending, which is loans to motor and truck dealerships secured against stock in wholesale lending, which is loans made to manage companies who lead in the markets we have experienced for our [indiscernible]. We hope dealerships are carrying higher levels of stock and, but, against supply chain constraints should they continue. And we expect further growth in this book as new facilities are secured. Floorplan lending supports both our Motor and asset finance divisions as it comes with the requirement for the retailers to provide us the finance originated from the yard. Now my explaining on Page 27 in terms of Motor finance. And perhaps that was the most interesting year I've experienced in this market, and thankfully, I've been doing it for quite some time. A strong start. First 5 months accumulated a record volume month in November. That was very pleasing and the performance was supported by market share gains at the franchise end of the market and this is the heat of the CCCFA changes. The introduction of those changes in December added both cost and complexity and pushed out improvement time frames. Further, the prescriptive nature of those changes saw decline rates increase significantly across the industry and looked at both the number of vehicles sold and the finance volumes being risen across the industry. As a consequence, volumes over the next 4 months were challenging. And before changes to the CCCFA was signaled, aimed at removing some of the unintended consequences resulting from the December changes. And we also note further changes to plan for early next calendar year. Growth returned in the last 3 months of the financial year, and we now expect a solid growth in the current financial year, notwithstanding the weaker consumer sentiment. That growth will be underpinned by an extension of distributor relationships, noting auto distributors that have added Opel to their portfolio. They will start being sold in New Zealand later this calendar year. And as with Citroen and Peugeot finance they will be offered under the iOwn brand that at Heartland underwrites. Further growth will come from market share gains discussed earlier that were hampered by the CCCFA changes. Jeff mentioned first on lending, and I'll narrow on Page 28, which is now a small part of Harmoney portfolio and specs remains under prevailing conditions. Principal growth for contracted ledger was, as Jeff mentioned, the right off the Harmoney platform, lending platform as they close the channel. And know that we also ended negotiations with Harmoney around provision of a wholesale facility in March. We are comfortable with producing first unsecured consumer lending in the current environment and to extend sort of run off to continue. Turning now to home loans on Page 29. Heartland's exclusively digital home loan platform targets borrowers who are refinancing and coming off fixed terms. It's a massive market and a Heartland's context with billions of dollars of loan values during every month. We target borrowers who have low LVR and strong income to debt ratio, it's at the quality end of the housing market. Quality, combined with low cost of acquisition, as a result of digitalization, enables Heartland to offer low and aftermarket leading rates. And as such, we expect continuation of the strong growth rates achieved in the last financial year. Lastly, turning now to Page 30, and our rural book. Increase in level of asset growth while improving the overall quality of the ledger, we continue recent large historical relationship loans replacing with higher quality, Sheep & Beef rearing direct loans. These loans have smaller loan sizes, are better secured in terms of LVR and as such carry lower risk. As part of the market that is under service currently and afford good growth opportunity for Heartland as a consequence. Growth in number of farmers is a seasonal livestock borrowings increased also, as to the limits that we provided them with. And improved facility utilization has opened a strong performance in the last financial year. We expect momentum to be maintained in the current financial year, not in the seasonal nature of that borrowing. I'll hand back now to Jeff.

Thank you. Chris, and I'll ask Andrew Dixson, the Financial Officer, to quickly take us through the funding of the capital update on a busy, monogamous thing to [indiscernible].

Thanks, Jeff. So yes, Slide 32. In New Zealand, with Heartland Bank increased borrowings by 16.8% to $4.35 billion. Deposits grew 11.7% to $3.6 billion, with strong contribution from Heartland Bank's 2 new noticeable products. In the current financial year, Heartland Bank launched a 90-day Notice Saver product at a market leading rate, off the back of the successful launch of the 32-day Notice Saver in late FY '21. The introduction of these products did see some initial depiction from Heartland's term deposits. However, underlying retention rates remain strong and new bank customers continue to grow with increased take up -- uptake, sorry, in digital channels via the mobile app. Heartland Bank was announced Canstar's Savings Bank of the Year in 2022, which is the fifth consecutive year for the awards of a Direct Call and Notice Saver accounts. Other borrowings increased by 49% to $750 million, largely driven by increases in the committed auto warehouse facility and commercial paper. During the year, we did increase the committed auto warehouse facility from $300 million to $400 million, with the amount drawn increasing by $160 million. Overall, liquidity remains strong, well in excess of regulatory and internal risk measures. And overall Heartland Bank continues to have a well-diversified funding base and demonstrated access to a wide range of funding markets and instruments. Moving to Slide 33, Australia. Heartland Australia increased borrowings by 9.3% to $1.2 billion in FY '22, and during the period, increased its access to committed Australian Reverse Mortgage funding to $1.3 billion -- $1.35 billion in aggregate. Reverse mortgage limits were increased by $100 million and maturities were extended by 2 and 3 years, respectively, on our 2 warehouses. We also increased issuance from our medium-term note program during the period. Issuing a new $45 million line in July '21, a new $115 million line in May '22, of which $100 million of that refinanced and existing maturity. And recently, we issued a $30 million tap to an existing maturity in August 2022. A new $300 million securitization warehouse was executed for StockCo Australia in conjunction with the acquisition. This refinanced an existing smaller facility and provide headroom for near-term growth. The facility is funded by 2 banks. Overall, the Australian business remains well financed with long-term committed funding improvement access to the market. The next phase of our funding strategy focuses on continuing to build these programs out ahead of ultimately becoming a bank in Australia. Moving to Slide 34. Group capital remained strong at $809 million, which is 11.4% of total assets. This is expected to rise above 14% following the equity raise. Heartland Bank's capital ratio as at 30 June '22, is 13.49%, it is down from 13.88% with growth in the latter half of the year, assuming capital generated from profit. In the regulatory space, for Heartland Bank, the partial restriction on bank dividends was removed from 1 July, '22. As part of the Reserve Bank's capital implementation review requiring an increase in capital, increases in capital will be phased over a 7-year period beginning from 1 July. This requires the minimum total capital ratio to gradually increase from the current 10.5% up to 16%. Giving an indication on current footings, Heartland Bank would require $24 million of additional capital to meet the 14% Tier 1 ratio and a further $93 million to meet the 16% total capital ratio. Remembering that Heartland Bank currently has no hybrid capital and either for additional Tier 1 or Tier 2 currently on issue. I'll hand back to Jeff.

Thank you very much. Michael Drumm, who's the COO, will just take us quickly through the regulatory update.

Thanks, Jeff, for the volume of recent and upcoming change in this area continues to be high, as Chris has spoken, to the impact of the credit contract and consumer signings impact on our consumer portfolios. And 2 of the changes are expected in that area in the latter part of the current financial year. The financial markets conduct new act will introduce a new conduct regime for banks and other financial institutions. Debt will be coming into force in 2025 and will require Heartland to obtain a license. And also producing rules around how we incentivize intermediaries, many of those details, however, to be determined. The Deposit Takers Act, upcoming uptake continues to strengthen the regulatory framework and deposit-taking institutions like Heartland Bank. The key part of the year will be the introduction of a depositor compensation scheme. But again, details are expected to be released for consultation in the latter part of the first calendar year. Final abstraction there is the Climate-Related Disclosures regime, which I touched on briefly before. Now that comes over from FY '24 onwards, and revised a significant level of Climate-Related Disclosures in our financial accounts.

Thank you very much, Michael. Now just turning towards the final part of the presentation of results just looking forward. Clearly, there's a lot of challenge in the economic environment in the coming years, high interest rates, high inflation amongst others. However, there is reasons for us to be optimistic. To some extent, we are insulated in terms of growth through products such as reverse mortgages and livestock in particular, that will continue to grow despite macro-economic conditions. In addition, in the banking activities, the reasons that Chris mentioned, we are optimistic with the level of refinancing that comes through the mortgage market that we're positioned to continue to grow in our online mortgage proposition, and indeed, in other areas pick up market share in Asset Finance and Motor. From a risk position, as we have discussed, we are much more resilient than we have ever been in the past, given the derisking and the change of portfolio mix that we have undergone. And indeed, on top of that, we have the advantage of that economic overlay. So we will continue also to pursue efficiencies through digitalization, but without a doubt, the biggest opportunity for us clearly is in Australia, to continue the high growth that we're getting in our reverse mortgage book, to unlock the potential of the livestock business and in starting that journey towards becoming a bank. A lot of boosters to jump through yet, but we're very confident that we found the right vehicle and the right pathway in order to realize the aspiration of becoming a bank. In terms of guidance, we have an underlying range of $109 million to $114 million, excluding any one-off impacts such as fair value changes of equity investments. Finally, [Foreign Language]. This performance would not be possible without our people. I'd like to thank all of our Heartland people for the strong contributions they have made in a year is again disrupted by COVID, et cetera. So [indiscernible]. And I'd also like to thank the support of our shareholders during the course of the year [indiscernible]. So that completes the presentation of the results, but we're not done yet. We're going to introduce the equity raise, Andrew Dixson is just going to take us through the key elements of the equity raise that we have announced. Just 1 thing I'd like to say is that we have chosen the structure with care and deliberation, a placement with an SPP for 2 reasons. One is, the markets remain extremely volatile, they're linked with can be quite wild swings. We needed a process which would have us in and out of the market in the fastest possible time. And secondly, and more importantly, the placement is designed to address the issue that we have, which is the liquidity in our shares through insufficient institutional support. We are quite unique in the NZX with the level of return to institution. We have only 15% institutional shareholder on the registry. That has to change, the long-term benefit of our shareholders, we need more institutional shareholders, we need all liquidity in the shares. To give you an idea, we are ranked 25th place on the Internet, #26 has more than double the turnover of shares that we have, and it's in everybody's best interest to create more liquidity. Thank you. I hand over to Andrew.

Thanks, Jeff. So I'm on Slide 39, and very pleased to announce Heartland's best equity raise since 2017. We are seeking to raise NZD 200 million via a $138 million fully underwrite replacement to eligible investors and a $70 million share purchase plan. The underwriter is provided by Jarden. The proceeds will principally be used to repay the acquisition finance facility that was utilized to complete the purchase of StockCo Australia, with the residual to provide additional growth capital to Heartland's existing businesses in Australia and New Zealand. The placement shares will be issued at a price of $1.80 per share, which is a 12.8% discount to the ex-dividend last close price. The share purchase plan price will be the lower placement price and a 2.5% discount to the 5-day VWAP up to the closing date of the share purchase plan. As Jeff mentioned, informing the structure, Heartland is focused to ensure existing shareholders are treated fairly, balanced against the backdrop of volatile market conditions that have been experienced to date in 2022, and our objective to further diversify the share register to increase liquidity on both NZD and ASX noting that Heartland's trading liquidity is lower than other NZX listed companies of similar size. Increasing liquidity will attract further institutional investors, which is positive for the company and all shareholders. Heartland decided the share purchase plan to the maximum amount possible under the NZX listing rules which 5% of shares on issue and a $15,000 share cap. We did seek a waiver to increase this amount to the rules are currently under consultation. Heartland also favored the share purchase plans that provide the benefit to participants in volatile markets with the downside pricing mechanism, which is not available in pro rata structures. Finally, regarding the placement, Heartland is again focused on ensuring all existing shareholders are treated fairly through the placement by an allocation policy that seeks to the extent possible to provide pro rata allocations to existing shareholders that bid for at least such quantum into the placement. I'll pass to Michael Drumm, who will cover the key risks of the offer.

Thanks, Andrew, just like any investment, there are a number of risks. We've noted some of the key risks back in Heartland and the notice period in the pack. So as we've talked about, we've seen a lot of volatility in the macro-economic conditions recently, increases in inflation and interest rates in the prior period. As a financial institution, there's always the potential for volatility, with the deterioration of those conditions to intake negatively fund liquidity in clear risk, work harder. Due the successful execution of our strategy involves both organic and acquisitive growth. There are various factors which impact on our ability to succeed and which we don't control, including the extensive competitive pressure in sectors we operate in, and the need to obtain regulatory approvals in some cases and the impact of overall market condition on things like budgets, and time frames, particularly for acquisitive growth. Like any business in the current environment we're operating in a tight labor market, which is dealing with the ongoing health impacts of COVID and other streams of illness. This is strictly the case in some specialist areas. We're comfortable at present, but we maintain a close watch on the area. We deal with the constant threat of cybersecurity, which again becomes more [indiscernible] present and we're monitoring very closely, but we're also in the process of upgrading our whole banking system. And we are comfortable with how that project is tracking. And with any project that is as the risk of delay or overrun. Given our rural and livestock portfolio, we're exposed to biosecurity risk. The recent foot and mouth disease outbreak in Bali is a very good example of this. In any case, A strong government response and compensation team together with strong origination standards. The Heartland team is expected to limit the longer-term risk, but it's always a short-term risk if an intrusion does occur in New Zealand or Australia. I touched upon the extent of regulation in this industry. And we obviously need to comply with them to -- continue to comply if that regulation and failure to do so can add to that the materials impact on us. We've also touched on the growth in the Reverse Mortgage book. Borrowers in and borrowers under that product can choose to remain in their property for as long as they wish to do so, in the balance of the loan, we never exceed the sale proceeds of the homes. This exposes to Heartland to negative equity risk which we monitor and we're comfortable with. The changes and factors such as interest rates, cost price inflation, mortality and voluntary exit rates can even impact on that risk. Finally, Andrew has talked about hedge accounting. So hedge accounting is tricky to achieve and verification and markets can cause hedge accounting risk into the future. I'll hand back to Jeff.

Thank you very much. We've run slightly over time, but we still have room for questions, and we'll now open up for questions.

[Operator Instructions] we will take our first question from Wade Gardiner with Craig Investment Partners.

I've got a couple of questions. First of all, the $8 million economic overlay, how did you calculate that, the science behind that?

Thanks,. So what we did to calculate that as we look to the impact downside scenario on the portfolios that Jeff mentioned, being a business relationship and asset finance in particular. So what would a downflow scenario look like to those portfolios. And during the bottom up now sort of losses computed with model losses yielded a number and that informed the size of the overlay.

I guess how aggressive did you get in terms of I guess, economic conditions, I mean, what was sort of the assumptions behind it?

I think -- look, there are a number of assumptions behind that. The problem, it's difficult to model losses, right? So -- what we did is looked at what we thought the impact could be on us by reference to our book and our individual exposures rather than using a sort of a more sophisticated model approach.