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

[indiscernible] Nau mai -- nau mai, haere mai. Good morning and welcome. I'm Jeff Greenslade, the Chief Executive of Heartland Group. I'm joined by Chris Flood, the deputy CEO of the group; the Chief Financial Officer of the group, Andrew Dixson; and the Bank Chief Executive, Leanne Lazarus. The purpose of this morning's webcast is to go through our announcement concerning the acquisition of Challenger Bank and the consequent equity raise. So we have now received what's called minded to grant from both regulators to proceed with the acquisition and the licensing really at this stage, subject primarily to the raising the capital. So the capital raise has been announced, a $210 million equity raise divided into a placement of $105 million and a unwritten rights issue of $105 million. So that equates to a 1 for 6.85 issuance. Integration is well underway with the -- with CBL, the bank. So we've been working very closely with the team in Australia, moving towards ultimate settlement on the 30th of April. So we're very well advanced in things like our systems, premises and people. And in that regard, I'm very pleased to announce that we have appointed a CEO for Australia Michelle Winzer. She comes from an extensive banking background in Australia and at senior levels, in particular, she was the CEO of the Bank of Melbourne and more lastly, the CEO of RACQ Bank in Australia, where she has done some tremendous things in turning that business around. So we're very pleased with the cover of the CEO, Michelle brings not just great compliance, banking experience, but also some really good commercial skills, which will be all go well for us going forward. Also, while we're talking about our people, we've announced my intended resignation. So I'll be finishing up in December. I've been with the group for 15 years, has been a wonderful journey. We've achieved a lot. We've grown a lot. And now we have now achieved 2 bank licensing, which is unusual. So having achieved this or about to achieve this. I feel it's a good time to step aside. And with the ample talent that we have with Chris, Andrew, Leanne and now Michelle, I feel very confident that the next chapter will be in good hands going forward. The other aspect of the integration we want to touch on is that in advance of taking ownership, CBL has been raising deposits. And the aim of doing that is so that we can refinance our wholesale funding of the $2 billion of assets that we have sitting outside the bank. So we obviously have been in Australia for 10 years. We had $2 billion worth of reverse mortgages, and we have $300 million of livestock loans, which we need to refinance out of wholesale funding into retail funding. So we have about $700 million have been raised over the last 3 or 4 months. So that's very impressive in terms of the pace with which CBL has been able to raise funds. But more particularly, the rate has been extraordinarily good, so that the delta between our wholesale cost of funds and the retail deposit funds is currently at 1.74%. So there is a fantastic fill-up to our margin going forward. If you can just do the math of 1.74% on $2 billion, you get the order of the benefit that we are facing. So we are in the final stage, as I said, the capital raise is the last stage. Very well placed in terms of integration. Systems issues are very simple. Their deposit system is very efficient, very seamless. It's operating now. We're seeing it live in action. We're very happy with that. We were bringing our own lending systems. So the post-acquisition integration issues are very much of a lower order and our focus really going forward is on refinancing that wholesale debt as fast as possible. I'll pause here now. I'll just get Andrew to give you the pro forma financials for the Australia Bank, and then I'll come back and talk about some of our growth aspirations and how we wish to present ourselves in the future and the question of the dividend.

Thanks, Jeff. Good morning, everyone. So I'm on Page 11 on which shows a pro forma projection for FY '25 for the new Harland Bank of Australia. And given the capital is being -- that's being raised as predominantly being deployed into Australia, we wanted to provide this for a look at the first year of -- or first full year of operation of the ADI Group. And just to point out, this projection is for existing products only, it's reverse mortgages and livestock in the main. We have not assumed any introduction of new lending products in this first year. So what this shows is a profitable Australian banking group in its first full year post transaction completion as it transitions its funding base from sole reliance on wholesale funding, security securitization and to deposit funding. In terms of the balance sheet, we have continuation of receivables growth, which is about 18% assumed across reverse mortgages and livestock with livestock resuming growth from where it's been trending in recent months. The cadence of deposit reason currently being experienced continues, and we ended the financial year with $2.35 billion of deposits on float and a small amount of wholesale lift with headroom assumed in both the residual reverse mortgage and livestock securitizations. In terms of the profit and loss, there is a good uplift in net interest margin from that transition into deposit funding. However, this is moderated by the time that is taken across the financial year. The negative carry also of a high liquidity pool with an MLH ratio, you'll see there of nearly 20%. The MLH is our liquidity ratio that we held to, which is effectively liquid assets over total liabilities. And also, we have the full impact of replacing our -- one of our existing securitizations with another. If you fast forward into the FY '26 period, you'll start seeing margin getting towards that 4% level. Further profit and loss items here, you have the operating expenses, including a $15 million per annum inheritance from the ADI, which reflects a fairly fully loaded cost base, which is really to scale with all systems and people in place and ready to go. And as such, a respectable 45% cost-to-income ratio was printed. Impairment is minimal, given the fair value nature of the reverse mortgage portfolio and the continuation of the exceptional credit metrics of these portfolios, which are outlined on Page 20 and similarly, the very low loss experience in livestock projected to continue supported by the recovery of the key credit quality drivers. I'll hand back to Jeff -- carry on.

Thank you, Andrew. And I'd draw your attention to Page 14, which is our aspirational targets that we have set ourselves as a group. So this includes Australia and New Zealand of achieving the $200 million net profit after tax by 2028 and in doing so, achieving ROE of up to 14%. What we've done on this page is just set out what are the ingredients that would contribute to that result. So it may be that some of these ingredients are under and some are over, but just gives you an idea of what we need to do. So particularly to give you an idea of what degree of challenge this target is for us. So the 4 key elements is obviously growth, the margin, the cost-to-income ratio and impairments. And just go through each in turn. So a pathway to this number requires a greater than 10% CAGR. Now we've been achieving around about 12% over the last few years. So the key thing to understand there is that that's not a particularly testing target for us. We have been achieving that. And indeed, if you look at the reverse mortgages in both countries, very high levels of growth. We're expecting Motor to kick back up again and Livestock Australia to kick in, and we'll start to see those sorts of growth rates returning. Seeing the margin back to 4%. We've been at 4% or above 4% for almost all of our history. It's sunk down for a number of reasons that we talked about at the half year. There are a number of pathways back to 4%. There's lower-yielding debt and Motor and Asset Finance that's rolling off. There's opportunities to move into sigmas that we occupied previously in Motor in order to increase the margin. And of course, as interest rates is with the reduction in inflation, we do expect to see us be to pull back some margin in that process. The cost-to-income ratio of getting down towards the 35% involves us in a number of internal projects where we maintain sort of ongoing business as usual costs at CPI, but we take out fundamental costs behind that by changing the way we do things, and there's a number of projects underway to do with telephony, digitalization, self-service and so forth, which will contribute to that. I'd also note that we have moved our cost-to-income ratio in the past, down from the high 50s to the low 40s. Now of course, a lot of that is driven by the top line, the NIM part of that equation. But in the past, we have achieved those cost savings in the fundamental sense indeed at half year. In dollar terms, our underlying costs went down. And then final element is the underlying impairment expense ratio, which is currently at 0.23%, and this requires us to maintain that at 0.3%. So again, all very achievable targets. Jumping backwards, with apologies, to Page 13. I'd also like to draw your attention to a perspective that we wish to use in terms of explaining results going forward. We have received feedback quite understandably for a whole lot of reasons, some of it within our control, some of it not. Our results are full of legacies, underlyings, one-offs, et cetera, et cetera or accounting issues. So what we're endeavoring to do is to try and simplify things as much as possible by dividing the group into 3. So we have the New Zealand bank, the Australian bank. And then we have a third notional bucket, that's not a structural bucket, it's a notional bucket, which includes those sorts of distractions from the underlying results or noncore or legacy activities. So within there, for example, equity investments real estate that we've picked up along the way, some loans that we are no longer writing as well as things like goodwill and the consequences of derivative derecognition. So it's something that we are tend to build on as we go in order to give you that sort of simplistic transparent view, but also more importantly, to give you a sense of our discipline around capital allocation. One of the things that we are concerned about is in that third bucket of the notional nonstrategic asset bucket, we have a lot of capital tied up. That's not earning optimal or, in some cases, 0 rates of return. So we've identified within that bucket, around about $100 million of capital that we would like to recycle through rationalizing and realizing the assets that are in that category. Finally, before I open up for questions, the issue of the dividends Obviously, we have a capital raise underway at the moment, which is running close to the year-end date. We are growing as well. We have needs for that capital in terms of our plans for both New Zealand, but more particularly, Australia. So with all that in mind, the Board has broken cover, if you like, in terms of the payout ratio and is indicated that it's targeting a 50% target for payout ratios for this financial year. This is just in terms of this financial year, our historical payout ratios in the past, as you'll be aware, have been higher, but for the factors that I've mentioned, we think this is a more balanced and reasonable approach, recognizing that we've paid $0.04 already and to get to 50% would require the Board to agree to something north of $0.03 a share. It still gives a very good dividend yield, but obviously, at a low level of payout ratio that we had in the past, but we believe that balance is justified given the capital raise and the activities that we have currently going on. So I will pause there, and I'm happy to take questions.

[Operator Instructions] Your first question comes from Wade Gardiner with Craigs Investment Partners.

So a couple of questions from me. If we go to Page 26 of the presentation, where you break down the use of funds and look at the pro forma capital ratio. First of all, the 18.2% for the Australian bank. Is that sort of the required level that the regulator set? Or is that -- does that have a level of sort of fastener if you like, for growth going forward?

Yes. So it's not the regulatory capital amount we're all allowed to disclose that. And it does include, I think, 2 elements. One is -- well, 3 elements -- the normal buffer that you would expect. There's growth buffer in there as well. And certainly, our opinion is that there is some, if you like, training wheels buffer there as well, which we hope over time to reduce.

Why are you not able to disclose the regulated capital amount?

It's just a requirement the -- that's the advice we've been given.

Okay. So if I look at that $205 million use of funds, all of that sits within that 18.2%, none of it was applied to the New Zealand business?

I don't think -- that's not quite right. Andrew, do you want to sort of explain that breakdown in terms of the growth capital is -- how that's being allocated?

Yes. So I would split that growth capital pretty evenly across the New Zealand and Australian banks. So that is a sort of -- there's about 25 notionally applied to each bank.

Okay. So therefore, going forward, the Heartland Bank, the $14.1 million, that's just the New Zealand business. So that has got to get up to 16% as we know over the next couple of years. I guess just to clarify what Jeff was saying about the dividend, you were saying 50% for this year, we shouldn't necessarily assume that it's going to be 50% going forward and maybe more likely to be up around that sort of 70%, 75% that you have been paying?

Well, I think obviously, that's a decision for the Board, but I guess the key thing to stress is that the -- that guidance given is purely for 2024. And Andrew, can you talk a bit about the options we have available to us in terms of funding the step-up in New Zealand PCR.

While we've got some Tier 2 as we grow, there's more scope to bring in more. And then obviously, we haven't been to the additional Tier 1 market as well. And also -- I was just going to say also, as I alluded to earlier, we have this more strategic asset bucket where we believe there is up to $100 million of capital that we can potentially recycle.

Yes. Okay. So we should assume, therefore, that the DRP remains in place, you sort of haven't raised equity this time around that means that you wouldn't bother with the DRP.

would be to carry on -- very much carry on with the DRP.

Yes. Okay. So looking at Page 13, that breakdown there. If I look at -- if I add all that up, it comes to about $102 million, Kiwi. But that New Zealand one is last 12-month statutory and -- I assume that has the elevated level of impairments and a lower level of growth out of a couple of the books. Therefore, for an FY '25 number, we're to be expecting something north of $102 million. Is that a fair comment?

Yes. So yes is the answer. Obviously, we're not providing guidance specifically for New Zealand at this stage because it'd be sort of a 15-month projection. But you have your own model and I wouldn't be changing the assumptions here, specifically around New Zealand. Within that, no doubt, you've got a split out for Australia, and we've given in the Australian numbers so you can probably build that off your own model. But yes, based on what you see, it's definitely north of $102 million.

[Operator Instructions] Your next question comes from Stephen Hudson with Macquarie Securities New Zealand.

I just wondered if you could give us an update on the normalization numbers that you're using for FY '24 underlying NPAT. I think there's sort of 4 or 5 buckets there. And I think you gave us the numbers in February. I just wondered if you can counter through those again.

Well, nothing's changed, Stephen, so what we've disclosed as there's no changes. And so this transaction or the passage of time haven't changed any of those normalizations.

Okay. And I just wondered if you can give us an update or provide some detail on the Commonwealth Bank warehousing repayment? What was the reason for that repayment to have what to be occurring that sort of facility being withdrawn or is Commonwealth Bank happy to continue to roll out or have they actually withdraw in that facility?

No, it's been driven by us in this transaction. So we have to bring all of our securitizations into compliance with the regulatory standard APS 120. Our view is that the CPI facility is not a securitization. And it was a different view provided by the regulator. So we've had to get on and refinance that facilities. So CBA had no desire to bring the facility and or restructure the facility into an actual securitization and therefore, in line with APS 120. So there's nothing other than the going on. So it's been a conscious decision on our side rather than CBA pulling funding.

Okay. And just the size of that facility, Andrew?

$600 million -- and just to mix there, that will be refinanced -- that will be refinanced before completion occurs.

And just on the AT1 and AT2 comments, are you advanced in your thinking on attacking those markets in New Zealand to satisfy the 17% that you're essentially going to require here by 2028? And sort of what sort of number you've given us a number for the bad bank number of $100 million. Can you give us a sort of a number for those 2 buckets?

So I can't give you a number at this stage, but planning is well underway. And I wouldn't call the categorization of bad bank, we called it nonstrategic. So yes, the assets are bad per se. It's just a pool of assets that either aren't consistent with our current business running strategy or just have been formed along the way of our journey and it's time to reset and start realizing.

Got you. And just coming back to guidance. I mean, obviously, we saw quite a material deterioration in NIM over the course of the first half of the year. We've also seen sort of asset quality data come out from the reserve bank out of February, which looks pretty horrific in the consumer finance space. What are you actually seeing in the second half of '24 on NIM and asset quality? Are you seeing an improvement in your metrics or sort of a continued decline there?

I might let Leanne talk to the asset quality side in terms of the work that's been going on, particularly in the motor space. In terms of margin, we've certainly seen stabilization. And in the bank, in particular, we've started seeing that start to creep back up, particularly as the lower yielding lower margin cohort of asset finance and motor loans continue to be refinanced. So that's looking positive in terms of asset quality.

In terms of asset quality, I see that improving for the rest of this financial year. We've seen stabilization since the beginning of the year, particularly from February onwards in the early stage areas and addressing as well as those legacy loans, those are long dated. So I see that very much having done.

Okay. And then just maybe a final question for Jeff. Can you just sort of flesh out your thinking for why you're leaving now? Sort of seems like there's a reasonable amount to do to incorporate to [indiscernible] the Australian bank? Just interested in your thinking on timing for announcing your departure and what's motivating that?

No -- some of these things it's always difficult finding the perfect time to go. But in terms of timing, I'm very comfortable that this is an appropriate juncture to move aside. Yes, we've pulled a lot of effort in over the last 18 months to get to where we are today. And obviously, we've got a couple of weeks to go in terms of the capital raise and the settlement. And I think that is a logical point for me to move aside because, as I said earlier, we've invested a lot in terms of developing people as well and the plan. So I'm very confident that we will have the people and the momentum going forward. And I'm still here until December. So my priority is to make sure that, that is the case that we are transitioned appropriately that integration occurs and Australia is on its way. Also noting that this isn't a startup bank in any sense. We've got -- it's unusual in that regard. We've got assets and momentum in those assets, particularly in reverse mortgages are now coming into the livestock as well. So we've got that aspect of the business is underway, and we're coming into a bank that's been in systems for some time. We've seen the systems and businesses operating underfire. So it's an entirely different order of integration challenge that's in front of us and one which I think will be well and truly down to over the next 6 months.

There are no further questions at this time. I'll now hand back to Mr. Greenslade for closing remarks.

Okay. Well, thank you very much for your time and for the questions. And obviously, please feel free to contact us over the next period as we go through the next stage of the capital raise. Please feel free to reach out. But thank you very much for your support, and thank you for your time.