Expanding into higher yield lending

MARTA STEEMAN
Last updated 05:00 26/08/2014

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Fledgling bank Heartland New Zealand prefers to grow its earnings than return capital to shareholders.

The company posted a $36 million profit after tax yesterday for the year to June 2014, a 5-fold jump from the previous year's $6.9m which was hurt by $24.4m of one-off costs related its legacy property portfolio.

It said in its commentary that it would continue looking for acquisitions and also assess possible capital management options to improve its return on equity (ROE).

Managing director Jeff Greenslade said Heartland had ROE objectives and wanted to improve that first and foremost through growing earnings. However, if beyond a certain point it did not achieve that and kept accumulating capital, there were other options.

"We are not there yet and it's not even something we have thought through in any detail," Greenslade said. The company was just making clear to the market that it knew it had to make its capital work, Greenslade said.

Its ROE for the year was 9 per cent and 9.7 per cent in the last quarter. Some comparable banks in Australia were achieving 13 per cent, but plenty of banks were making less ROE than Heartland, Greenslade said.

Its $36m profit was earned from $210.3m of interest income, up 1.8 per cent from the previous year.

Greenslade said Heartland was always assessing some companies for possible acquisition but there was nothing it could make any comment on at present.

Heartland was formed in 2011 from the merger of Marac Finance with two building societies and later a rural finance company.

Its share price remained steady at 95c yesterday after its result was released.

It declared a final, fully taxed dividend of 3.5 cents a share, on top of its interim dividend of 2.5c, taking the total to 6c a share for the June 2014 year.

The $36m profit was 48 per cent, or $11.6m, ahead of the previous year excluding the $24.4m of one-offs. The company said earnings improvement was also due to increasing operating income and control of expenses and loans.

Its main lending is to businesses, rural businesses, and consumers for car financing. It is slowly reducing its residential mortgage lending assigning loans to Kiwibank.

Heartland's strategy is to focus on expanding higher yielding lending where it does not compete head on with the big banks. In April this year it bought a reverse mortgage business, Home Equity Release (HER), for $87m, where interest rates are typically higher than for standard home mortgages.

HER contributed $700,000 to profit for the last quarter of the June 2014 year after acquisition costs of $1.2m.

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Greenslade said the company expected about $8m of profit a year from the HER business.

Heartland expects modest earnings growth from business and rural lending also this financial year. It adjusted its earnings forecast for the June 2015 year to a range of $42m to $45m from $42m to $44m previously. It also reduced the book value of HER by $7.5m to $61.2m but that was not taken to the profit and loss account.

- The Press

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