Half Year Results to 31 December 2012 Jeff Greenslade Simon Owen Craig Stephen Interim Results to 31 December 2012 | Page 1
Important Notice This presentation has been prepared by Heartland New Zealand Limited (Heartland) (NZX: HNZ) for the purpose of briefings provided by HNZ in relation to its financial statements. The presentation and the briefing constitute summary information only, and you should not rely on them in isolation from the full detail set out in the financial statements. Heartland Bank Limited is the principal operating subsidiary of HNZ. Interim Results to 31 December 2012 | Page 2
Agenda • Introduction Jeff Greenslade • Financial overview Simon Owen / Craig Stephen • Looking forward Jeff Greenslade • Questions Interim Results to 31 December 2012 | Page 3
Introduction Achievements 1. Bank registration 2. Dividend policy set, special dividend paid 3. Interim dividend announced 4. Investment grade credit rating affirmed and outlook to stable Key Priorities 1. Focus shift to drive financial performance 2. Cost of funds reduction underway 3. Balance sheet, operating efficiencies and product strategy 4. Non-core property review and Board composition Interim Results to 31 December 2012 | Page 4
Financial Overview Simon Owen / Craig Stephen Interim Results to 31 December 2012 | Page 5
Financial Half Year Overview Big increase in NPBT • Achieved NPAT of $10.7m 6 months to 6 months to 12 months to Dec 2012 Dec 2011 Jun 2012 • Prior half included one-off (NZ$m) (NZ$m) (NZ$m) Net interest income 46.8 39.1 83.6 tax credits of $6.2m Net other income 5.3 6.0 11.8 Net operating income * 52.1 45.1 95.4 • NPBT $14.9m vs $5.6m Expenses 31.9 35.7 65.6 • Key value drivers are: Profit before impairments and tax 20.2 9.4 29.8 — Net interest margin Impaired asset expense 5.3 3.8 5.6 Decrease in fair value of investment properties - - 3.9 — Operating expenses ratio Net profit before tax 14.9 5.6 20.3 • Impairments higher due to Tax 4.2 (4.2) (3.3) non-core property Net profit after tax (reported) 10.7 9.8 23.6 * Net operating income includes share of MARAC Insurance profit Interim Results to 31 December 2012 | Page 6
Net Profit Before Tax Trend improvement in NPBT continues • NPBT improving half on half Net Profit Before Tax • Profitability growth rate slowed in the half 16.0 14.9 14.7 year ended 31 Dec 2012 (1H13) 14.0 • 12.0 Higher growth in half year ended 30 June 10.0 2012 (2H12) due to less liquidity held and $m 8.0 lower funding margins post Crown 5.6 6.0 guarantee 3.7 4.0 • Growth rate in 1H13 lower due to higher 2.0 bank - related professional fees, system 0.0 integration costs and expense “lumpiness” 2H11 1H12 2H12 1H13 • Expect NPBT growth to uplift in 2H13 – mid range forecast 2H13 $16.5m Interim Results to 31 December 2012 | Page 7
Net Profit Before Tax - Bridge Breakdown of component parts NPBT NPBT 1H13 v 1H12 ($m) 1H13 v 2H12 ($m) 18.0 20.0 3.7 18.0 16.0 0.1 14.9 1.9 16.0 14.0 0.5 0.1 14.9 1.5 14.7 6.9 14.0 12.0 2.1 12.0 10.0 10.0 8.0 8.0 5.6 6.0 6.0 4.0 4.0 2.0 2.0 0.0 0.0 NPBT Net Operating Operating Impaired asset Equity NPBT NPBT Net Operating Operating Impaired asset Equity NPBT 31/12/2011 Income expenses expense earnings 31/12/2012 30/06/2012 Income expenses expense* earnings 31/12/2012 * Includes investment property fair value adjustments Interim Results to 31 December 2012 | Page 8
Operational Efficiency We are on track Net Operating Income and Operating Expenses 55.0 50.0 • On track – cost to income trend line 45.0 shows steady improvement $m 40.0 • Some wobbles due to integration, bank 35.0 30.0 registration and expense timing 25.0 • 2H11 1H12 2H12 1H13 Cost project to further reduce nominal Operating Income Operating Expenses costs in 2014 financial year Cost to Income Ratio 85% 80% 75% 70% 65% 60% 55% 50% 2H11 1H12 2H12 1H13 Cost Income Ratio Trend Interim Results to 31 December 2012 | Page 9
Balance Sheet Summary Strong balance sheet Net Operating Income 60 • Total assets stable $52m • Net finance receivables fell by $33m $50m 50 $45m • NTA increased to $0.90 per share Net Finance Receivables 2,500 40 24 23 • Core divisions net receivables up Retail & Consumer $2,078m 22 $2,045m Business 2.8%pa 2,000 Rural $m 30 Non-Core Property Other 955 946 31 Dec 2012 30 Jun 2012 31 Dec 2011 1,500 11 13 (NZ$m) (NZ$m) (NZ$m) Retail & Consumer 20 $m Business Total assets 2,350.1 2,348.1 2,380.5 10 Rural Total liabilities 1,969.0 1,973.3 2,020.3 1,000 Non-Core Property 540 Total equity 381.1 374.8 360.2 531 11 10 11 8 500 Equity ratio 16.2% 16.0% 15.1% 479 481 3 4 2 Net tangible assets 350.0 343.7 330.6 2 2 1 - 105 88 - NTA per share $ 0.90 $ 0.88 $ 0.85 H1 2013 H2 2012 H1 2012 H1 2013 H2 2012 Interim Results to 31 December 2012 | Page 10
Net Finance Receivables - Bridge Core up, Non-Core down Receivables Movement 6 Months ended 31 December 2012 2,090 2,078 2,080 39 2,070 2 2,060 10 2,050 2,045 $m 2,040 17 2,030 48 2,020 2,010 2,000 Receivables Retail Consumer Business Rural Non Core Property Receivables 30/6/2012 31/12/2012 Interim Results to 31 December 2012 | Page 11
Asset Quality Trends Trend improvement in underlying asset quality • Asset quality improving Heartland Asset Quality $m • Non-core property remains 200 driver of elevated impairment 180 160 139 levels 140 Impaired Assets ($m) 118 122 120 108 • 65 Underlying impairment trend 67 100 52 80 49 improvement in last half 76 60 38 40 75 27 27 69 65 • 29 57 56 55 Profit affected by RECL 26 49 20 19 18 34 15 26 5 14 12 9 9 7 8 - agreement being treated as fully utilised Collective Provision Specific Provision Specifically Impaired Past Due >90 Investment Property Restructured Assets • Non-core property impairment FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 HY 2013 Net Finance Receivables ($bn) 2.1 2.0 1.8 1.7 2.1 2.0 manageable, but review Net Impairment (%) 4.2% 8.3% 5.4% 5.9% 4.4% 3.9% Net Core Finance Receivables ($bn) 1.6 2.0 2.0 underway to test strategy Net Impairment (%) 1.7% 1.8% 1.7% Interim Results to 31 December 2012 | Page 12
Funding & Liquidity Liquidity Split 100% 35% 90% 25% 27% 30% 31% 56% 80% Strong liquidity position 50% % of Total Liabilities 25% 70% Liquidity Split (%) 60% 20% 41% 42% 50% • 15% 14% Improving liquidity mix 40% 59% 30% 10% • 44% 20% Strong positive cash flows from asset 36% 33% 30% 5% 10% 10% base 0% 0% Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 • Staggered maturity profile Undrawn Standby Facility Undrawn Securitisation Facility Cash and Liquid Assets Liquidity as % of Total Liabilities (RHS) Invested Cash and Liquid Assets as at 31 December 2012 Call Deposits Bonds Cash at Bank 15% 16% 69% Interim Results to 31 December 2012 | Page 13
Cost of Funds Cost of funds continue to track lower Heartland Bank - Cost of Funds • Cost of Funds has fallen in the 12 months to 31 Dec 2012 due to: - Funding margin alignment with bank peers - Run-off of higher cost deposits Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 - Portfolio mix changes and new product developments Trend of Heartland Term Deposit Margins over Peer Bank Rates 140 Funding Margin Over Bank Rates (bp) 120 • This Cost of Funds reduction trend – based 100 80 on current identified needs – will continue 60 to flow through over the next 18 months 40 20 0 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Interim Results to 31 December 2012 | Page 14
Progress since Bank Registration Solid deposit growth & lower COF Average Weekly New Funds & Reinvestment Rates Liquidity Bank Registration 90% 12 17 December Bank Registration 2012 700 35% 17 December 2012 85% 10 650 30% New Fund Flows ($m) 600 Reinvestment Rate 80% 8 25% As % of Total Liabilities Total Liquidity ($m) 550 20% Holiday period 75% 6 500 15% 70% 4 450 10% 400 65% 2 5% 350 60% 0 300 0% Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Reinvestment Rate New Fund Flows (RHS) Liquidity Liquidity as % of Total Liabilities (RHS) Business Call Deposits Retail Deposit Growth Bank Registration 20 60 Bank Registration 17 December 17 December 2012 2012 15 50 Total Growth / Contraction ($m) 10 Total Business Call ($m) 40 5 30 0 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 20 -5 10 -10 0 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 -15 Interim Results to 31 December 2012 | Page 15
Looking Forward Jeff Greenslade Interim Results to 31 December 2012 | Page 16
Supporting NZ Households, Farmers and Small Businesses Products & Campaigns Business Call Account Invoice Finance Livestock Finance School Fees Interim Results to 31 December 2012 | Page 17
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