Heartland Group Holdings sees net profits rise 9.3% for the full year; Capital raising of $200 mln is to repay bridging loan and to fund future growth

Heartland Group Holdings, the parent company of Heartland Bank, is looking at becoming a bank in Australia - and hopes to turn its NZ bank into a subsidiary of the Australian operation.

The group on Tuesday announced a record profit of $95.1 million and announced a $200 million capital raising.

But perhaps the real news was contained in the company's detailed result announcement to the NZX. 

The company said it was at the early stage of possibly acquiring start-up bank Avenue Bank in Australia. If this goes ahead Avenue Bank will become the company's vehicle in Australia. 

But also the intention would be to make the NZ Heartland Bank a subsidiary of the Australian operation. This would require Reserve Bank of New Zealand (RBNZ) approval and Heartland said contact with the RBNZ about this was at an early stage.

"It is currently expected that completion of any acquisition would take place no earlier than the last quarter of FY2023, and possibly not until the first half of the financial year ending 30 June 2024 (FY2024). The consideration payable by Heartland on completion is expected to be A$49 million, subject to adjustments," Heartland said.

"For regulatory reasons, Heartland would be required to hold any ADI [authorised deposit taking institution] in Australia through an Australian incorporated non-operating holding company (NOHC) which is approved and regulated by APRA.

"It is currently anticipated that HAH would be the appropriate vehicle to apply to APRA for authority to act as a NOHC. To pre-position HAH for this opportunity, Heartland is seeking the consent of the RBNZ for HAH to also act as the NOHC of Heartland Bank in New Zealand. This would not result in any change to Heartland Bank’s beneficial ownership. This engagement with RBNZ is at an early stage."

This is the full part of the relevant text in the announcement:

Heartland is continuing to look for further opportunities in Australia as a key growth market, and has been exploring opportunities to establish or acquire an authorised deposit-taking institution (ADI) in Australia.

Becoming a bank through an ADI in Australia would make possible a number of benefits: - access to a deep and efficient pool of funding to support ongoing growth; - potential uplift in margin, to the extent that retail funding rates are less than wholesale rates; and - providing a platform to extend Heartland’s best or only strategy into Australia.

The aim is to create the potential for a digital bank which, once Heartland assets are transferred into it, would be profitable. This, together with Heartland’s best or only strategy, provides the opportunity for a differentiated proposition.

To this end, Heartland has entered into a non-binding memorandum of understanding (MoU) with Avenue Hold Limited (Avenue Hold) in relation to the potential acquisition of Avenue Hold and its subsidiary Avenue Bank Limited (Avenue Bank).

Avenue Bank is a restricted ADI. This means Avenue Bank may conduct banking business in Australia for a limited period and subject to specific restrictions. Avenue Bank is seeking to progress to becoming a full ADI. Any establishment or acquisition by Heartland of an ADI in Australia would be subject to regulatory approvals.

Subject to regulatory approvals and transaction completion, Heartland’s existing businesses in Australia would be transferred to sit in or under Avenue Bank, and this would be the vehicle for growth in Australia.

In accordance with the MoU, Heartland has made an initial subscription for A$5 million of capital in Avenue Hold.

Heartland’s due diligence review is continuing, as is negotiation of binding transaction documentation. Completion of any transaction is expected to be conditional upon a number of matters (which may include Heartland securing acquisition funding, Heartland being satisfied as to the likelihood of Avenue Bank progressing to being a full ADI, Avenue Hold shareholder support of the transaction, receipt of all necessary regulatory approvals (including from APRA and the Reserve Bank of New Zealand (RBNZ)), and the absence of any material adverse change).

Any requirements or conditions of regulatory approvals (including capital and liquidity requirements for the bank and relevant business of Heartland held below Heartland’s top-level holding company in Australia, Heartland Australia Holdings Pty Limited (HAH)) will:

1. become known only as engagement with APRA and RBNZ progresses; and

2. be relevant to Heartland’s decision to proceed with the transaction.

It is currently expected that completion of any acquisition would take place no earlier than the last quarter of FY2023, and possibly not until the first half of the financial year ending 30 June 2024 (FY2024).

The consideration payable by Heartland on completion is expected to be A$49 million, subject to adjustments.

For regulatory reasons, Heartland would be required to hold any ADI in Australia through an Australian incorporated non-operating holding company (NOHC) which is approved and regulated by APRA. It is currently anticipated that HAH would be the appropriate vehicle to apply to APRA for authority to act as a NOHC.

To pre-position HAH for this opportunity, Heartland is seeking the consent of the RBNZ for HAH to also act as the NOHC of Heartland Bank in New Zealand. This would not result in any change to Heartland Bank’s beneficial ownership. This engagement with RBNZ is at an early stage.

The group, which went into a trading halt on the NZX on Tuesday, said the equity raising was to to retire bridge debt and fund growth ambitions for existing business.

Heartland said the $95.1 million for the financial year ended June 30, 2022 was an increase of $8.1 million (9.3%) compared with the previous year. On an "underlying" basis, FY2022 NPAT was $96.1 million, an increase of $8.2 million (9.3%) compared with the FY2021 underlying NPAT.

Heartland said the $200 million equity raise would comprise a $130 million fully underwritten placement and a $70 million non-underwritten share purchase plan to shareholders in New Zealand and Australia, with the ability for Heartland to accept oversubscriptions at its discretion.

Proceeds will be used to repay a A$158 million acquisition finance facility outstanding in relation to the recent acquisition of Australian livestock financing businesses StockCo Holdings 2 Pty Ltd and StockCo Australia Management Pty Limited (together, StockCo Australia), and to provide additional growth capital for Heartland’s existing businesses in Australia and New Zealand.

The company provided these highlights:

• NPAT of $95.1 million, up 9.3% ($8.1 million). Underlying NPAT of $96.1 million, up 9.3% ($8.2 million) on FY2021 underlying NPAT.
• One-off items had a $0.9 million net impact on NPAT.
• Gross finance receivables (Receivables) of $6.2 billion, up 15.3% ($765.9 million).
• Return on equity (ROE) of 12.1%, up 21 basis points (bps). Underlying ROE of 12.6%, up 59 bps.
• Net interest margin (NIM) of 4.16%, down 19 bps.
• Net interest income (NII) of $250.1 million, up 7.1%.
• Cost to income (CTI) ratio of 43.6%, down 3.2 percentage points (pps). Underlying CTI ratio of 42.5%, down 2.3 pps, and CTI ratio of 41.9% for the second half of FY2022 (2H2022).
• Impairment expense as a percentage of average receivables decreased from 0.31% in FY2021 to 0.25% in FY2022. Underlying impairment expense of 0.29% benefitted from an improved book quality.
• FY2022 final dividend of 5.5 cents per share (cps), taking FY2022 total dividend to 11.0 cps – flat on FY2021, with a payout ratio consistent with the average over the last three years.
• Earnings per share (EPS) of 16.1 cps, up 1.2 cps.
• Completed the acquisition of StockCo Australia on 31 May 2022.
• 120% increase in users of Heartland Bank Limited’s (Heartland Bank) mobile app.
• Heartland Bank awarded Canstar Savings Bank of the Year 2022 (fifth consecutive year), and awards for its Direct Call, 32 Day Notice Saver and 90 Day Notice Saver accounts.
• New Zealand Reverse Mortgages awarded Consumer Trusted Accreditation (fifth consecutive year), and helped its 20,000th customer.
• Australian Reverse Mortgages business increased market share to 33.1%.