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Edited Transcript of HBL.NZ earnings conference call or presentation 18-Feb-20 10:59am GMT

Half Year 2020 Heartland Bank Ltd Earnings Call

Christchurch Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Heartland Bank Ltd earnings conference call or presentation Tuesday, February 18, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Dixson

Heartland Group Holdings Limited - CFO

* Cherise Leanne Barrie

Heartland Group Holdings Limited - CFO

* Chris Flood

Heartland Bank Limited - CEO

* Jeffrey Kenneth Greenslade

Heartland Group Holdings Limited - CEO & Non-Independent Executive Director

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Conference Call Participants

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* Christian Bell

Jarden Limited, Research Division - Research Analyst

* Jack Crowley

Jarden Limited, Research Division - VP of Equity Research

* Jeremy Kincaid

UBS Investment Bank, Research Division - Associate Analyst

* Stephen Hudson

Macquarie Research - Head of Research

* Wade Gardiner

Craigs Investment Partners Limited, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Heartland Group interim results announcement conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Jeff Greenslade. Please go ahead, Jeff.

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [2]

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(foreign language) I'm Jeff Greenslade, the Chief Executive of the Heartland Group. I'm joined by members of the senior executive: Chris Flood, Laura Byrne, Cherise Barrie and Andrew Dixson.

So I have the presentation in front of me. I'm just going to kick off on Page 4, which is the highlights. And indeed they are, as you can see all the positive headline numbers have moved in the right direction. So we've seen $177 million of balance sheet growth, which is 8% on an annualized basis coming through, driving an uplift in net operating income of 16% on an annualized basis, up to $118.6 million. That compares with a 16% up on the previous half. And that drove net profit after tax of $39.9 million, which is a 20% uplift from the previous period. And those -- that figure combined to drive a return on equity of 11.7%, which is a good uplift on where we were previously. So a good result, which we'll go into in more detail. Before I do that, I'll just talk briefly about some of the strategic drivers behind that, which again we'll pick up in more detail later.

So the result reflects the continued consolidation of growth around 'best or only' products, particularly in New Zealand, but also reflecting increasingly the benefits of expansion in our digital strategy, which furthers our reach to customers, improves customer services but also reduces the onboarding costs of acquiring new customers. The third element is leveraging the new structure that we have, and that's obviously being reflected through that increase in ROE. And then finally, expanding what we're doing in Australia, particularly in Reverse Mortgages but also in other products as well, as we'll talk about in a moment.

In terms of customer and culture, obviously, at the heart of what we do is our customers and ensuring that customer outcomes are the best possible. That is increasingly demonstrated through our focus on concepts of UX and CX, which is user experience and customer experience, which is part of the digital world. We're really responding to customer demand and providing fast and frictionless service. We've also spent a lot of investment and time on marketing, raising our profile, which is seeing good results coming through both in terms of growth that we've just demonstrated but also increased applications coming through.

Culturally, and our focus is very much on our matapono or values of Mahi Tika, Mahi Tipu, Mahi Toa, Mahi Tahi, which in essence means to be bold, evolve, work together and above all do the right thing, which is very much aligned culturally with both sustainability but also the regulatory demands that currently prevail. At the same time, we are seeing a change in the profile of who we are. We are increasingly a younger organization. 47% of our employees are aged under 35, and we think that positioned us very well in terms of meeting the demands of our customer base going forward.

And also, we're very proud of our Manawa Ako internship program, where we now have 35 young Maori and Pacifica students who are either full time, part-time or holiday workers for us here in Heartland.

So turning back to the financial results. I'm now on to Page 8, which is the waterfall growth in profitability. And no result that seems would be complete without having to explain some accounting change. And so the first thing I have to do is explain an accounting change. So you will see that other income at $9.4 million is up compared with previous period, and costs are also up compared with the previous periods. Now both of those lines have been influenced by a change in IFRS 16, which is the change in treatment for Reverse Mortgages going from amortization to fair value, which, apart from other things, means that the costs of acquiring those assets can no longer be effectively deducted from interest. So you've seen an adjustment to interest going up. It's that treatment that's being reversed, and then there's been a corresponding increase in cost as it's been transferred to the cost line. So if you exclude the impact of that plus the write-up in the value of Harmoney that happened in the period, the underlying NOI was $10.3 million, which was a 10% increase on the previous period.

Similarly, the cost line of $11.2 million, if you take out the impact of that accounting change, which was $5.1 million, we get to a $6.7 million underlying cost, which is a 16% increase on the previous period. And that increase reflects the impact of the marketing costs and to a lesser extent the compliance costs that we signaled would be happening during this period.

Moving now to the second waterfall chart, which is where was the growth coming through. And as you can see, a very consistent picture with previous announcement. Just to add, these percentages are year-to-date. So as you can see, there are very strong levels of growth coming through in those core activities, the Reverse Mortgages, Business Intermediated, in particular, has gone very well and also some of the digital activities and Open for Business. And on the other side of the coin, we have the continued reduction coming through in the noncore activities in Business Relationship and Rural Relationships. So very comfortable with the level of growth that we are seeing across those core activities.

Turning now to the key performance measures. A couple of things to call out. This year, we have reported NIM both in a traditional sense, which includes the impact of liquid assets. But we've also separated out the impact of liquid assets, which gives you an idea of, if you like, the core business of borrowing money and lending money. So as you can see, whilst the net interest margin in the traditional sense has declined, the lending NIM, if you like, has remained relatively stable. So what that means is that the reduction is reflected in the impact of carrying additional liquid assets, something that we decided to do towards the end of last year, just a reflection of the typical Christmas period. You always want to go out to Christmas carrying more cash just in case something happens. And indeed, something did happen in the form of the coronavirus, which we're very only indirectly impacted by, if at all. But it's something that will -- I mean that we'll take a conservative approach in carrying additional liquidity as we do when there's times of global uncertainty.

The cost/income ratio was up. Now we've given you 2 lines there, which one which reflects the overall impact including the accounting change, and one which excludes that, which itself at 43.3% is up. And again, that reflects the increased marketing spend and compliance spend. To give you an idea, we've roughly spent more -- $2 million more on marketing than we had in the same period previously. And that's -- hopefully, you are seeing that through various sponsorships on TV and various TV commercials that we are running.

Nonperforming loans continued on very much business as usual. Nothing really to report in terms of where we ended up there. Obviously, just for background, we tend to have higher NPLs than other banks, just reflecting the nature of our customer base being SMEs and consumer who do tend to get behind on their payments from time to time. But if you look across that right-hand -- bottom right-hand table, which is the impairment expense ratio at declining now up to 40 basis points, reflects the high level of remediation that we're able to get from our nonperforming loans. And just focusing on the impairment expense ratio, as you can see, it has come down quite considerably off the peak when we converted to IFRS. It has normalized but also declining in line with continued benign market conditions in terms of expenses.

Turning now to shareholder return. As I mentioned before, very pleased to see the ROE getting up to areas where we want to be, and we'll continue to work on improving our ROE. That is reflecting the efficiencies of the new structure we brought in place more than a year ago. As you can see, earnings per share has gone up. And we've also decided to increase the dividend for the half, and that's a reflection really of aligning ourselves more closely to market practice.

Obviously, during the period, there was the completion of the Reserve Bank's capital review, which we're very pleased with the outcome, the final outcome, both in terms of its content but also the direction that it was heading in. And as we have announced really, it is not a major issue for us in the immediate future. 2022, we're required to increase our capital by 1% and then another 7% over the following 5 years. So nothing that we anticipate will cause any material issues given current rates of growth and profitability.

I will now move on to divisional summary. I'll hand over to Chris Flood, the Bank Chief Executive in a moment. I'll just cover off Open for Business, which is part of our digital strategy, the online platform for unsecured working capital, which is accessible via a number of devices but increasingly mobile phone. That has been growing very well, being supported by a TVC campaign recently. And we are looking to roll out a similar offer into Australia. In fact, it has been launched and marketing has started this week. So we are very keen to see ourselves export the technology that we have successfully developed here at -- in New Zealand.

Secondly, Reverse Mortgages, I'll cover. And I guess a couple of key things to call out is the expansion of our online offering into Australia. So at the moment, we've shifted distribution to being predominantly broker-driven to now 50% broker, 50% direct. And within that 50%, half or 25% overall is now coming to us online, which is a fantastic element going forward in terms of both delivering good customer outcomes but also reducing the cost of onboarding these new customers. We have been marketing in Australia as part of that investment in Australia in TVCs and radio, and we intend very shortly to refresh our TVCs and provide another version of the advertising campaign for next year.

We're also working and investing in making Australia more scalable. Given the volumes that we're going through, we see that market share growth, which is lifted from 24% to 26%. We see that trend continuing. We've recently utilized our premises that we own in Ashburton and the availability of very qualified staff in Ashburton to transfer some of the inbound-outbound calls for Australia to Ashburton.

So I will take a break here and then hand over to Chris Flood to take you through the rest of the divisional story.

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Chris Flood, Heartland Bank Limited - CEO [3]

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Yes. Good. Thanks, Jeff. So I'm on the reverse -- New Zealand reverse mortgage page. And we've achieved steady growth in -- versus now double-digit growth for a number of years, and the first half of this year was no exception. Our expectation for the second half is, however, for a better result, improved performance. And there's a number of factors that's driving that. First of all, Jeff mentioned the increased marketing spend, which has increased Heartland's brand presence in New Zealand. But also, we have developed some specific Reverse Mortgage marketing, which is also running. And I think that is helping normalize the product or get that brand -- that product to win us out in the marketplace more than it has been in the past.

There's a couple of other factors in play as well. And I think the low deposit rates in the market right now are seeing some retirees consume their savings more quickly. And that's leading them to start considering what do they do when those savings run out and increasing applications. We've also improved our distribution. Jeff mentioned the digital play and the lessons that we've learned in other parts of the business. And it's now being applied to our reverse mortgage portfolio. And I think the other thing that's driving an increase in inquiries has been the inflation driving positive consumer sentiment.

Just a last point I'll make about this slide before moving on to the next is the business is scalable, as evidenced by the very strong operating income growth.

So turning now to Business Intermediated, which has grown strongly over recent years. In the first half of this financial year, it was absolutely no exception. So delighted with that annualized growth at 32%. The strategy is to provide financing products that assist distributors and more importantly dealerships sell plant equipment such as trucks, trailers or tractors. It's typically 1 customer, 1 loan that places our staff right at or near a point of sale. So it's incredibly efficient for us.

Growth rates in the division is significantly above the sector growth rates achieved and reflects that our partners value the proposition. Our focus remains on broadening that distribution, and we expect growth rates to be maintained at the levels achieved in the first half helped in part by the recent introduction of a digital platform in the space, which we call [O COM], and that alone assist dealer's ability to sell but also approve efficiency from a Heartland perspective.

Turning now to Motor Finance. And 6% annualized growth rate was pleasing and largely achieved without the impact of the recently acquired Kia relationship, noting new and used car sales were back in the half sort of circa 8%. This is very much a demand-driven business. It remains a very large market in New Zealand, and over 1 million cars are expected to be sold this year. Broadening our distribution partnerships remains a key strategy for us, as does developing wholesale and retail relationships with their dealer networks. We provide the broadest range of products in this sector, and this has helped being -- differentiate us from our competitors. We expect a stronger second half as a consequence, benefiting in part from Kia but also that continued market share gain.

Turning now to Harmoney and other personal lending, noting growth in New Zealand continues well ahead of system. So pleased about a 10% annualized growth rate. It's -- perhaps the top has been knocked off, that growth rate, a little bit through higher levels of repayments than we had expected. And it's principally as a consequence of deconsolidation of -- by homeowners when they go to refix their mortgages. Harmoney, on the other hand, has -- is enjoying the hockey rate growth that the business achieved here in New Zealand at a similar point in their development. So we expect our growth rates to remain at similar levels to that achieved in the first half. And just the other point I'd make on our personal lending is that the credit quality remains well within our expectations and budget.

So turning now to livestock. And the half year is always a difficult time to measure the performance at livestock as farmers typically destock in the December quarter and then restock through January through to June. So typically, it's a low point in the year for us. Notwithstanding that, we're 17% ahead of the same period last year. We benefited from stronger livestock prices but also improved Heartland distribution. We continue to investigate better ways to distribute the product. And our expectations are for a much stronger second half, in part seasonally adjusted, but also compared to the same period last year. We do note some drought conditions in parts of the country, and it can lead to some farmers destocking. But also -- so on one side, farmers are selling stock, but they're selling into other farmers. And that's typically a reasonably good period of time and a good opportunity for Heartland.

Relationship, on the next slide, is, of course, the noncore part of the balance sheet. We've discussed this over recent years, and we are seeing the continued sort of decline in those assets as we seek to lower exposure to the larger loans and get rid of concentration risk. Business did run off a little faster than we anticipated in the first half of the year. We think that will then normalize and expect a sort of an on-budget performance for that. And rural was a little flatter in the first half, but we do know some farms have sold and due to settle a little later in the year. So on balance, we think it will run off pretty much in line as we budgeted. We do keep a weather eye on this part of the market, and it would be interesting to see over the next few years what happens with some of the larger banks as a consequence of the capital requirements and better understanding their strategy around that.

So lastly, I'm going to cover funding. And it was another strong half in terms of growth for the bank. Our term deposits were up 9%. There was a deliberate strategy to lengthen the term of our average deposits. So we're very pleased about that. But it also helped by very strong retention rates up in the late 80s, just a tick under 90%.

A key to that, I think, is driven by a couple of things. Clearly, we have great rates. And -- but secondly, we also have fantastic products, as recognized by our Canstar awards. And now we've shifted the focus from not just having great products and great rates but also having a better user experience. And Jeff talked about the investment in the digital experience. And we've now developed at and our deposit area that makes the user experience much better than we think will drive much stickier customers as a consequence.

Handing back to you now, Jeff.

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [4]

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Thank you, Chris. So I'll just give a strategic roundup. So our strategy really is being based around and will continue to be based around New Zealand banking, Australia and digital. So New Zealand banking is itself weighted towards a strategy of 'best or only' products and maximizing customer experience through increased service proposition that the digital platforms offer. At the same time, reweighting that portfolio, moving out of those relationships, those low-margin, high cost-to-serve or analog products that Chris mentioned in Business Relationship and Rural Relationship. So expecting to see continued growth in areas like the very successful work for getting out of Business Intermediated, Motor Finance, Reverse Mortgages and Open for Business. And also looking to use and expand our digital channels to allow us to challenge in other areas.

Australia is heavily weighted towards the reverse mortgage book, and we will continue to invest in that both in terms of awareness, through marketing, shifting some of the processing and onboarding to digital channels. It took a lot of the cost of onboarding but also at the same time, recognizing that it's a very compliance-heavy activity that we need to maintain a very strong human touch but doing so in a more scalable way, something we're keen to invest in. And also support that business through broadening and diversifying its funding base. And finally, in Australia, we're looking to see where we can export some of our successes here and starting with Open for Business to expand our offering over there.

Thirdly, and digital, which underpins a lot of everything we do. Increasingly, we see as much as possible what we do shifting on to some form of digital platforms. And ultimately, we'll see things like Internet banking, telephone banking will be eclipsed by digital and mobile fund-based services and features, in particular. And that is obviously something which is lower cost, but more particularly, this is the really key point, it is reflecting what customers want. Increasingly, that's what customers want. In the United States, I saw some surveys that say that mobile phone is the preferred medium for financial services not just for millennials but the Gen X and is now the fastest-growing for baby boomers. So the future is around the mobile phone, and that's where we wish to shift a lot of our focus in activities going forward to give our customers that frictionless and fast service. And fast is at the heart of anything digital.

And in doing so, we look to see if we can expand beyond 'best or only' products into 'best or only' channels. And if you think about it, Open for Business as an example of that, that is a product which all the banks offer. But we have carved out a particular point of differentiation around (inaudible) the channel, which is a mobile phone-based or digital device but predominantly mobile phone channel, which allows us to offer speed and certainty as a point of differentiation. So those sorts of opportunities that comes through the digital world are quite exciting for us.

Turning lastly to the outlook. Firstly, just to confirm the interim dividend of $0.045 per share. But secondly, in terms of strategy and what you can expect, it is more of the same. Those elements that we have touched on, investing in awareness, investing in more automation, expansion of the digital platforms and looking to exploit opportunities in Australia. So with all that taken into consideration, we expect our results for the full year to be in line with the range originally indicated of $77 million to $80 million.

All right. So that is the end of the formal part of the presentation, and we'll now hand over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jeremy Kincaid of UBS.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [2]

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Just a few ones for me. First of all, on employee costs, do these mostly relate to compliance? Or was it reverse mortgage growth? Or I suppose it was somewhat related. And are you expecting a similar amount of growth in employees over the next 12 months and beyond?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [3]

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The increased costs that we've incurred is probably divided around marketing, and that is predominantly paying external providers. But there is an element of self-service that we quite like. So we have increased our investment in people in marketing areas. Compliance, clearly, there has been an increase in compliance costs. Chris, you -- obviously, the bank, closer to that. It's round about $1 million you estimate?

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Chris Flood, Heartland Bank Limited - CEO [4]

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Yes, Jeff. That's right. Yes.

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [5]

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And there will be -- as we grow, there is -- the business is not 100% scalable. So yes, there will be ongoing increases in FTE as we grow.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [6]

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Okay. Great. And just turning to your impairment ratio. You said in the commentary that there was a split between an improvement in the collection process and also a change in accounting standards there or the way you calculated it. Are you able to give a split of the impact of those 2 factors?

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Cherise Leanne Barrie, Heartland Group Holdings Limited - CFO [7]

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So Cherise Barrie speaking. It's probably difficult to split them quite specifically. But I think on the implementation of IFRS 9, which was a new way of calculating the -- effectively the collective impairments, at that point in time, our ratio was 13.2% So as the understanding of IFRS 9 has worked its way through and collections have also occurred, that ratio has just been by naturally effectively coming down because it gets impacted by your improvement and collections, and we've made quite substantive investment in our collections activity. So they're both kind of linked, but it's very difficult to separate those into 2 amounts.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [8]

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Would you be able to point to one being greater than the other? Or is that not possible?

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Cherise Leanne Barrie, Heartland Group Holdings Limited - CFO [9]

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I don't think so. No.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [10]

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Okay. And you touched on broadening the funding base with regards to the Australian business. You've talked about this in the past. Are you able to provide a bit more color? Are we closer to something a deal being done on that front?

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Andrew Dixson, Heartland Group Holdings Limited - CFO [11]

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It's Andrew Dixson here. We continue to broaden and diversify funding. We will look to bring on further warehousing and other forms of term funding, which are a better match for the underlying assets. At this stage, a transaction is not imminent. So there's not a lot to report there.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [12]

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Okay. Great. And then just finally, on the dividend, you mentioned you were -- the higher dividend is aligning yourselves with market practice. Does this mean we can expect sort of a higher payout ratio going forward? And do you have a target number that you're expecting or hoping to hit?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [13]

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We don't give forecasts on the dividend. And obviously, it's really a Board issue. So that's all we can really say on that. And obviously, you are aware of our history when it comes to payout ratios. But that's really all I can say by way of answer.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [14]

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So you are looking to move away from the history or not really? Because I'm just a bit confused between you're looking to move to market, correct...

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [15]

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No. Firstly, I think what I said is what I said, and that's we don't forecast. It is what it is, what we had told you thus far.

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Operator [16]

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Our next question comes from the line of Wade Gardiner of Craigs Investment Partners.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [17]

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A couple of quick questions from me. When you were talking about the Rural Relationship loans, and maybe I'm reading a bit too much into it, but there was a comment there around given the changes in the capital requirements and sort of keeping an eye on what the larger banks are doing in that area. Can we, therefore, read into that, that you might sort of head back into that area? Are you going to actually look to increase loans in that area in the future? Or as I say, am I reading too much into it?

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Chris Flood, Heartland Bank Limited - CEO [18]

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Wade, it's Chris Flood. I think the -- I don't think the behavior that been occurring over recent years will change in the interim. But right at the lower end of that relationship book, traditionally, banks haven't been that active. Over recent years, they dug deeper into that and took on a lot smaller loan sizes. So it will be interesting to see in the future whether they retreat from that market, and there's some opportunities that we can make a decent return out of. (inaudible).

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Wade Gardiner, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [19]

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Okay. And the other question I had was just around marketing spend going forward. I mean the spend was higher in this period. But now that you're doing Open for Business in Australia, what should we expect there?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [20]

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It is something that we are -- constantly, we're evaluating the amount and the length of the spend. So we are comfortable that the current level of spend we're doing is about right. But we -- obviously, if it's succeeding, and we are -- believe it's the right thing to do in terms of investing for the future, because remember, in Reverse Mortgages, you're buying a long annuity with your marketing spend, then -- of course, then we would review the level and the period of this more, if you like, in terms of investment period.

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Operator [21]

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Our next question comes from the line of Stephen Hudson of Macquarie Securities.

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Stephen Hudson, Macquarie Research - Head of Research [22]

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Just a couple of quick ones from me. Just firstly, on your NIM, I just wondered if you were sort of seeing any pressure on your funding spreads in the retail space. We're obviously just following the macro data and seeing spreads increased versus wholesale spreads in New Zealand. So I just wondered if that might translate through to some net interest margin pressure in the second half or if you're seeing some stabilization there.

I guess secondly, just interested in the cost/income ratio and whether or not the -- I think you had given a steer over the last year or so of that ratio kind of settling down to the low 40s going forward. So is that still kind of a reasonable target?

And then just one for the motor vehicle business. Obviously, with the announcement yesterday on the Holden closures, I do recall you guys having quite a long-standing relationship with Holden dealerships, I recall. I just wondered if you might comment on materiality or not of that announcement yesterday?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [23]

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Sure. Look, great questions. So just starting with the NIM. So as I alluded to in the presentation, NIM is really impacted mostly for us currently by mix of assets. So obviously, when we have more liquidity, which is very much low-earning assets, that drives the NIM down. So that's why we've endeavored to give you the picture with and without liquid assets. Now excluding that, what other factors can we see at the moment? Base rates have been stable for some time, so we're not seeing too much pressure there. Yes, there is a little bit of noise every now and again across the retail deposit curve, which is where we do the bulk of our funding domestically. And -- but we tend to find parts of the yield curve that we can occupy and have to ourselves to avoid competition. So that kind of equilibrium in the local deposit market, we are seeing kind of continuing.

And also, remembering that we have the advantage of -- for us because we are so saw retail deposit-dependent that call rates, we can offer best -- very high, relatively speaking, call rates, and it's still below our average cost of funds. So we still have that degree of flexibility going on. So we see -- at the moment, we see NIM being impacted mostly by liquid assets and also reverse mortgage growth. Because reverse mortgage is a great product, hold features we really love, but it is one of our lower-margin products. So when you see that waterfall chart, higher levels of growth coming from those products relative to the others, say, motor or Open for Business, then you will see a bit of a drag on NIM. But it's an acceptable drag.

Thank you for raising the cost-to-income ratio issue because one thing I meant to say, my apologies, is obviously the accounting change will impact our ability in terms of ongoing cost/income ratios because something that used to be taken off the top line is now added to the expense line. So -- and obviously, if we're growing Reverse Mortgages, then we're going to see the good reasons that cost continuing. So we would expect to see -- all things considered, with that impact and our current sort of appetite to invest in marketing and growth and things like automation, we expect those sorts of low 40s to be what you'll see for the next year or so.

Turning now to Holden. As Chris mentioned, Motor Finance is really driven by the demand for motor vehicles. It's not driven by the supply of certain brands. It's more what are people's needs in terms of cars. So we don't see, Chris, any impact materially going forward in terms of -- it's likely that another brand will occupy that space.

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Chris Flood, Heartland Bank Limited - CEO [24]

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Yes. Well, that certainly what's happened in other parts of the world when the U.K., for example, when GM pulled out of the U.K., the same cars were sold but just under a different brand. But I think more importantly, we have relationships not just with the distributor but also the dealer network, and that's been a very long-standing part of our business. We have very strong relationships at dealership level, and these are very strong businesses. So if they're not selling a Holden, most of them are multi-branded and have more than 1 product on their yards. And so we'll be funding something else that they're selling.

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Operator [25]

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(Operator Instructions) Our next question comes from Jack Crowley of Jarden.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [26]

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Just one for me. I guess they've largely been covered off. But thinking about that $1 million increase in compliance costs. I guess I'm just interested in whether or not you think the pressure that you're seeing from a compliance perspective as kind of a one-off step-change or if that's an ongoing source of cost inflation. I guess kind of what we're seeing anecdotally is a pretty tight kind of labor market for compliance and finance stuff, given I guess the kind of wake of the Royal Commission in Australia, the RBNZ being a lot more kind of active, actually calling out the big banks on various things in terms -- including the way that they calculate their risk-weighted assets but also, I suppose, the workaround and the capital review kind of in implementing that. So just interested in if you think that it's an ongoing cost pressure for the business?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [27]

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It is. The reality is it's going to be both ongoing and one-off, if you know what I mean, because when reviews take place or changes occur, there is inevitably a one-off cost as you adjust to whatever the new requirements are. And invariably, they tend to also result in a net increase in terms of resourcing. So again, we just sort of have baked that into what we expect to see going forward, that there will be always the possibility of the next regulatory initiative. And -- but increasingly, what we are endeavoring to do is particularly around our culture to anticipate these rather than respond to them. So by training, by cultural awareness, particularly around customer outcomes, we like to think that we are front-footing these issues in terms of our DNA, as it were, as opposed to simply having to respond with FTE and/or projects. But the reality, as I said, is that, that is something that you can expect that it is the name of the game in banking for all -- for a number of very good reasons.

When it comes to the availability of staff, I agree. People with operational risk experience, regulatory compliance experience are high in demand. And again, our response to that is largely cultural. It's to make ourselves an attractive employer, as an alternative typically to the major banks.

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Operator [28]

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We have no further questions at this time.

A new question has come in. It comes from...

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [29]

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I hear there are no more questions?

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Operator [30]

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Pardon me. We do have question that came from Christian Bell of Jarden.

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Christian Bell, Jarden Limited, Research Division - Research Analyst [31]

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Just a quick one, Reverse Mortgages. Do you have any idea on what the current penetration rates are in the Australian and New Zealand markets?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [32]

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So I have the -- I have the penetration rates in the New Zealand market, but we have a very, very large share of it. Outside of us, I think you see, it has a -- does a little bit of -- not a lot else happens in the market. So in Australia, we talk about some market share, 26% market share in the Australian market -- where we've got 26% of the Australian market, I should say.

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Andrew Dixson, Heartland Group Holdings Limited - CFO [33]

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We have (inaudible) top of my head.

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [34]

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Sorry. Go ahead.

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Christian Bell, Jarden Limited, Research Division - Research Analyst [35]

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Yes. So the market share, the actual penetration rate into the, I think, what was it, every 60 years of age, do you have any idea of how many people were sort of getting into the reverse mortgage product, how big that market is?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [36]

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Not off hand, those numbers. But we do that calculation in terms of just working out what is the percentage of reverse mortgages that we know are in the market and not -- and particularly, in Australia, that's not always easy because we're -- I mean 26% in those -- in the other banks, particularly these products tend to get lost in the rounding. So they're hard to find, but we've got a rough idea of what, say, CBA and Westpac is. And we have got available, off the top of my head, but what percentage that is of people aged over 60 or 65, respectively. What I can say is that it is a very small percentage. So there is potential upside there in terms of broadening their product and hence, why we spend money on the TVC. So I can certainly make that available to you because we have had that in the past. It's just that we can't recollect the numbers off the top of my head. Just go back (inaudible).

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Chris Flood, Heartland Bank Limited - CEO [37]

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Just the other point I'd make. I mean currently, it's a product that -- it's a product that has a very high conversion ratio. So we -- for every 100 applications we get in, we write about 96 -- 94 to 96 loans.

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Christian Bell, Jarden Limited, Research Division - Research Analyst [38]

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So like just ballpark or maybe 1% of the over 60s, is that about right or -- currently?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [39]

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We'll give you the working...

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Chris Flood, Heartland Bank Limited - CEO [40]

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We'll come back to you. I ought to, soon.

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Operator [41]

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And there are no further questions at this time.

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [42]

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If there are no further questions, then thank you very much for your attendance and listening to this and for the questions. And please, if there's any further questions, by all means give me or one of my team a call. Thank you very much.

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Operator [43]

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Ladies and gentlemen, this concludes the Heartland results announcement presentation. Thank you for participating. You may now disconnect.