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Edited Transcript of HBL.NZ earnings conference call or presentation 14-Aug-19 9:45pm GMT

Q4 2019 Heartland Bank Ltd Earnings Call

Christchurch Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Heartland Bank Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 9:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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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* 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

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Heartland Group results announcement. (Operator Instructions) I would now like to turn the conference over to Mr. Jeff Greenslade, Chief Executive Officer of Heartland Group. Please go ahead.

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

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(foreign language) Greetings and welcome to our results. Our apologies for the delay. There were some technical issues with NZX's uploading. And then we had to email them the results, which we're told just now been posted. So we are, unfortunately, unable to move until we had confirmation that the results were released. So apologies, and thank you for your patience. I'm joined here today by the Chief Executive of the Bank, Chris Flood; the group Chief Finance Officer, Cherise Barrie; and the Head of Corporate Finance, Andrew Dixson.

So results and highlight. We came up at $73.6 million of net profit after tax, that's a 9% increase from the previous year on the back of $206 million of top line earnings and $4.4 billion of assets, which, excluding FX, was a 10.6% increase on receivables. So strong growth quite continuing for us and resulting in an increase in our final dividend to $0.065 per share, taking total dividends for the year to a record $0.10 per share, and that increased dividend reflecting the consistently strong growth from the bank, but also the additional growth and profitability we're getting out of Australia.

Before I turn to the financial results in detail, I just want to go through some of the business and strategic highlights.

Just starting with the business. A pleasing aspect of it was, perhaps, the 2 reverse mortgage businesses saw a new area of growth for us, both going very well, particularly Australia, 24%. Secondly, the areas where we have repositioned in the business market more towards intermediaries and SMEs, again, both provided strong growth. And our good old [full force] Motor came in was 13.3%, in a very choppy second half, which Chris Flood will go into in a bit more detail when he speaks of that division. But that was a good result. And of course, our alignment with Harmoney, the relations we have with them continuing to be afoot.

In a strategic sense, we've been very busy with corporate restructure, completed ASX listing. Both those things have given us significant flexibility and breadth in terms of our funding, and we'll talk a bit about some of the activity that's been underway under that heading.

In terms of customer, clearly, customer outcomes are very critical beyond those success of our business. We're very pleased to see that the uptake of the Heartland Mobile App has continued to rise up 72%. There's now 5,900 downloads to date, which is fantastic given our size. During the course of the financial year, we picked up 3 significant awards: 2 from CANSTAR for our savings products, reflecting great outcomes for our depositors; and in Australia, we won the Money Magazine Reverse Mortgage Product Provider of the Year, again, another significant endorsement of providing good simple products to customers that need them.

On a related matter, we have submitted our work plan to the FMA and RBNZ in response to the Conduct and Culture Review, and there is an ongoing process. And more importantly, one that is -- has been and continues to be heavily embedded in our culture. We really do believe that sustainability of our business is dependent upon providing positive customer outcomes and having those to support them. We since refreshed our matapono values around some key simple messages, in particular, Mahi Tika, which is to do the right thing.

We also said that a couple of years ago that we wanted to address 2 things in terms of diversity. One is more gender diversity, and I'm pleased to say that certainly, at the key leadership roles, as you can see, the balance has shifted quite considerably, where we now have 62.5% female and 37.5% male in the key leadership roles within the organization.

Also, we wanted to be known as an employee preferred of Maori. We had a Maori internship program going now for a couple of years. And we've seen participation now at 4%, which is still not where we want it to be, but it is significantly higher than the average for the financial sectors.

Moving now, and I'm on Page 8, just to go through the financial performance in a bit more detail. So Page 8, you have the profitability waterfall chart there. And as you can see, the strong net interest income growth driven off that balance sheet growth offset the advantage of the previous year, a large one-off net income benefit and also the additional costs during the current year, and in particular, the additional one-off costs that we incurred in the first half to do with the restructure and ASX listing.

So that drove the result to $73.6 million. And if you added back in the one-off costs, you're getting back to the upper range of the original forecast that we had at the outset of the financial year.

Turning now to Page 9, which is the waterfall in terms of how this looks in terms of breakdown of the receivables. And what is really good to see is that the strategically important areas are the new areas, charming and growing strongly with -- both the reverse mortgage businesses growing strongly. Business intermediated and open for business also doing very well to produce that result.

And look at Motor, 13.3%, is a handful [$130 million] of net new business that needed to be written, and Chris will talk about what that means in gross terms. So we have done very well in that area. And that is despite this 10.6% growth in the current balance sheet. That balance sheet is despite the headwinds of a reduction in our non-core lending and business in rural of around about $130 million. So that 10% or 10.6% has been quite a significant result given that headwind.

Moving now to some of the more key metrics on Page 10, just go through those quickly. Net interest margin is down slightly at 4.33%. That's being driven by a one-off impact of repayment of our Tier 2 bond when we did the restructure that filtered through the deadline. But also, and I guess more of a positive sense, represents the growth -- disproportionate growth we're getting out of the reverse mortgages, which are lower-margin products. So no particular concern about the percentage of the margin there.

The cost-income ratio continued to perform an underlying sense in adjusted for the one-offs of the restructure in the ASX listing. But with that, we picked up to 41.6% versus just under 40% if those one-off items hadn't occurred.

The very pleasing picture to report is the next 2 tables on impairments, where both NPLs and expenses have come down. So that's been -- I think as we said at half year, we did expect that to happen in terms of underlying performance that we were seeing. We had some one-off noise coming through the larger collections issues that we went through that (inaudible) are now behind us. And particularly, you will recall that we had a one-off lumpy provision when we introduced IFRS in terms of the book generally, but specifically in Motor, and we were hopeful that, that would be a one-off, and indeed it has. And we are now seeing expenses rates becoming more predictable and more normalized in terms of their levels.

Turning now briefly on IFRS, there is a note on Page 11 on IFRS. I don't tend to go into too much detail other than highlight a couple of things we -- as we announced in the last half year, the initial balance sheet adjustments as a result of the adoption of IFRS. And the impact of accelerating the recognition of ongoing impairments did bring forward impairments and heightened them. So to give you a like-for-like scenario, they're 0.49% that we're traveling at the moments in terms of expenses would look like 0.42% under the old regime. One last thing on IFRS, just to highlight is that reverse mortgages are treated differently than other financial assets. Under IFRS, they are required to be valued at fair value, which is a complicated exercise for us in a market where there isn't a lot of trading in reverse mortgages, particularly not in New Zealand. There's -- to some degree, there is some in Australia. We've had a DCF calculation down in order to meet our requirements to fair value the -- both. But currently at the moment, we are taking the view that fair value is the same as the current carrying values, mainly on the basis that we cannot find an observable market in order to test those values. However, that is something that we will continue to keep an eye on and test constantly.

Finally, before I hand over to Chris to go through the divisional reports, I'll come back later with some of the strategic issues. The shareholder return. So return on equity was 11.1%, which, excluding those one-off items, would have been at 11.7%. But in any event, from the second half was 12.2%. So what we're seeing is, in an underlying sense but also in a more recent sense, the trend is moving in the right direction, which is what we aim to do because we recognize that, that was perhaps one mix that where we were underperforming. And part of the rationale behind the restructure was to provide us the opportunities for more capital efficiency. So we're seeing that coming through.

So we've delivered a dividend, as I said earlier, of $0.10 per share, which is, just to repeat that, it recognizes the contribution we're now getting out of our Australian business, and that translates that current process to a dividend yield of 8.6%. So Chris Flood is going to pick up some of the divisional report, and I'll come back in a few pages time. So Chris?

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Chris Flood, Heartland Bank Limited - CEO [3]

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Thanks, Jeff, and good morning, everyone. I'm on Page 14 on New Zealand reverse mortgages. And that records what I think is an excellent result in a market where awareness is one of our greatest barriers growth, and in a market that isn't like Australia, supported by an active broker -- mortgage broker supporting it in that sector. Demographics, like Australia, are compelling. Thousands of New Zealanders retiring (inaudible) asset rich and cash pool. So it is a market where we [do spend] money on advertising. You will see us on TV, and we recently launched a new TV ad primarily targeted to the Australian market but it's working well for us here in New Zealand. And you also hear some on radio. But increasingly, we do a lot of our advertising online. And we are seeing our customers start to more and more use online or telephony to connect with us. So as a consequence, we've changed our distribution model, where we have left fewer people in the field, and finally, we're able to meet the needs of their customers more effectively and efficiently by online and by the telephone. It's a product we're very proud of. It achieves great customer outcomes, enables retirees to have a better quality of life and a much more dignified retirement. We do expect similar sort of growth rates in New Zealand to those achieved last -- in the last financial year.

Turning out to business on Page 15. And on this slide, we combine our non-core relationship business with our business intermediated. So as a consequence, [proper to get out] the relatively modest growth rate of 3.5%, but it recognizes the relationship book, which we have discussed for some time as wanting to exit over time, given the competitive nature of that market, given the wanting to reduce exposures to single assets and also recognizing the more efficient way to grow in business intermediated. That, like Motor, has relationships with distributors and dealerships who sell plant equipment. And their staff connect our staff with people who are at or doing their point of sale. So it's a very efficient way for us to grow. And you can see the underlying growth rate that achieved in that division is superb. And we have expectations, notwithstanding a weaker business confidence, the growth rate is at [similar] level in the year ahead.

Turning now to Motor. And that was, as Jeff described, another strong result in a long series of strong results. It was very much a game of 2 halves in the sense that we had exceptional above 16% growth in the first half of the year, supported by modest growth in the number of cars being sold. Second half of the year, we saw a decline in new cars sold by 6% and in terms of new cars and 8% in terms of used cars. Yet, we were still able to drive [growth up] by 5%. To do that, we had to lead, during the course of the year, a little under, $700 million. And so it's an area where we did a lot of activity to (inaudible) $700 million to grow, [$130 million], you have to be very efficient and very focused and we're able to do that.

We have, during the year, increased the number of dealerships we have relationships with, and we will, in the coming days, announce a new distributor relationship, and we would have followed later in the year. That will give us access to more new car sales and late-model used car sales, which is -- will also help improve the quality of the overall nature, given the nature of the buyers of those vehicles.

Turning now to Rural on Page 17. And it was a very quiet year for the Rural division and the industry across the country for a combination of reasons, (inaudible), changes in the (inaudible) toward a lot less international interest in acquiring farms and the livestock season, as described in the half year, was also very low. So as a consequence, those sort of things combined to flatten growth in income, given the timing of the livestock growth. And it was -- sorry, has been a relatively difficult market in that regard. We plan to continue and we're able to exit those larger dairy exposures we had, and are confident that we can continue to grow in the livestock area. We're also starting to see some interesting opportunities outside of the dairy sector.

Turning now to Harmoney -- sorry, and personal lending, and we're very pleased with the growth that we've achieved and they're largely on the back of the Harmoney performance. We now have about 17% of the company and now the principal funder through the platform. Harmoney is one of Australasia's most or best [fund kit] in the personal loan space, and they have a very impressive scorecard and origination technology, and we're delighted with the relationship we have with Harmoney and the performance that they've achieved month in, month out. So we expect similar sort of growth rates in that personal loan area for us in the year ahead.

Lastly, I just want to touch on Slide 19 in terms of deposits. And obviously, we know deposits, albeit to fund the growth and aspirations of the bank. We had changed the model since origination, which was very much a traditional bill (inaudible) model based around branches and people coming in store. We moved that model to a much more of a telephony model and into a degree, online. So now increasingly, as Jeff mentioned, we're seeing more and more customers using mobile apps to conduct their banking relationship with us. That's very efficient for us. And those, combined with the -- our excellent product suite, including the 2 that have been recognized by CANSTAR, and the new products we have out in the market, called YouChoose, has seen -- has given us confidence that those things, combined with our retail bond program, gives us confidence that we have the ability to fund the growth of the business into the future. And back now to 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 will pick up from a good strategy perspective, which centers around 3 areas of activity: the New Zealand bank; Australia; and Digital.

In terms of New Zealand bank, as Chris has mentioned, the results were flat. We have a strong base of earnings underpinned by our Motor business. And then we have these new areas of businesses coming through and picking up and running very quickly. So the challenge for us is to support those new businesses in terms of marketing spend, in particular, growing awareness will be the biggest challenge in terms of reverse mortgages, and some of the digital activities, particularly Open for Business. It's about awareness. And then secondly, we have to build the process capacity behind them because these are sort of new businesses. We now need to circle back and reinvest and create the ability to deal with more volumes.

In particular, telephony. We are in a state of transition. We are increasingly offering more and more of our interaction online. How will the [account] lose sight of the fact that there's still large sections of the population who require person-to-person contact, and the telephone has become the principal means of delivering that. And the thing about telephones, particularly inbound calls, they're very hard to scale. So are needing to sort of look at that. To resource that, we have established a new call center in a building we owned [above] our branch in Ashburton, and we're hiring people there. It's been a very successful relocation and establishment of a new center, a high-touch call center to deal with increased volumes coming through via telephone, either reverse mortgages Australia or New Zealand for the business. So we had to train a few of them up on their Australian accents. Otherwise, we have had a -- been strongly supported by our depositors in the bank, which is very pleasing. We had to raise more than $270 million of deposits during the course of the year, and that was done successfully. At the same time, as I mentioned right at the outset, we are still refining and redrawing the parameters of our business. So the low-margin risk concentrations that we have in Business and Rural are assets that were exercised -- we're exiting and recycling the capital into more productive periods.

Australia is obviously a story about reverse mortgages. At the moment, we've fantastic demographics there. We're in a great market position, we're growing market share very quickly and we expect that to continue. We've been very busy in those 3 areas of promotion, although TV advertising has been built and is just being launched in the Australian market now. And for us, that's been an experiment. It's not been before in Australia. So we're learning, and we'll learn about which channels, which times of the day. We're also building additional capacity, particularly at the [Ashburton] call center, but also introducing more automation to the Australian office, so that our staff can focus on the really important things, which is meeting their customers' needs, getting them their answers faster, giving them the product that they need. And as we announced and we talked a bit about in the half year, one of the big challenges for us is in funding this growth, if you like the high-quality problem. And I'm pleased to report that since we last spoke, we have put in place an [LTM] AUD 50 million and also an additional committed facility of $250 million. And there are another 2 initiatives underway, one of which is designed to access long-term funding. So we hope to be able to announce those results in due course.

We're also looking to expanding our presence in Australia, and we intend to pilot of the business in Australia, just to create some -- a platform there. And then based on our experience here, run a pilot in terms of their product from Australia.

Thirdly, digital. When it comes to digital, it's a very much an evolutionary path and one is very tempted to define digital by what our reality be enable us to talk about smartphones and apps and APIs and that sort of thing. What we're increasingly finding is that digital is a business model and a business model which, in essence, is built around being fast and simple.

You have to do things quickly, and you have to be -- the access has to be simple and intuitive to your customers. That is the essence of modern banking. That's what provides customer experience, or CX, and increasingly, we believe customer experience of that nature is going to drive customer outcomes. If you keep your customers waiting, that is poor conduct. If you have poor conduct, you will not have a sustainable business. And I don't have to reemphasize that point too much to you today. You spent a long time waiting for this phone call that we -- none of us want to [cheer] anymore, none of us want to wait. So that's the world we live in, that's the world that we're preparing our selves for and that is a world which we consider is a constant struggle. The whole advent of the digital world has just afforded everybody so much more choice. If they wait, they move. If you don't give them what they want, then they can go somewhere else. So that's the reality. That has been the challenge that we're up for. And there have been a number of achievements. As I mentioned, the app has gone very well. We launched an interesting product called YouChoose, which provides both quick credit and debit facilities. It's targeting the [earnings]. We've added a payment capability to that. Our website visits have increased considerably. [O4B] the main authority which measures effectively the popularity of our website, has increased, improving our search engine marketing. And the current flagship of our digital campaign of the business has done very well, still continuing to be growing, and that's an area that we wish to invest in, in terms of both raising awareness of the product and increasing the capacity.

Turning now to Page 25. Regulatory update. As I mentioned earlier, we are aware of the Conduct and Culture Review, which didn't find any major area of concern, but it's something that is a ongoing part of our DNA is to drive fantastic customer outcomes because the success of our business ultimately depends upon that, apart from the fact the very good point that is part our values of Mahi Tika, which is to do the right thing.

There's also the Reserve Bank capital review underway, which, like anybody else, we're waiting to see what will happen in November in terms of our planning. We are assuming it will be what they say it's going to be. As we said in the past, the impact on us is not significant. It is something that we are able to deal with.

If you turn to the next page, Page 26, you can see the extent of the capital required for us to lead it. And so for us, we see under our new structure, we have a number of tools available in terms of meeting growth capital in the bank is alongside growth capital for the group. Obviously, retained earnings contribution, for example, in managing the reduction of those noncore loans, released probably around about $15 million of capital this year. We have available group leverage that we're allowed to carry under our rating. And obviously, the funding structures that we're looking in Australia, one of the things that we're looking to -- will be to create additional leverage in Australia. So we have a number of interesting and useful efficient tools to use in order to deliver capital growth going forward.

Turning now to strategic outlook. Once again, key top of the spin is high-quality customer outcomes. We have got great people in Heartland, in the bank, in digital and in Australia and some of the work that we've been doing around matapono has been really fantastic and really does underpin that strong sense of social responsibility within our people in terms of ultimately delivering relevant and high-value needs to our customers. So it's something that I feel very [patterned in] and confident that we are achieving. The second big strategic outlook is obviously Australia, to talk about the reasons why alongside that capital efficiency and improved return on equity. Continued stability in growth in the bank, particularly the sort of the workhorse Motor that keeps turning in those fantastic results year-on-year on. And this other unrelenting drive in the digital world to deliver fast, simple onboarding and other processes to our customers.

So finally, turning to the outlook, what does this really mean in terms of metrics, which I'm sure that you looked through to test these things more clearly. We expect to seeing similar levels of balance sheet growth overall, probably slightly higher, particularly coming out of the Australia reverse mortgages. We've also got headwind in terms of growth through the continued reduction of the business rural noncore books. We are looking to invest very heavily this year in terms of marketing spend in capacity and in financing compliance. Now a lot of those things are various forms of OpEx. Some of them are one-off in nature, and some of them are accelerated, but we do expect our operating cost to go up. We feel very strongly that the time is right for us to deal in that investment. We're investing for the future. We don't want to die wondering just how big Australia could be or just how big the business could be. We want to invest and test that fully as we go.

As a result, we do expect cost-income ratio in the short term to blip up to around about the high 41s before being returned down to its trajectory. The timing of that, a little bit unknown in the sense that as I said earlier, for example, when it comes to marketing, we are the first ever to be doing TV advertising in Australia and until recently and earlier in New Zealand. So we are still learning our way in terms of how to have to advertise effectively. And then secondly, how quickly do you get the payback from there, how long does it take to develop with us in the market. So based on all those factors, we expect our forecast for FY '20 to be in the range of $77 million to $80 million. So that ends the presentation. Thank you very much for listening. Once again, apologies for the wait and happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First, we will go to Jeremy Kincaid from UBS.

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

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My first line of questioning is just around the comments you made around recycling capital into the areas of the business. So first things first. Would you look at branching outside of the areas you're currently in (inaudible) low capital intensity, lending such as reverse mortgages? Sorry, residential mortgages?

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

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Not at this stage. At the moment, if you look at the fixed-rate mortgage rates that are offered, they look [alarmingly] like the deposit yield curve, which is really how we fund ourselves. Floating rate mortgages would be different. But at the moment, much of the traffic is going towards the fixed rate here. So at the moment, it's just simply a pricing thing, we can't compete.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [4]

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Okay. And then you also talked about rural. Would you look at completely winding that business down? Or just shrinking it?

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

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I think it's an opportunity in the rural markets. So let's see debt in the immediate future. So one, we haven't really completely. I think it will shrink over time as we reduce the average size of our loans. But certainly, the livestock market is something that we remain very interested in. As to put into some context, we financed something like [460],000 animals last year. So in a market where [8 billion] -- [8 million] get processed every year. So it's a big market, a big opportunity for us.

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

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Sure my other question is half-on-half growth for Australian reverse mortgages was reasonably flat. Do you have any comments around that?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [7]

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The growth wasn't as close growth in the second half, but it was still good. I think these things are just timing issues. So there's nothing I can think of that can sort of explain that. It just -- for example, one of those months, we had a record repayment. And that was just, dare I say it, a bunch of people sold their houses or they died. And it was just all have been happening about the same time. So there's nothing that I can point to that would explain a [trained] just the way the [cash to go].

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

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Great. And then impairments, other personal and business impairments that rise a little bit. Can you talk to that a little bit as well please?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [9]

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Sorry, just repeat that question.

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

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In your sort of divisional breakdown at the back that shows other personal lending and business lending impairment growth. I'm just sort of wondering, is that, dare I say, one-off, that all impairments are one-offs? Or would you say it's a reflection of flying economy like we're seeing in the front page of the papers today, but they sort of one-off large consumers, businesses, et cetera, if you could give a little bit -- paint some color around the detail of those numbers?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [11]

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So there's no -- in terms of the -- both the business in the personal and the motor impairments. There are no concerning trends at all. In fact, as discussed in the presentation, we -- impairments in the larger books are improving, and given to us in some of the chart early on in this presentation.

So as the books get larger, we are -- particularly in [video], which is a business book, impairments are growing. But they, in terms of the margin we get in terms of the (inaudible) [represent] of the business and so in line with the expectations.

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

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Okay. I was just looking at the division called other personnel, in particular, I think that might represent Harmoney lines but maybe we can take that one off-line. But then I suppose my other final question is on the sort of interest rate environment that we're in. I know you've had very good growth in retail deposits. But I was just wondering, sort of around on your thoughts or your view on getting into a low interest rate environment, can you confirm that retail investors might be looking for a high yield and cycle also your traditional deposits and look for high-yielding investments? And if so, do you have any plans to combat that?

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

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I think what you'll find is, irrespective of where interest rates are, people need to keep money in some form of bank investment. And because plenty of people even now, even interest rates were high had their money in accounts that earn just a 1% or 0. They just to keep their sort of liquidity profile the way they want to be, that's what happens. So to some extent, we've participated in that world where we're in that part of the pie, which is made that just has to be in a bank for a whole lot of reasons. We do get some of the people who are looking for better yields, and that's why we did some of the funds we get because we offer better call rates, for example. You normally see, what, sometimes a better rate, but also better features. We don't penalize people for going into branches or whatever. So that they get the rate that they previously is what they get -- (inaudible) what they get. So we still think that there is -- the phenomena you're talking about I totally understand. But I don't see it necessarily changing really the dynamics of the pool that we are in, in terms of deposits that we're seeing. (inaudible) in terms of depositor demand. And also, the deposit you (inaudible) is a funny thing. It doesn't necessarily follow exactly or the same sequence as OCR declines.

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

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Okay. That's great. And then just finally, your CET1 capital ratio, I couldn't find that (inaudible). Do you know what that number was as at that end of the year?

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Cherise Leanne Barrie, Heartland Group Holdings Limited - CFO [15]

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13.3%.

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Operator [16]

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(Operator Instructions) Next, we'll go to Jack Crowley from Jarden.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [17]

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I guess first question for me. As I'm looking at the impairment ratio and the way that that's kind of tracked down from about [58] bps to 42 bps -- (inaudible) if we think about impairments ratio and nonperforming loans, which should both kind of track down quite well this year. Could you just provide a little bit of color on whether that's kind of the mix factor with reverse mortgage? Or kind of other that's a fix? Or if that's kind of underlying within your finance receivables booked with the (inaudible)

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Chris Flood, Heartland Bank Limited - CEO [18]

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So yes, it's -- can you hear me? It's Chris Flood here. So one of the two (inaudible) been the improvement in -- one of the big drivers of that has been improvement in the consumer areas, that's improved during the course of the year. As we announced that this time last year, we had a bit of a blip up, and that we would look for remediate results over time, and we're certainly starting to see that now. But we also had some improvements in the relationship assets. So some of the larger loans that were also -- had been remediated during the period.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [19]

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Got it. Chris, sort of on P&L, there was a fair value movement of $1.9 million as an uplift on investment property. Could you just run me through kind of what in particular that represents?

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Cherise Leanne Barrie, Heartland Group Holdings Limited - CFO [20]

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Yes. Cherise Barrie speaking. We have a property that has held as an investment property that we reclassified some years ago as a consequence of a [workout] arrangement. And at the time, there's a fee evaluation and negative adjustment taken against their property. That property has now the value and the future outlook and the -- that property hasn't improved. And before we have been able to release that fair value adjustment there previously been taken against that property.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [21]

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Understood. And is kind of -- is it a legacy of something with some relationship banking where you've taken ownership of an asset.

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Cherise Leanne Barrie, Heartland Group Holdings Limited - CFO [22]

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(inaudible)

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

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(inaudible) it's a debt recovery (inaudible) yes.

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Cherise Leanne Barrie, Heartland Group Holdings Limited - CFO [24]

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Yes. So (inaudible) even to the financial statements to fix that out.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [25]

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Okay. And if I kind of second to last one for me is just thinking about how many during the period. Obviously, it's recently come out that they've had quite a significant turnaround in the profit. In that particular business, I think there was around a $7 million uplift from a one-off tax benefit. Could you just clarify, with you guys now holding 17% of Harmoney, whether any of that washes through your own P&L? Or whether kind of nothing from that included?

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Cherise Leanne Barrie, Heartland Group Holdings Limited - CFO [26]

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So there was nothing from that included. We don't equity account that investment.

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [27]

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Right. Okay. And so could you just kind of clarify quite why that's the case if you guys own kind of 17% of Harmoney, will that kind of phase in it at any point in time? Or is it kind of captured somewhere else sitting outside of the context of the P&L?

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Cherise Leanne Barrie, Heartland Group Holdings Limited - CFO [28]

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So at the moment, so there's been a decision that we don't equity account and take for our share. I think it's something as our holding continues to increase, recognizing that debt holding only increased to 17% on very lately in the financial year. So at the moment, that investment has carried at fair value on just an investment and equity. And we review the carrying value of that, so to the extent that we ultimately saw a market for that investment increasing significantly, we would currently look to take it through the fair value adjustment. But we had...

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Jack Crowley, Jarden Limited, Research Division - VP of Equity Research [29]

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Understood on that. Got it perfect. And it makes terrific sense. And just a final one for me is, is there any kind of detail you can provide on what you think might be achievable from a cost of funds perspective on that (inaudible) that's been established from Australia.

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [30]

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No, we kind of keep those details quiet to [avoid] market tensions. But obviously, what I can say, sounds very significant historically very attractive rates.

I've got one question that's coming from an e-mail, which is, is the reverse mortgages the only business currently in Australia and is currently doing business in Australia.

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Operator [31]

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(Operator Instructions) I'm sorry, did you have another question on the web?

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

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So I want to make clear that that's the only business in Australia done out of Australia. There are some legacy Australian assets in the bank. But there's only one in Australia, done by Australia.

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Operator [33]

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(Operator Instructions) And we'll take our next question on the phone. (Operator Instructions) And next we'll take it from Stephen Hudson from Macquarie.

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Stephen Hudson, Macquarie Research - Head of Research [34]

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Just a couple of quick ones for me. The $60 million of regulatory capital that you've kind of whether as an estimate. I just wondered if you can give us some assumptions that you've used around that. So are you assuming any buffer above the 2023 eventual requirement? Are you assuming anything around a reduced requirement as a result of the new warehousing facility? What sort of receivables growth are you assuming? And what, if any, capital release that you're assuming from a rural book run down? I guess that's my first long-winded question. And then secondly, if you can just help us on the impairment expense, and then there's been a few questions, but the 49 basis point impairment expense, what sort of long-term expense number would you be factoring in over a 5-year period as we look through the cycle?

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [35]

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Well, the deal with the first question, the $60 million is simply 15% on current footings. So we've got, obviously, growth to come, but there's been -- against that, we've got retained earnings and all those other factors that I mentioned. And look, we will continue to recalculate that as we go along, but we can't reach or give you the 5-year kind of forecast effectively to give you the ultimate answer. But that's the order book today, whatever number comes out is, I guess, the point we're making, we believe it's manageable, very manageable.

Your second question, just one thing. Our market -- I'll make a general comment that I might get Chris to talk a little bit about the mix. But really, what we are seeing is the trend back to what we'd call our normal business as usual type of impairment rates, which is at most mid-40s as we've experienced. And the big contributor to that tends to be Motor, historically, because it's such a big unit. And also, it is a business that does reflect. It is correlated to things like unemployment and those sorts of macro issues. So you do see rises and falls as those sorts of macro indicators (inaudible) or positive. Reverse mortgages historically have been also an introduction to the mix and have been very benign. And we talked about length of that, what the future looks like and aren't going into that detail, but we're very happy to run sessions as we've done in the past about how we calculate our look forward. But we think that, that sort of moderate, very low moderate trainees in something that we expect to see. So then we see the balance sheet bits, which is the business banking, the best that we're trying to move that farther ones that usually cause the short-term blips. It literally comes down to 2 or three deals. And suddenly, we get a blip because they are large ones. So that's the ones we're going to move out. So we could miss all that going forward. And then you got something like (inaudible) with the business, which is a new product. It's small at the moment. So it doesn't really show up on the radar, give us $130 million, but we expect that business to be hit higher than average impairments. I mean sure, we expect it to be more significantly more than Motor because where earnings are significantly more than Motor. So that's still being worked through exactly how that should travel. Internationally, those sorts of businesses sit between 2% and 4% impairments. And that's what we saw affecting the future. So all those things go into the mix, probably crystal taxes back down to that sort of look [mid-40] (inaudible).

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Stephen Hudson, Macquarie Research - Head of Research [36]

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So essentially, the key to that model is that we're replacing these larger lumpy loans with a much larger number of smaller loans for greater value. So those -- and those loans are originated on models that are very predictable. So we're getting back down to the (inaudible)

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [37]

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(inaudible) particularly Motor because you miss opportunity a bit about that, right? And secondly because it's intermediated.

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Stephen Hudson, Macquarie Research - Head of Research [38]

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That's useful. Just sorry, if I can just put one more in. Obviously, on the reserve bank proposals on capital adequacy, part of the sort of $20 billion of the banks are being, like 4 banks, are being asked to raise is the disqualification of CoCos and the IRB risk for risk-weighting floor. And the reserve bank has talked about implementing those changes to level the playing field with smaller banks like yourself. Are you seeing any change in the pricing behavior that informs pricing behavior or behavior in terms of chasing business, I suppose, that's benefiting you at the moment?

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

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What we're seeing is, it's too early to say, but what we're seeing is a lot of talk and a lot of concern around what this all means for the longer term. So you get to be translated into action. And I suspect we won't see anything committing to last and review if finished because, yes, the results are there. So they've been -- but the noise we're hearing is the obvious things, is that areas where a high cost to serve and high capital cost for them like SME, we think, is likely to be (inaudible) that will -- they are capable or someway rush in time or money, and our response to that is to certainly compete on speed, offering the fast and simple solutions to lower end of SME.

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Operator [40]

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(Operator Instructions) All right. At this point, we have no more questions, I'll now pass the line back to Jeff Greenslade for closing statements.

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Jeffrey Kenneth Greenslade, Heartland Group Holdings Limited - CEO & Non-Independent Executive Director [41]

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Thank you very much for attending and appreciate the questions. And once again, appreciate your patience. Look forward to catching up with some of you during the course of the week, but any of you who wish to ask any questions, please get in touch with myself or Cherise, or Andrew. Sorry. Thank you very much.

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Operator [42]

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And this does conclude the Heartland Group 2019 Results Presentation. Thank you for your participation. You may now disconnect.