Heartland Group Holdings, the parent company of Heartland Bank, has been enjoying what the group Jeff Greenslade describes as "spectacular growth" in reverse mortgages both in New Zealand and Australia.
But the group has eyes on further such growth. And it is also very optimistic about its prospects with conventional mortgages too.
On Tuesday the group announced a record after tax profit of $95.1 million, a capital raising for $200 million - and plans to establish itself as a bank in Australia. Heartland expects net profit after tax for FY2023 to be in the range of $109 million to $114 million, excluding any impacts of fair value changes on equity investments held.
In the year to June the New Zealand reverse mortgages net operating income was $32.5 million, an increase of $8.1 million (33.4%) compared with FY2021, while receivables increased $119.8 million (19.9%) to $721.3 million.
The Australian reverse mortgages net operating income was was $39.2 million, an increase of $3.0 million (8.2%) compared with FY2021. Australian Reverse Mortgages Receivables increased by $163.8 million (15.2%) to $1.24 billion.
Heartland's Chris Flood, who has recently taken up the role of deputy CEO of the group and been succeeded as Heartland Bank CEO by Leanne Lazarus, says the New Zealand 'pipelines' of future reverse mortgage business are up 67% year on year, while Australian pipelines "up circa 50%".
"So we anticipate a very strong year ahead.
“I’m very optimistic about continued levels of strong growth at the levels we’ve experienced in the last financial year. The pipelines are continuing to build."
Flood wasn't concerned by the prospect that the growth that Heartland's seen in reverse mortgages would lead to increasing rivals in the business.
He pointed to fairly long lead times to build up a reverse mortgage business, saying Heartland had bought a business in 2014 that had been going since 2000 and was currently the largest writer of reverse mortgage loans on both sides of the Tasman by some margin.
“I’m not fearful of competition, I think it will assist the awareness of the product.
“These are hard books to start up because essentially you are going through a period of limited cashflow. Loans are going out. The average term is seven to nine years, so these are not easy books to start up. Obviously we’ve got a very mature book that’s being repaid on a regular basis and provides good liquidity and we are well positioned to grow."
Heartland's been aggressively building business in the conventional home loans market in New Zealand as well.
Its home Loans net operating income was $2.1 million (FY2021: $0.1 million). Home Loans Receivables increased $224.8 million (450.8%) to $274.7 million.
Heartland claimed to have interest rates that were "frequently market-leading" across standard residential mortgage products throughout the year.
The company is targeting a book size of $495 million by the end of FY2023.
“We are very excited by it. We are targeting low LVR borrowers, so, they have good equity in their properties, they have good income relative to their debt level and we are targeting people that already have existing mortgages," Flood said.
In the mortgage market, group CEO Greenslade said the company was "very proud of what we have achieved in a very short space of time".
"...We’ve been able at times to offer market best rates. And why is it? Why can a bank like Heartland offer better rates than major banks?
“...Our cost to income ratio on an online mortgage is very very low.
“The cost of us writing a mortgage is probably a fifth or a sixth of what it is for a major bank. And that difference really allows us to compete despite their size and other advantages in terms of cost of funds.”
Heartland is now in the early stages of looking to acquire start-up bank Avenue Bank in Australia.
It is currently expected that completion of any acquisition would take place no earlier than the last quarter of FY2023, and possibly not until the first half of the financial year ending 30 June 2024 (FY2024). The consideration payable by Heartland on completion is expected to be A$49 million, subject to adjustments.
If Heartland goes ahead with the deal it would look ultimately to have the NZ bank put under the ownership of a new Heartland Australian holding company that would also own the Australian bank. Heartland is at the early stages of seeking Reserve Bank of New Zealand approval for the move.
“Our aspiration is ultimately to become a bank in Australia,” Greenslade said.
He said Heartland was already successful in Australia. The biggest challenge now was is funding of its loan book.
“So becoming a bank in order to access a wider, deeper, long term pool of funding is something that is a strategic imperative.”
He said this would unlock full the potential of livestock lending through its recently acquired of Australian livestock financing businesses StockCo Holdings 2 Pty Ltd and StockCo Australia Management Pty Limited (together, StockCo Australia). Having a bank licence would also underpin its growing reverse mortgage business in Australia.
“But we just don’t want to be any sort of bank. We want to be a digital bank.”
"...Without a doubt the biggest opportunity for us is clearly in Australia. To continue the high growth that we are getting in our reverse mortgage book, to unlock the potential of the livestock business, and in starting that journey toward becoming a bank. A lot of hoops to jump through yet but we are very confident that we have found the right vehicle and the right pathway in order to realise that aspiration of becoming a bank."
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