Weak NZ economy and more proactive and prescriptive approach to loan arrears leads to almost $50m impairment for Heartland, shares tank

Heartland Group Holdings says New Zealand's weaker economy and "a more proactive and prescriptive approach" to car and business loan arrears management means it's taking an $49.6 million impairment in its interim results, sinking group half-year profit to between just $2 million and $5 million.

Heartland, which operates in both NZ and Australia, pins the impairment on both "ongoing deterioration in economic conditions in NZ," and the derisking and repositioning of some of its NZ lending portfolios. The impairment expense stems largely from loan arrears within Heartland's NZ motor finance and business lending portfolios.

"Although this is a substantial increase in impairment expense for Heartland Bank, up from $23.9 million in first-half 2024, this will significantly derisk and reposition the affected lending portfolios, and is in the long-term interests of the business, its customers and Heartland’s shareholders," Heartland says.

Heartland's shares were down almost 15% in share market trading on Tuesday morning.

Heartland details the $49.6 million impairments as;

1. Write-offs: a $20.2 million impact from writing off arrears, net of expected recoveries. This includes an $12.1 million impact from writing-off arrears greater than 365 days past due in the Motor Finance and Open for Business (O4B) loan portfolios, and $8.1 million of business-as usual write offs.

2. Specific provisions: $19.4 million specific provisions expense predominantly for Asset Finance and older Business Relationship loan portfolios.

3. Collective provisions: $10.0 million collective provisions expense for the Motor Finance, O4B and Asset Finance loan portfolios.

Heartland now says its net profit after tax for the six months to December 2024, due to be reported on February 27, will come in at between $2 million to $5 million. That's down from $37.6 million in the equivalent period of its previous financial year.

Heartland, does however, still expect to pay an interim dividend.

Heartland gets more 'proactive & prescriptive,' bringing in debt collectors

Meanwhile, Heartland says whilst it has "taken a supportive and judgement-based [case by case] approach to helping customers in arrears repay their loans," a deteriorating economy now requires "a more proactive and prescriptive approach."

"As a result, Heartland Bank has enhanced its collections, recoveries and write-offs strategies for its motor finance portfolio. Changes have included the adoption of a more prescriptive repossession policy. This sees Heartland Bank implement recovery action sooner in the collections cycle for customers in arrears unable or unwilling to work with Heartland Bank to develop corrective solutions. Recovery rate improvements are already flowing through."

"Heartland Bank has also implemented a prescriptive write-off policy which requires write-off decisions to be made no later than the point at which a loan becomes 180 days past due and the repossession process has been completed, if not earlier," Heartland says.

"Rather than mainly managing recovery activity internally, Heartland Bank is now engaging with debt collection agencies immediately post-write-off to enhance subsequent recovery."

"Simultaneously, in Heartland Bank’s older business relationship and older rural relationship portfolios, changes to risk-grading, security valuations, Heartland Bank’s restructuring policy, and the strategy and timing of intervention measures are underway to strengthen non-performing loan management," says Heartland.

It expects NZ economic conditions for both consumers and businesses to remain challenging, including within the forestry, transport, agriculture and construction sectors through to the end of its June financial year.

"With all future arrears in the motor finance and O4B portfolios managed under the new 180-day write-off policy, Heartland Bank is proactively managing motor finance and O4B loans currently between 180 and 364 days past due."

"Combined with the write-off of all motor finance and O4B loans greater than 365 days past due, this is expected to result in no arrears for this cohort by 30 June 2026. If conditions deteriorate further than what is currently anticipated and provisioned within Heartland Bank’s lending portfolios, then additional losses could result in second-half 2025, of up to $8 million in write-offs, in addition to what is considered business as usual, and up to $5 million in specific provisions," says Heartland. 

Tuesday's announcement comes after Heartland revealed last November new specific loan provisions of $6.6 million for its September quarter against the backdrop of elevated arrears in its car loan and asset finance portfolios, and with a number of forestry and transportation customers entering liquidation. Andrew Dixson, Heartland's former Chief Financial Officer, succeeded Jeff Greenslade as Chief Executive Officer on October 1 last year.

Heartland says it will provide profit guidance for its June financial year when it reports interim results on February 27.

Heartland's full statement is here, and its investor presentation is here.