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Bank wannabe Heartland NZ gets big annual profit boost from one-off tax benefits

Bank wannabe Heartland NZ gets big annual profit boost from one-off tax benefits

Heartland New Zealand says its annual net profit surged more than threefold, helped by almost NZ$10 million worth of one-off tax benefits.

Heartland, created through the merger of Marac Finance - which was spun out of Pyne Gould Corporation - the Southern Cross Building Society and CBS Canterbury in January 2011, said net profit after tax for the year to June 30 rose NZ$16.5 million to NZ$23.6 million from NZ$7.1 million the previous year when profit was hit by NZ$6.8 million of one-off costs.

The group's tax benefits included a one-off deferred one of NZ$6.2 million - after a law change - and a NZ$3.4 million gain resulting from utilising historic tax losses from Marac. Heartland, which wants to become a bank, expects normalised tax in its 2013 financial year. See Heartland's full results announcement here.

In an announcement earlier this month Heartland appeared confident of achieving its goal of securing Reserve Bank approval to become a registered bank, saying it expected a decision in November. Heartland was formed with the aim of becoming a sharemarket listed, New Zealand controlled bank that doubled its NZ$2.2 billion asset base within five years by growing lending to families, small and medium sized businesses and farmers. Heartland focuses its rural sector lending on working and seasonal capital and since it was established it has bought rural specialist PGG Wrightson Finance's good loans.

For the second-half of its year Heartland said net profit before tax was NZ$14.7 million, up from NZ$5.6 million in the first-half, due to improved margins and reduced costs.

Heartland said its net finance receivables rose NZ$400 million to NZ$2.1 billion during the year to June, largely due to the PGG Wrightson Finance deal. Over the second half-year, net finance receivables remained unchanged with Heartland saying “core” asset growth in its business, rural and consumer divisions was offset by reductions in non-core property, and retail (where its mortgage book declined), in  a competitive environment.

Cash and cash equivalents fell NZ$177.5 million to NZ$89.7 million over the year as money held in the lead-up to the expiry of the extended Crown retail deposit guarantee scheme on December 31 was then used as planned. Borrowings increased to NZ$1.9 billion from NZ$1.8 billion again, following the PGG Wrightson Finance deal, although NZ$92.3 million of  PGG Wrightson Finance bonds were repaid.

Total equity rose NZ$78.4 million to NZ$374.8 million, giving an equity ratio of 16% to total assets, versus 14% a year earlier.

Total non-core property assets reduced by NZ$26.9 million, or 14%, to NZ$160.2 million. This comprises net receivables of NZ$104.7 million and investment properties of NZ$55.5 million, up NZ$21 million with a NZ$3.9 million cut in the fair value of these investment properties.

Costs up

Meanwhile, operating costs rose NZ$19.9 million, or 44%, to NZ$65.6 million with Heartland saying this was because six months of Marac costs and six months of Heartland costs were included for the year to June 2011, compared with 12 months of Heartland costs and 10 months of PGG Wrightson Finance costs for the June 2012 year .

"Notwithstanding this, operational efficiency improved, with average operating expenses as a percentage of net operating income reducing from 80% in the six months through to 31 December 2011, to 60% for the six months through to 30 June 2012. This was delivered through both cost reductions and improvements in net operating income," Heartland said.

Annual impaired asset expense more than halved to NZ$5.6 million from NZ$13.3 million. Net impaired, restructured and past due loans over 90 days were NZ$90.5 million, which was 4.4% of net finance receivables as at June 30, down from NZ$100.7 million, or 5.9%, a year earlier.

"The level of impaired, restructured and past due loans are due to the legacy non-core property books and will continue to reduce as a percentage of total assets as lending in the core business grows and the non-core book runs down. The net impairment ratio on the core business is relatively consistent with the prior year at 1.3% as at 30 June 2012, compared to 1.2% as at 30 June 2011," said Heartland.

The building society said it was likely to give profit guidance for June 2013 year at its annual general meeting (AGM) on November 2.

"Whilst trading conditions remain challenging given economic conditions generally, Heartland expects a continual improvement in underlying performance in the year ahead. No dividend was paid or is to be paid by Heartland in, or in respect of, the 30 June 2012 financial year. Heartland’s Dividend Policy will be outlined at the AGM."

See Heartland's full financial statements here and its results presentation here.

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