Heartland bank gets cautious approval from analyst

The company looking to become the Heartland Bank has received a positive review from Forsyth Barr analyst John Cairns, who has given its shares an “accumulate” recommendation.

Building Society Holdings (NZX:BSH), the NZX-listed holding company that resulted from the merger of CBS, SCBS and Marac, is to be renamed Heartland New Zealand from next month.

It has also applied to be registered as a bank, which Mr Cairns said would give the company’s share price a boost if successful.

But even as a regular finance company BSH is still in pretty good shape, he said.

“The risks pertaining to finance companies have reduced significantly under the new NBDT (non-bank deposit taker) regulations.

“BSH has a risk weighted capital ratio of 9.6% compared with a minimum of 8%. BSH has obtained a BBB- investment grade credit rating from Standard & Poors.”

The total impaired asset provision of BSH as at January 5 was $51.1m, comprising individual and collective impairment provisions of $28.5m and $22.6m respectively.

$142.5m of loans representing 8.1% of the total loan book are classified as “past due but not impaired”, with around half of these loans property related.

“These loans may have been collectively impaired depending upon their respective internal credit risk rating,” Mr Cairns said.

“A loan can be past due but not impaired as the underlying security of the loan is deemed to be adequate to cover any outstanding P&I payments.

“In addition a number of the past due property loans fall within the RECL management agreement.”

However, Mr Cairns said the next couple of years would be tough going for the newly-created company.

“Our forecasts at this stage are cautious bearing in mind the sluggish economic environment, potential for the quality of the loan book to deteriorate, increased operating expenses and the uncertain outlook for retail deposit funding.

“Our forecasts imply financial year 2012 and 2013 return on equity of only 5.2% and 7.1% respectively.”

He said with currently depressed earnings, Forsyth Barr’s primary valuation metric is a price/NTA ratio of 1.0x, implying a share price target of $0.88.

Mr Cairns said BSH has made considerable progress in a relatively short period in effecting the merger and obtaining an investment grade rating.

He also mentioned the repayment of the $27m Marac note, which has eliminated inter-company advances.

“The in-specie distribution of the 72.2% stake in BSH by PGC is expected to result in the inclusion of BSH in the NZX50 Index, a potential source of additional tier one capital,” Mr Cairns said.

“Both these developments are likely to be viewed positively by the Reserve Bank in a bank registration application.

“Despite uncertainties over the short term earnings outlook we consider BSH bank registration would be a positive share price catalyst.”