Heartland lifts annual profit 12% on expanding loan book

Heartland Bank boosted annual profit 12 percent as the country's only locally-owned and listed bank managed to maintain relatively wide margins while expanding its loan book across all three of its main target sectors.

Net profit rose to $60.8 million, or 12 cents per share, in the 12 months ended June 30 from $54.2 million, or 11 cents, a year earlier, the Auckland-based company said in a statement. That was in line with analysts' expectations with First NZ Capital predicting profit of $60.2 million and Forsyth Barr's Jeremy Simpson forecasting $59 million. Net operating income rose 8.7 percent to $171.3 million, with the bank's loan book expanding to $3.55 billion as at June 30 from $3.1 billion a year earlier.

"The increase in profitability was driven primarily by growth in receivables across all divisions - households, business and rural," the bank said in a statement. "Looking forward, underlying asset growth is expected to continue, with strong household, business and rural volumes projected through execution of Heartland's strategy, in particular the expansion of customer reach through digital and intermediary channels."

Heartland, which was formed through the merger of Marac Finance with the Southern Cross and Canterbury building societies, largely ignores the residential mortgage market dominated by the country's big four Australian-owned banks in favour of targeting higher margin consumer lending, such as auto-loans and reverse mortgages, and investing in online lending channels, such as peer-to-peer lender Harmoney.

While the Australian banks have complained about shrinking margins as the cost of international wholesale markets increases, Heartland, which funds the bulk of its lending through retail deposits, only saw a small contraction in net interest margins to 4.46 percent from 4.5 percent a year earlier. ASB Bank, which shares the same reporting period, last week reported a 15 basis point contraction in net interest margins to 2.18 percent.

Heartland expects annual earnings to keep rising in the current financial year, forecasting net profit of between $65 million and $68 million in the year ending June 30, 2018.

The bank's deposits grew to $2.57 billion as at June 30 from $2.28 billion a year earlier, and Heartland said the market was responding well to its direct call and business call accounts "which give customers a competitive rate of interest and unlimited on call access to their money".

Heartland said it's also considering a retail bond offer for five-year, unsecured, unsubordinated fixed rate notes for institutional and local retail investors. If the offer goes ahead it will open later this month. New Zealand's five-year swap rate was recently at 2.62 percent, down from 3.13 percent at the start of the year.

The board declared a fully-imputed final dividend of 5.5 cents per share, payable on Sept. 21 with a Sept. 7 record. That takes the annual return to 9 cents per share, up from 8.5 cents in 2016.

The bank's household business, which covers retail and consumer lending and reverse mortgages, lifted earnings 13 percent to $68.6 million on a 7.9 percent gain in net operating income to $92.9 million, led by strong growth in its Australian reverse mortgage business, offsetting lower earnings rates on auto lending and personal loans. The unit's loan book grew to $1.89 billion from $1.67 billion.

Heartland's business lending division boosted earnings 13 percent to $34.5 million on a 9.5 percent increase in operating income to $47.1 million as its assets grew 10 percent to $999.9 million. The rural division boosted profit 29 percent to $24.6 million on an 11 percent gain in operating income to $29.2 million as impairment charges on bad debt shrank.

The shares last traded at $1.86 and have gained 24 percent this year, outpacing the 10 percent gain on the S&P/NZX All Index over the same period.

(BusinessDesk)