Heartland : announces half year NPAT of $47.5 million

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NZX/ASX release 22 February 2022

Heartland announces net profit after tax of $47.5 million for the six months ended 31 December 2021

Heartland Group Holdings Limited (Heartland) (NZX/ASX: HGH) achieved a net profit after tax

(NPAT) of $47.5 million for the six-month period ended 31 December 2021 (1H2022), an increase of $3.4 million (7.8%) compared with the six-month period ended 31 December 2020 (1H2021). On an underlying basis (which excludes the impacts of one-offs1), 1H2022 NPAT was $47.1 million, an increase of $3.8 million (8.8%) compared with 1H2021 underlying NPAT.

The first half performance included a pleasing annualised rate of growth in lending (13.9%2). It also demonstrated the benefits of ongoing digitalisation, with a reduction in the cost-to-income (CTI) ratio.

Impairments were up on 1H2021 (19 basis points (bps)) due to COVID-19 related extensions3 that occurred in 1H2021. This was largely successful as reflected in the 'business as usual' reported rate of 33 bps for 1H2022, which is below the six months to 30 June 2021 (2H2021) (43 bps contributing to the full year outcome of 31 bps) and the financial year ended 30 June 2020 (FY2020) (65 bps).

The introduction of changes to the New Zealand Credit Contracts and Consumer Finance Act 2003 and the Credit Contracts and Consumer Finance Regulations 2004 (CCCFA) slowed growth in Motor and online Home Loans in January and February 2022. This has the potential to impact on the growth rate for the remainder of the six-month period ending 30 June 2022 (2H2022). This is being partially offset by growth in other areas, especially Reverse Mortgages in Australia and New Zealand, and no material reduction in anticipated full year growth is expected.

Highlights for 1H2022

• NPAT of $47.5 million, up 7.8% ($3.4 million). Underlying NPAT of $47.1 million, up 8.8% ($3.8 million) on 1H2021 underlying NPAT.
• One-offitems had a $0.5 million net impact on NPAT, consisting of $1.1 million of one-off net gains and $0.9 million of one-off expenses4.
• Gross finance receivables5 of $5.4 billion, up 13.9%2 ($339.4 million).
• Return on equity of 12.2%, up 7 bps.
• Net interest margin6 of 4.30%, up 3 bps.
• Net operating income of $130.7 million, up 4.3%.
• CTI ratio of 43.8%, down 5.0 percentage points (pps). Underlying cost to income ratio of 43.1%, down 2.7 pps.
• Impairment expense as a percentage of average receivables increased from 0.19% in 1H2021 to 0.33% in 1H2022.
• 1H2022 interim dividend of 5.5 cents per share (cps), an increase of 1.5 cps from 1H2021.

1. Underlying results exclude the impacts of one-offs. Refer to 'Profitability' on pages 3 and 4 for details.
2. Annualised 1H2022 growth excluding the impact of changes in foreign currency exchange (FX) rates.
3. These extensions included those provided under the Heartland Extend product and the New Zealand Government's Business Finance Guarantee Scheme (BFGS).
4. Refer to 'Profitability' on pages 3 and 4 for details.
5. Gross finance receivables (Receivables) include Reverse Mortgages.
6. NIM is calculated based on average gross interest earning assets.

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• Earnings per share of 8.1 cps, up 0.5 cps.
• Progress in digitalisation and continuous integration of product applications and platforms has provided faster processes and the ability to offer market-leading rates across New Zealand and Australia.
• Heartland Bank Limited (Heartland Bank) was awarded Canstar Savings Bank of the Year 2021 (for the fourth consecutive year), and 5-Star Ratings for Outstanding Value for its Direct Call and YouChoose accounts.
• Australian Reverse Mortgages received two Excellence Awards at the Australia Mortgage Awards 2021 (Non-Bank of the Year and Most Effective Digital Strategy - Lender), and won a 5-Star Lender
  Award in Your Mortgage's Mortgage of the Year Awards 2021.
• New Zealand Reverse Mortgages awarded Consumer Trusted Accreditation (for the fifth consecutive year).

Strategic vision

Heartland's strategic vision is to create sustainable growth and differentiation by providing best or only products delivered through scalable digital platforms. There are four strategic elements underpinning Heartland's strategic positioning:

1. Business as Usual growth (reported on within 'Business performance' from page 5)
2. Frictionless Service at the Lowest Cost
3. Expansion in Australia
4. Acquisitions which fit with and add value to the above.

Frictionless Service at the Lowest Cost

Heartland's ongoing focus on digital distribution is providing improved reach and customer experience across integrated platforms, with online access available for almost all of Heartland's products in New Zealand and Australia.

The Home Loans platform, launched in October 2020, reached $218.5 million of lending across 422 customers as at 31 January 2022. This online offering has enabled Heartland to consistently provide customers with market-leading or highly competitive rates. The ambition is for the Home Loans book to reach $1 billion of lending by the end of the 2023 financial year.

At the same time, the aim is to enhance customer experience by removing friction and creating scale without costly processes. This will be achieved through automation, self-service digital platforms and mobile apps. Development is ongoing, and a mobile app will soon be available to support Reverse Mortgage customers in Australia.

Expansion in Australia

Growth in Australia continues to be a strategic priority, and Heartland is exploring potential acquisitions as part of this.

Market share in Reverse Mortgages Australia continues to grow, increasing from 28% to 31% over the past 12 months7. In addition, Heartland has expanded its appeal through the launch of Express Reverse Mortgages in January 2022. This streamlined loan, with a market-leading variable interest rate, targets homeowners aged 60 to 70.

7 Based on APRA ADI Property Exposure and Heartland Reverse Mortgages data at 30 September 2020 and 30 September 2021.

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COVID-19

Heartland is following government guidance and taking a cautious approach to ensure the safety of its people, customers and strength of its business. Heartland's ongoing digitalisation of customer and product platforms is supportive of this cautious approach, ensuring customers can continue to engage with Heartland remotely.

Additional economic pressures are also being faced, including the steepening interest rate environment, higher cost of labour, and inflation increasing globally, with New Zealand recently experiencing its largest movement in the consumer price index since 1990.

Despite this, the higher levels of growth experienced by Heartland in 2H2021 has continued through 1H2022. As in previous periods, the impact of the pandemic has not disrupted business as usual activity, noting that the demographics most affected by COVID-19 are under-represented in Heartland's customer base.8

Heartland's COVID-19 economic overlay of $9.6 million, taken in FY2020, remains unutilised as the impact of COVID-19 on Heartland's portfolios has been more benign than initially forecast. The overlay does not represent any actual losses, but was taken to provide a buffer against any future losses that the uncertainty of COVID-19 may give rise to.

In the current operating environment, a release of the COVID-19 economic overlay is not yet appropriate and the overlay has been retained in full. Heartland's COVID-19 economic overlay remains in place and available to be applied to any losses stemming from the pandemic.

Financial results

Profitability

NPAT was $47.5 million, a $3.4 million (7.8%) increase on 1H2021. Underlying NPAT was $47.1 million, a $3.8 million (8.8%) increase on 1H2021.

Return on equity (ROE) was 12.2%, up 7 bps from 1H2021. Underlying ROE was 12.1%, up 21 bps from 1H2021.

Earnings per share (EPS) was 8.1 cents per share (cps), up 0.5 cps from 1H2021. Underlying EPS was 8.0 cps, up 0.6 cps from 1H2021.

1H2022 reported results include one-off items which should be considered when analysing the underlying result. The impact of these one-off items on the respective financial metrics is outlined in the table below.

8 Heartland's total exposure to the retail, accommodation and transport (excluding road freight transport) industries at 31 December 2021, based on borrower ANZSIC codes, was 1.84%, 1.50% and 1.22% respectively. Heartland's exposure to customers aged 15-24 years (those most affected by increases in unemployment) at 31 December 2021 was 3.91% in Motor and 6.10% in Personal Lending.

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			Reported					Underlying
	1H2022		1H2021			Movement		1H2022		1H2021		Movement
Net operating income	130.7		125.3			5.4		130.8		120.1		10.7
(NOI)9 ($m)
Operating expenses ($m)	57.3		61.1			(3.8)		56.4		55.1		1.4
NPAT ($m)	47.5		44.1			3.4		47.1		43.3		3.8
Net interest margin (NIM)	4.30%		4.28%			3 bps	4.30%		4.28%		3 bps
NIM excl. liquid assets10	4.63%		4.65%			(2 bps)	4.63%		4.65%		(2 bps)
CTI	43.8%		48.8%			(5.0 pps)	43.1%		45.8%		(2.7 pps)
Impairment expense ratio	0.33%		0.19%			13 bps	0.33%		0.19%		13 bps
ROE	12.2%		12.2%			7 bps	12.1%		11.9%		21 bps
EPS	8.1 cps	7.6 cps		0.5 cps	8.0 cps	7.4 cps	0.6 cps

Income

Total NOI was $130.7 million, an increase of $5.4 million (4.3%) from 1H2021.

Excluding the impact of one-offs11, underlying NOI was $10.7 million (8.9%) higher half-on-half. This was due to a $10.7 million (9.4%) increase in net interest income, driven by a $460.3 million (8.8%) higher average interest earning assets in 1H2022 than in 1H2021, and a 3 bps increase in NIM compared with 1H2021. Underlying other operating income remained stable half-on-half.

Expenses

Operating expenses were $57.3 million, a decrease of $3.8 million (6.3%) on 1H2021. Excluding the impact of one-offs, the underlying operating expenses were $1.4 million (2.5%) higher compared with 1H2021.

Higher underlying operating expenses were primarily due to a $1.9 million (26.9%) increase in IT and communication expenses driven by software amortisation and licencing costs as a result of continued investments in technology and digital capabilities.

The CTI ratio decreased to 43.8%, down 5.0 pps compared with 1H2021. The underlying CTI ratio decreased 2.7 pps to 43.1%. It is expected to continue trending downwards.

Impairment expense

Impairment expense increased by $4.0 million (88.1%) to $8.5 million, reflecting the benefit of post- COVID-19 remediation activity which occurred in 1H2021, together with a return to more normal levels of asset growth and associated provisioning in 2H2021, continuing into 1H2022.

Lower impairments in 1H2021 of 19 bps were due to COVID-19 related extensions (including under the Heartland Extend product or the New Zealand Government's BFGS). These were largely successful in

1. NOI includes fair value gains/losses on investments.
2. NIM is calculated based on average gross interest earning assets excluding liquid assets.
3. 1H2021 one-offs include $5.2 million of fair value gains on investments. 1H2022 one-offs include $0.1 million of net fair value loss on investments.

Heartland Group Holdings Limited | 0800 85 20 20 | PO Box 9919, Newmarket, Auckland 1149 | shareholders.heartland.co.nz

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allowing time for borrowers to remediate, as reflected in the 'business as usual' reported rate of 33 bps for 1H2022, which is below 2H2021 (43 bps contributing to the full year outcome of 31 bps) and FY2020 (65 bps).

Financial position

Total assets increased during 1H2022 by $315.8 million (5.6%), driven by a $339.4 million (13.9%)12 increase in Receivables, offset by a $36.0 million (6.7%) decrease in liquid assets.

Receivables growth was experienced primarily in Home Loans, Australian Reverse Mortgages, Motor, New Zealand Reverse Mortgages, Business Relationship and Asset Finance, partly offset by decreases in the Harmoney Corp Limited (Harmoney) originated personal loan portfolio, Open for Business (O4B) and Rural Relationship. With the continued tilt of the Receivables portfolio mix towards higher quality and lower risk assets, maintaining the current levels of NIM will pose a challenge in the coming periods. This, however, is expected to be mitigated by a lower cost origination model and impairment expense benefitting from an improved book quality.

Borrowings13 increased by $290.8 million (6.0%). Deposits increased $149.0 million, and other funding increased $141.8 million, primarily due to growth in Australian Reverse Mortgages.

Net assets increased by $16.5 million to $778.2 million. Net tangible assets (NTA) increased by $8.9 million to $687.4 million, resulting in an NTA per share of $1.17 (30 June 2021: $1.16).

Business performance

Asset Finance

Asset Finance lending NOI was $15.8 million, an increase of $2.4 million (17.9%) compared with 1H2021.

Asset Finance Receivables increased $35.7 million (12.4%)12 to $606.6 million. The underlying demand from transport, logistics and other productive sectors has remained consistent.

Wholesale Lending14

Wholesale Lending NOI was $15.7 million, an increase of $3.5 million (28.8%) compared with 1H2021.

Wholesale Lending Receivables increased $38.4 million (13.7%)122 to $593.4 million. Contributing to this growth was a funding facility provided to Go Car Finance in 2H2021 for its New Zealand loan book, along with the expansion of wholesale motor vehicle dealer groups. This aligns with Heartland's strategy to diversify distribution in motor vehicle finance.

O4B

O4B NOI was $7.2 million, a decrease of $0.3 million (4.2%) compared with 1H2021. This reflects still subdued confidence resulting from COVID-19 related lockdowns and travel restrictions.

1. Annualised 1H2022 growth excluding the impact of changes in FX rates.
2. Includes retail deposits and other borrowings.
3. Wholesale Lending includes what was formally known as Business Relationship, reflecting Heartland's strategy in this sector.

Heartland Group Holdings Limited | 0800 85 20 20 | PO Box 9919, Newmarket, Auckland 1149 | shareholders.heartland.co.nz

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