Heartland focuses on high-margin auto-loans, rural, SMEs

The aspiring bank will put its energy into growing bigger margins as a lack of credit demand erodes the viability of simply seeking volume growth.

BUSINESSDESK: Heartland New Zealand, the lender formed from the merger of Pyne Gould's Marac Finance with the Canterbury and Southern Cross building societies, will put its energy into growing high-margin business as credit growth stays subdued for the foreseeable future.

Chief executive Jeff Greenslade told analysts in Auckland the lender will look to build its motor vehicle, rural and small- and medium-sized enterprise loan books which deliver bigger margins as a lack of demand for credit erodes the viability of simply seeking volume growth.

"Banks have never been through such significant change since 2008 we're going to have low-credit growth for the next five years," he says. "Growth based on volume strategy is simply not going to happen. We need to focus a lot more on margin."

That means Heartland will not pursue much of the low interest rate residential mortgage market, where demand is based on cost, he says.

The lender holds about $324 million in home loans of its $2.08 billion net receivables as at June 30.

Mr Greenslade says he anticipates greater switching between lenders as customers look for the best deal, a trend the banking sector has largely avoided until now.

Heartland's net profit climbed to $23.6 million, or 6 cents per share, in the 12 months ended June 30, from $7.1 million, or 5 cents, a year earlier. Pretax earnings rose to $20.3 million from $11.6 million a year earlier, in line with Heartland's guidance of between $20 million and $22 million.

The lender is engaged with the Reserve Bank as it seeks a banking licence and is looking at November as a possible date for the decision.

The merger of the financiers was predicated on the new entity achieving a licence as lenders enter a new regime that imposes stricter controls on finance companies after the collapse of the sector through the latter half of the 2000s.

The board did not declare a dividend and will outline its dividend policy at its annual meeting in November.

The shares fell 3.6 percent to 54 cents in trading today, having gained 14% this year. The stock is rated an average "outperform" based on two analyst recommendations compiled by Reuters, with a median target price of 60 cents.

Heartland's net interest income rose 36% to $83.6 million as the Wrightson book increased its portfolio. Its net operating income advanced 35% to $94.9 million from improved margins and a lower cost of funding.

The lender's $989.4 million retail and consumer book increased profit 9.7% to $31.6 million on a 17% lift in net interest income to $39 million. Its $540.2 million business portfolio more than doubled profit to $13.3 million, with a 23% boost to net interest income to $21 million.

The $478.6 million rural book, most of which came from the Wrightson acquisition, reported profit of $12.6 million on net interest income of $19.1 million.

The non-core property unit, which consists of $160.2 million of loans and investment properties managed by Pyne Gould's Real Estate Credit business, had a loss of $4.4 million on net operating income of $6.4 million.