Heartland Bank Reports Profit Growth Amid Rising Loan Arrears

Heartland Bank has reported an increase in profitability for the first quarter ending June 30, 2023, despite facing challenges with borrowers of motor vehicle and business loans. Chief Executive Andrew Dixson noted that the bank’s improved profitability stemmed from enhanced net interest margins while maintaining stable costs. However, the bank is experiencing a rise in loan arrears, particularly within its business finance portfolio, which has seen arrears increase by $2.9 million.

The first quarter proved challenging for the business sector, leading to a decline in lending demand. Dixson emphasized that the bank is actively engaging with customers in arrears and anticipates a reduction in overdue loans in the next quarter. He stated, “The business lending portfolio remains appropriately provisioned, and we expect improvements in the number of loans that are currently behind on payments.”

Challenges and Adjustments in Lending Portfolios

Heartland Bank operates in both New Zealand and Australia, and the trading environment has posed obstacles for many borrowers. Although the bank’s asset quality for its motor finance segment has improved due to better repayment strategies, consumer motor finance arrears stood at 4.6% as of August 31, 2023, slightly better than the industry average of 5.1%. Late-stage arrears have also shown improvement, as have recovery rates.

Dixson expects that seasonal factors, which have impeded livestock finance loan repayments in Heartland Bank Australia, will stabilize in the upcoming quarter. He indicated optimism that the bank could maintain no arrears greater than 180 days past due by June 30, 2026.

The reverse mortgage division on both sides of the Tasman performed well in the first quarter, although core lending activities experienced a downturn due to subdued market conditions and seasonal fluctuations. As the year progresses, Dixson expects lending volumes to recover.

Financial Performance Overview

In New Zealand, the net interest margin for the first quarter remained flat compared to the fourth quarter on a like-for-like basis. This was predominantly attributed to a significant reduction in reverse mortgage rates, which was somewhat offset by enhancements in the cost of funds. Underlying operating expenses decreased by $2.4 million, totaling $31.1 million for the quarter.

The impairment expense ratio improved, dropping by 9 basis points to 0.61%, while the total non-performing loan ratio held steady at 3.22%. Notably, the value of non-performing loans decreased by $3.5 million from June 30 to $148.2 million as the overall asset quality continued to advance.

Dixson highlighted growth in the reverse mortgage sector, with receivables increasing by $43.6 million (14.0%) to $1.28 billion in the quarter. Excluding livestock finance, which typically sees seasonal reductions, the rural portfolio expanded by $5.8 million (6.1%) to $380.3 million.

In Australia, Heartland Bank successfully raised its net interest margin by 15 basis points to 3.62%. The exit net interest margin of 3.50% reflects the complete pass-through of the official cash rate reduction for reverse mortgages. Receivables in the reverse mortgage sector surged by A$85.9 million (NZ$97 million), representing a 17.2% increase to A$2.07 billion. Conversely, livestock finance receivables fell by A$22.2 million (34.7%) to A$231.7 million due to seasonal influences.

Overall, Heartland Bank’s financial performance demonstrates resilience amid a challenging lending environment, with a focus on enhancing asset quality and supporting customers facing repayment difficulties.