Heartland announces 1H2024 financial results

Heartland Group Holdings Limited (Heartland) (NZX/ASX: HGH) has announced its financial results for the six-month period ended 31 December 2023 (1H2024). - Net profit after tax (NPAT) of $37.6 million. Underlying NPAT of $52.7 million. NPAT decreased by $11.1 million (22.7%) and, on an underlying basis, decreased by $2.0 million (3.6%) compared with the six-month period ended 31 December 2022 (1H2023). - One-off or non-cash technical items had a $15.1 million net impact on NPAT. - Gross finance receivables (Receivables) up 4.2% . - Continued strong growth in New Zealand Reverse Mortgages (up 18.7%)5 and Australian Reverse Mortgages (up 20.0%)5. - Solid growth in Asset Finance (up 8.9%)5 and Motor Finance (up 6.4%)5. - Underlying impairment expense ratio decreased by 6 basis points (bps) to 0.23% compared with 1H2023. - Significant progress towards Heartland's ambitions to become a bank in Australia through the acquisition of Challenger Bank Limited (Challenger Bank). - Completion of Heartland Bank Limited's (Heartland Bank) core banking system upgrade in 1H2024 enabling accelerated digitalisation and automation. In December 2023, Heartland announced revised NPAT guidance for the financial year ending 30 June 2024 (FY2024) due to: - the expected A$3.5 million one-off FY2024 impact on underlying NPAT arising from the anticipated acquisition of Challenger Bank, positioning Heartland for its next stage of growth - short-term operational performance challenges - a slower than expected start to FY2024 for Motor Finance and Australian Livestock Finance, and higher cost of funds - Heartland Bank's response to issues affecting a subset of legacy lending. In what has been a mixed environment in which to operate, Heartland's 1H2024 result saw continued growth in most of its core lending portfolios , with good pipelines for further growth and to expand market share. The acquisition of Challenger Bank is nearing completion with the regulatory approval process now in the final stages. When FY2024 guidance was provided, it excluded any costs related to the acquisition of Challenger Bank. As the acquisition nears completion, it was appropriate that guidance was updated to reflect the impact of Challenger Bank becoming part of Heartland. The impact to underlying NPAT for FY2024 is expected to be a net loss of A$3.5 million, reflecting underlying NPAT of Challenger Bank. This is expected to transition quickly to a profit-making position as material deposit raising occurs. In preparation for completion, Challenger Bank is actively raising deposits. Recent success achieved by Challenger Bank in the Australian deposit market has exceeded Heartland's expectations. This will enable Heartland to optimise the advantage of a lower cost of funds post-acquisition completion. Heartland is confident of acquisition completion in the second half of FY2024 (2H2024). The arrears experienced in a subset of longer dated Motor Finance loans are a result of operational issues in Heartland Bank's Collections & Recoveries area and do not reflect any underlying issues with the credit quality of the book. This is primarily a resourcing issue caused by illness, employee turnover due to overseas travel, and a focus on Heartland Bank's core banking system upgrade (which is now complete). This is being addressed through a specialised recruitment strategy and automation. Underlying impairments are otherwise performing as expected given the challenging economic conditions. Heartland's asset quality continues to shift towards loans with lower risk exposures. Overall performance continues to demonstrate the resilience of Heartland's core lending portfolios and 'best or only' strategy. In particular, Australian Reverse Mortgages' market share increased to 41% as at 30 September 2023 and Motor Finance experienced growth of 6.4%5 in a market where total new and used car sales in New Zealand were down by 12.2% . In the long-term Heartland expects to continue its growth story. Organic growth is expected to improve in line with reduced inflation. Similarly, cost of funds and net interest margin (NIM) are expected to improve as interest rates ease. One of Heartland's focuses in 1H2024 has been on continuing to position for future growth. Heartland has growth ambitions that will facilitate cost efficiency and return on equity (ROE) expansion. Specifically, Heartland's ambition is to achieve an underlying NPAT of $200 million and an underlying cost-to-income (CTI) ratio of less than 35% by the financial year ending 30 June 2028 (FY2028). Heartland has various strategic initiatives underway to support the realisation of its FY2028 ambitions, including: - expansion in Australia facilitated by the acquisition of Challenger Bank providing access to depositor funding and larger addressable markets - increased digitalisation and automation to achieve frictionless service at a low cost - continued growth across core lending portfolios. For the full announcement, see the attachments to this release: - Heartland 1H2024 Results Announcement - Heartland 1H2024 Investor Presentation - Heartland NZX Results Announcement Template - Heartland Distribution Notice - Heartland Interim Financial Statements - Heartland Bank Disclosure Statement - ENDS - The persons who authorised this announcement: Jeff Greenslade, Chief Executive Officer Andrew Dixson, Chief Financial Officer For further information and media enquiries, please contact: Nicola Foley, Group Head of Communications +64 27 345 6809 nicola.foley@heartland.co.nz Level 3, Heartland House, 35 Teed Street, Newmarket, Auckland, New Zealand End CA:00426935 For:HGH Type:HALFYR Time:2024-02-27 10:04:10