Rising Impairments Signal Growing Risk for Heartland Bank in NZ Downturn

Economic Pressures Drive Impairment Spike

Heartland Group Holdings Limited (NZX/ASX: HGH) has revealed a significant increase in impairment expenses for its New Zealand banking subsidiary, Heartland Bank Limited. For the six months ending 31 December 2024, the impairment expense surged to $49.6 million, more than doubling from $23.9 million in the prior corresponding period. This sharp rise reflects the ongoing deterioration in New Zealand's economic environment, which has particularly impacted the bank’s Motor Finance and business lending portfolios.

The impairment expense comprises $20.2 million in write-offs, $19.4 million in specific provisions, and $10 million in collective provisions. Notably, $12.1 million of the write-offs relate to loans overdue by more than 365 days in the Motor Finance and Open for Business (O4B) portfolios. These measures are part of Heartland Bank’s strategy to derisk and reposition its lending book amid challenging conditions.

Navigating a Recessionary Landscape

New Zealand’s economy has experienced its largest six-month GDP contraction since 1991, excluding the COVID-19 period, with a 1.0% fall in the September 2024 quarter and a restated 1.1% decline in the June quarter. This downturn has been accompanied by rising unemployment, now at a four-year high of 5.1%, increased financial hardship, and a surge in company liquidations by 39% year-on-year. These macroeconomic headwinds have strained Heartland Bank’s customers, particularly in sectors such as construction, manufacturing, forestry, and agriculture.

In response, Heartland Bank has adopted a more prescriptive approach to collections and write-offs, including a new policy requiring loans to be written off no later than 180 days past due following repossession efforts. The bank has also engaged debt collection agencies post-write-off to enhance recoveries. These changes aim to improve the quality of the loan book and free resources to focus on earlier-stage arrears.

Financial Resilience and Dividend Outlook

Despite the impairment charge, Heartland Bank remains well capitalised with a total capital ratio of 14.8% as at 31 December 2024 and maintains strong liquidity. The credit quality of its Reverse Mortgage and Livestock Finance portfolios remains robust, and its Australian banking operations continue to perform well, unaffected by the New Zealand economic challenges.

Heartland expects its net profit after tax (NPAT) for 1H2025 to be between $2 million and $5 million, pending final audit review. While the Board has yet to declare an interim dividend, it currently anticipates that the impairment expense will not preclude dividend payments. The dividend quantum will be carefully balanced against capital requirements, growth opportunities, and financial performance.

Looking Ahead

Looking forward, Heartland Bank anticipates continued economic challenges for New Zealand consumers and businesses through the second half of FY2025, particularly in sectors it supports heavily. However, some positive tailwinds may emerge from potential interest rate reductions and increased credit demand. The bank is proactively managing loans in arrears and aims to eliminate arrears in Motor Finance and O4B portfolios greater than 180 days past due by mid-2026.

Should economic conditions worsen beyond current expectations, Heartland warns of potential additional losses up to $8 million in write-offs and $5 million in specific provisions in the latter half of FY2025. The market will be closely watching Heartland’s upcoming 1H2025 financial results and FY2025 NPAT guidance update scheduled for 27 February 2025.