Aussie banks target Heartland
Loss of business relationship lending has been offset by growth of other lending
The major banks have been encroaching on what used to be Heartland Group’s core business of relationship banking with businesses. Chief operating officer Chris Flood says that’s because the general growth of the banking system has been flat, driving the major banks to vie for business further down the food chain than they normally seek.
The impact on Heartland’s business lending has been dramatic.
Heartland’s “business relationship” lending fell by $107 million in the year ended June.
But the company — which aims to be a big player in niches where it has little competition rather than trying to compete head-on with the major banks — has managed to more than offset the loss of business by growing its burgeoning “intermediated” and online business lending.
Its “intermediated business” lending rose by $101.7m in the year and its online Open-for-Business lending grew another $43.4m.
That meant Heartland’s total business loan book rose 3.5 per cent to nearly $1.1 billion at June 30 from $1.07b a year earlier and annual profit
from that book rose 11.6 per cent to $41.5m.
Flood describes “relationship banking” as a model under which dedicated bank staff aim to cultivate relationships with individual businesses and thus provide for all the needs of those businesses.
So, a relationship with a single business can result in multiple loans for different purposes and the loans tend to be on the large side.
But intermediated business operates similarly to Heartland’s lending on motor vehicles.
A third party dealer, say selling Isuzu or Hino trucks, does all the work of selling the truck and arranging the loan to pay for it, with Heartland providing the funding.
Or a plant and equipment dealer plays a similar role with Heartland again simply providing the funding, often branded for that dealer.
These intermediated loans tend to be smaller, helping Heartland to spread its risks.
“The average loan is under $100,000. We like that because we spread our risks across a large number of customers and you’re not exposed to one customer having a problem,” Flood says.
But if a relationship loan goes sour, that tends to have a larger and lumpier impact on Heartland’s nonperforming loans than if an intermediated loan goes south.
The relationship model is high cost with margins being squeezed as the banks moved in. “It’s very expensive and an account manager can only handle a certain number of relationships. The margins get finer and the loans get larger,” Flood says.
It also means the loan book grows or fades depending on individual
The average loan is under $100,000. We like that because we spread our risks.
Chris Flood, Heartland
customers’ need for loans.
“We were charging loans at 7 per cent and banks were taking them off us at 4 or 5 per cent. That’s been going on for some time, but last year it escalated as banks went downwards in loan size and started targeting more loans at rates we couldn’t compete with,” he says.
This kind of behaviour tends to happen in a downturn, he says.
Whether this trend continues depends very much on the behaviour of the major banks and that will depend, to at least some extent, on the outcome of the Reserve Bank’s review of bank capital requirements.
The RBNZ is proposing that the major banks’ minimum capital nearly double from 8.5 per cent of riskweighted assets to 16 per cent over a number of years.
RBNZ is also proposing to force the major banks to hold significantly more capital per loan, particularly for business loans.
“It will be interesting to see with the capital review, what the timeline around that will be and what our competitors’ response will be,” Flood says.
“Where Open-for-Business operates, outside of using a residential mortgage to secure lending, it’s a very expensive model and not scalable.”
It’s also more capital intensive than mortgage lending, which until recent years was practically the only funding option available to small businesses.
In the meantime, while Heartland waits to see how the market develops, it’s reorganised staffing, retaining some to focus exclusively on relationship lending, others exclusively on intermediated and online lending and some overlapping both models of lending.
Heartland made a similar decision years ago on retail mortgage lending. Because some customers want to source mortgages from Heartland, it will provide them, but makes no pretence of competing with the major banks.
The GoodReturns website shows Heartland’s floating mortgage rate currently is 6.7 per cent and its twoyear fixed mortgages are 7.25 per cent. By contrast, ASB Bank’s floating rate is 5.2 per cent and its two-year fixed “special” is 3.69 per cent.
Small wonder then that Heartland’s retail mortgage book shrank 23.1 per cent (or $6m) in the 12 months ended June.
But its reverse mortgages, where it dominates in both New Zealand and Australia, grew 11.4 per cent to $561.2m in New Zealand and 24 per cent to $757.6m.
Because of this niche strategy, Heartland’s net interest margin was 4.33 per cent in the latest year compared with an average 2.18 per cent for the major banks.