Heartland's banking aspirations knocked
Standard & Poor's has downgraded Heartland Building Society's outlook to negative from stable, saying its asset quality and earnings profile aren't consistent with its current BBB- rating.
Monday, August 15th 2011, 5:00AM
by Jenny Ruth
"The outlook revision reflects the slower-than-anticipated stabilisation and improvement in HBS's key asset quality indicators and earnings profile," S&P says.
"Headwinds in the commercial property market and the general operating environment have contributed to our view that it will now take longer for HBS to restore its asset quality and earnings profiles to levels supportive of the rating and comparable to other, similarly rated, peers," it says.
The downgrade is a blow to Heartland's aspirations to become a bank, although while it retains the "BBB-" rating, the lowest investment grade rating, it can still progress its application.
The company says the areas of S&P's concerns are where management is currently focused.
"In particular, earnings have been forecast to improve by full-year 2012, based on core business and the reduction of one-offs relating to merger activities," Heartland says.
Heartland was created early this year from the merger of Marac Finance, Canterbury Building Society and Southern Cross Building Society.
"The change in outlook does not imply any deterioration in underlying risk but, rather, reflects the rating agency's desire to see faster improvement in earnings and exit of the legacy property development book," the company says.
S&P's report doesn't mention Heartland's planned purchase of PGG Wrightson Finance, currently rated "BB," on terms widely regarded as favourable to Heartland.
The ratings agency says HBS has a high level of non-performing loans and low core earnings. Next Friday, Heartland expects to report a net profit between $6 million and $8 million, including the one-off merger costs and provisioning for its property development loan book, for the year ended June 30 and it expects net profit will rise to between $20 million and $24 million the following year.
S&P says it may lower Heartland's rating if its asset quality metrics deteriorate further or if it can't improve its key asset quality metrics and core earnings over the next 12 months.
"The rating outlook could return to stable if HBS were successful in managing down its non-performing asset level and improve core earnings to a sustainable level more supportive of current ratings," it says.
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