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Heartland does it tough, narrows profit forecast

Heartland New Zealand is finding business tougher than expected and has narrowed its net profit expectation for the year ending June 2012 to between $20 million and $22 million.

Monday, November 28th 2011, 9:19PM

by Jenny Ruth

The forecast is well up on the $7.1 million it reported for the year ended June this year, which included the costs of merging Marac Finance, CBS Canterbury and Southern Cross Building Society which created Heartland.

However, it is down from the $20 million to $24 million Heartland forecast in August.

The company, which aims to become a bank, says it expects first-half profit will be between $9 million and $10 million.

Heartland says while business and consumer lending growth has performed within expectations, rural lending has been slower, reflecting strong early grass growth which led to lower stock trading. It expects to make up some of the expected growth in the second half of the year.

The PGG Wrightson Finance (PWF) book was smaller than expected due to run-off ahead of the August 31 settlement, it says.

It is also experiencing reduced demand for mortgage lending as well as repayments in Christchurch due to earthquake-related insurance payouts.

"Net interest margin has improved but not to the extent anticipated. This has been due to the competitive environment in some of the lending sectors but mitigated by the benefit of lower costs of funds beginning to emerge," the company says.

Profit has also been depressed by the cost of maintaining surplus funds ahead of the government guarantee of deposits expiring on December 31 - the company plans to progressively reduce cash holdings but will continue to hold more liquidity than regulations require.

On the positive side, the cost of bad loans was lower in the three months ended September and is expected to track at budgeted levels for the rest of the year.

Assumptions behind the new forecast include lending growth between $130 million and $170 million, including seasonally-based livestock financing.

"The integration with PWF is proceeding well and referrals from PGG Wrightson under the strategic alliance are at higher levels than anticipated," Heartland says.

It expects higher retail and consumer lending will offset its falling mortgage book and that business lending will grow.

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