Fitch affirms credit rating of Heartland Group companies

NZX/ASX Release

Fitch affirms credit rating of Heartland Group companies

1 November 2018


Heartland Group Holdings Limited (NZX/ASX:HGH) (Heartland Group) is pleased to announce that
Fitch Australia Pty Ltd (Fitch) has affirmed its long term issuer default rating of the following
Heartland Group companies:

Heartland Group Holdings Limited (HGH) BBB (Outlook Stable)
Heartland Bank Limited (HBL) BBB (Outlook Stable)
Heartland Australia Group Pty Ltd (HAG) BBB- (Outlook Stable)

The full report from Fitch is attached to this announcement.


- Ends -


For further information please contact:

David Mackrell
Chief Financial Officer
Heartland Group Holdings Limited

DDI 09 927 9561
Email: david.mackrell@heartland.co.nz

---

11/1/2018Press Release
https://www.fitchratings.com/site/pr/100500561/6
Fitch Affirms Heartland Bank; Assigns Ratings to 2 Heartland
Entities
Fitch Ratings - Sydney - 01 November 2018: Fitch Ratings has affirmed the ratings on New Zealand-
based Heartland Bank Limited (HBL) and assigned Heartland Group Holdings Limited (HGL) a Long-
Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB' and Heartland Australia Group Pty Ltd
(HAG) a Long-Term Foreign-Currency IDR of 'BBB-'. The Outlooks are Stable.

The rating actions follow a corporate restructuring that resulted in the creation of bank holding
company HGL, with HBL as the main operating subsidiary that accounted for 82% of total assets at
the end of the year to June 2018 (FYE18), and HAG as the operator of the Australian business.

The affirmation of the ratings on HBL and the new ratings reflect our view that the restructuring will
not have a material impact on the credit profile of the group. The group is likely to continue to perform
solidly over the next year or two, absent a significant acquisition. The group's franchise benefits from
niche positions in some products, which has facilitated a strong net interest margin relative to peers.
Fitch has observed improvements in underwriting standards and risk controls in recent years, which
is important, considering some of the higher-risk segments the group focuses on.
RATING ACTIONS
ENTITYRATINGPRIOR
Heartland Bank Limited5
bbb
NF
F2
BBB
F2
BBB
Support
5
Affirmed
Viability
bbb
Affirmed
Support Floor
NF
Affirmed
LC ST IDR
F2
Affirmed
LC LT IDR
BBB
Affirmed
ST IDR
F2
Affirmed
LT IDR
BBB
Affirmed

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senior unsecuredF2
senior unsecuredBBB
Heartland Australia Group
Pty Ltd
Heartland Group Holdings
Limited

KEY RATING DRIVERS
IDRS AND VIABILITY RATINGS
HBL and HGL

The ratings on the demerged bank and the top-level holding company are driven by the consolidated
risk profile of the group. This reflects the very close correlation between failure and default
probabilities at HBL and HGL.

The consolidated risk profile reflects the group's higher risk appetite compared with its peers, as well
as its sound profitability and capitalisation. The bank focuses on higher-risk products where it has a
competitive advantage and does not need to compete with the major banks. The higher risk of its
products is evident from the weaker collateral compared with the residential mortgage books of other
New Zealand banks. The group's underwriting standards and lending profile have improved over time
and have led to faster and better decision making.

ST
F2
Affirmed
LT
BBB
Affirmed
Support
2
New Rating
ST IDR
F3
New Rating
LT IDR
BBB-
New Rating
LT IDR
BBB
New Rating
ST IDR
F2
New Rating
LC LT IDR
BBB
New Rating
LC ST IDR
F2
New Rating
Viability
bbb
New Rating

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The improvements in the group's underwriting standards and controls and the benign operating
environment have contributed to relatively stable asset quality in recent years. However, Fitch
expects the group's financial profile to be more vulnerable to deterioration relative to its peers, albeit
still adequate, through a full credit cycle. This is owing to the bank's stronger-than-domestic-peer net
interest margin and improved cost efficiency. Both provide sufficient buffers to absorb larger
impairment charges in an economic downturn.

The group's strong asset growth could result in deterioration in its risk-weighted capital ratios,
although capitalisation and leverage continue to have satisfactory buffers over regulatory minimums.
The group has proven in recent years that it is able to access the equity markets for fresh capital to
support growth.

The group's funding is confidence sensitive and the funding profile remains more reliant on wholesale
funding markets than that of peers. The group has some cushion should it need to reprice deposits to
attract depositors, given the wider margin on its loans. Liquidity may become less stable during
periods of stress, but the group generally has lower maturity mismatches than domestic peers.

HAG
HAG's IDR is ultimately driven by institutional support from HGL, based on HAG's role in the group.
HAG provides similar products, has common management, and shared services with the rest of the
group. The group will also leverage from experiences in its home market to introduce products and
concepts into the Australian market to support growth and product diversification. HAG is 100%
owned by HGL, its management is deeply integrated with its parent's and they share board
members. HAG also makes use of corporate services offered by the group, further cementing its role
in the group.

However, due to its small size, Fitch sees HAG as complementing the group rather than as a key
and integral part of the group. As such, Fitch classifies HAG as a strategically important subsidiary
and rates it one notch lower than the group's ratings.

SUPPORT RATING AND SUPPORT RATING FLOOR
HBL
The Support Rating and Support Rating Floor on HBL reflect Fitch's view that while support from the
New Zealand sovereign (AA/Stable) is possible, it cannot be relied on. We believe the Open Bank
Resolution (OBR) framework reduces the propensity of the sovereign to support its banks. The OBR
framework allows for the imposition of losses on depositors and senior debt holders to make up
capital shortfalls if a deposit-taking institution fails.

HAG
HAG's Support Rating reflects Fitch's view that there is a high probability of support from HGL.

DEBT RATINGS
HBL's senior unsecured notes and commercial paper programme are rated at the same level as its
Long- and Short-Term Foreign-Currency IDRs, respectively, in accordance with Fitch's criteria.
RATING SENSITIVITIES
RATING SENSITIVITIES
IDRS AND VIABILITY RATINGS
HBL and HGL
The IDRs and Viability Ratings are most sensitive to a change in Fitch's assessment of the group's
risk appetite. An aggressive expansion by the group into new or existing market segments while
compromising its risk-management practices would be negative for the ratings. Excessive growth
over a sustained period could weaken the consolidated financial profile, including funding and
liquidity, and pressure the ratings. There is little scope for the ratings to be upgraded unless the

11/1/2018Press Release
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franchise were to strengthen significantly relative to peers, which is not probable without increasing
its risk appetite. Fitch expects HGL's ratings to continue to be equalised with those of HBL over the
next two years.

HAG
Any change in the propensity or ability of the group to provide support to HAG is likely to result in
changes to the entity's IDRs and Support Rating.

SUPPORT RATING AND SUPPORT RATING FLOOR
HBL
The Support Rating and Support Rating Floor are sensitive to any change in assumptions around the
propensity of the New Zealand sovereign to provide timely support to the bank.

HAG
The Support Rating is sensitive to any change in the ability or propensity of HGL to provide support.

DEBT RATINGS
The ratings on HBL's senior unsecured notes and commercial paper programme are sensitive to the
same factors as the IDRs and Viability Rating.
DATE OF RELEVANT COMMITTEE
31 October 2018
Additional information is available on www.fitchratings.com
FITCH RATINGS ANALYSTS
Primary Rating Analyst
Bert Jansen
Director
+61 2 8256 0345
Fitch Australia Pty Ltd
Level 15 77 King Street
Sydney NSW 2000

Secondary Rating Analyst
Tim Roche
Senior Director
+61 2 8256 0310

Committee Chairperson
Heakyu Chang
Senior Director
+822 3278 8363

MEDIA CONTACTS
Peter Hoflich
Singapore
+65 6796 7229
peter.hoflich@thefitchgroup.com

Applicable Criteria
Non-Bank Financial Institutions Rating Criteria (pub. 12 Oct 2018) (/site/re/10044407)
Bank Rating Criteria (pub. 12 Oct 2018) (/site/re/10044408)
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