Fitch Long-Term and Short-Term Ratings

NZX/ASX Release
Fitch Long-Term and Short-Term Ratings
29 October 2019
Fitch Ratings (Fitch) has affirmed the Long-Term Issuer Default Ratings (IDR) of Heartland Group
Holdings Limited (NZX/ASX: HGH) (Heartland Group) and Heartland Bank Limited (NZX: HBL)
(Heartland Bank) at 'BBB' and the Long-Term IDR of Heartland Australia Group Pty Ltd (Heartland
Australia) at 'BBB-'. The Outlooks are Stable.
Fitch has downgraded the Short-Term IDR on Heartland Group and Heartland Bank to ‘F3’ from ‘F2’.
This follows a change in Fitch’s ratings criteria.
Fitch’s press release is attached.
- Ends -
For further information, please contact:
Andrew Dixson
Head of Corporate Finance
Heartland Group Holdings Limited
09 927 9274

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Fitch Affirms Heartland at 'BBB'; Downgrades Short-Term IDR to
'F3'
Fitch Ratings - Sydney - 24 October 2019:
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of Heartland Group Holdings Limited
(HGL) and Heartland Bank Limited (HBL) at 'BBB' and the Long-Term IDR of Heartland Australia Group Pty
Ltd (HAG) at 'BBB-'. The Outlooks are Stable.
At the same time, Fitch has downgraded the Short-Term IDRs on HGL and HBL to 'F3' from 'F2' because
the funding and liquidity mid-point of 'bbb', which feeds into the Viability Rating, is below the minimum level
required to maintain the Short-Term IDR at 'F2' under Fitch's cross-sector Short-Term Ratings Criteria. The
Short-Term IDR has been removed from Under Criteria Observation, under which it was placed in May 2019
following the publication of the new criteria.
RATING ACTIONS
ENTITY/DEBTRATINGPRIOR
Heartland Australia Group Pty
Ltd
LT IDR
BBB-
Affirmed
BBB-
ST IDR
F3
Affirmed
F3
Support
2
Affirmed
2
Heartland Group Holdings
Limited
LT IDR
BBB
Affirmed
BBB
ST IDR
F3
Downgrade
F2
LC LT IDR
BBB
Affirmed
BBB
LC ST IDR
F3
Downgrade
F2
Viability
bbb
Affirmed
bbb
Heartland Bank Limited
LT IDR
BBB
Affirmed
BBB
ST IDR
F3
Downgrade
F2
LC LT IDR
BBB
BBB

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Affirmed
LC ST IDR
F3
Downgrade
F2
Viability
bbb
Affirmed
bbb
Support
5
Affirmed
5
Support Floor
NF
Affirmed
NF
senior unsecured
LT
BBB
Affirmed
BBB
senior unsecured
ST
F3
Downgrade
F2
Key Rating Drivers
IDRS AND VIABILITY RATINGS FOR HGL and HBL
The ratings on HGL and HBL are driven by the group's consolidated risk profile, which reflects the close
correlation between failure and default probabilities of the two entities and the group's higher risk appetite
relative to peers, although this is mitigated by its stronger profitability. HBL accounted for 85% of the
consolidated group's total assets as at the financial year ending June 2019 (FY19).
Risk appetite remains the key driver of the ratings, particularly the group's underwriting standards. The
group's underwriting standards have improved over time and its systems and underwriting processes have
benefited from ongoing investment. However, we expect the group's financial profile to be more vulnerable
to economic shocks given the higher-risk nature of its loan book.
Group profitability continues to compare favourably against that of peers, benefiting from the higher margins
of its loan book and sound cost-to-income ratio. This provides adequate buffers to absorb larger impairment
charges during a downturn. Fitch believes the continued investment in platforms and increased focus on
compliance could pressure costs for the next year, but these should remain manageable.
Asset quality is sound and the impaired loan ratio has remained consistent, but trails that of most domestic
peers due to differing exposure types. An increase in the impaired loan ratio in FY19 was largely due to the
adoption of IFRS9 and Fitch's adoption of Stage 3 loans, where disclosed, as the impaired loan figure when
calculating the ratio. We expect the group's asset quality ratios to remain around current levels for the next
year, supported by the low interest-rate environment.
The group's funding profile has been generally stable over the last few years, despite reliance on
confidence-sensitive wholesale funding remaining higher than for domestic peers. We believe the group's
strong interest margin will improve flexibility should the group need to attract more deposits. The liquidity
profile is satisfactory, although the group has less contingent liquidity sources compared with peers, as its
reverse mortgage book is not repo-eligible and therefore cannot be securitised to provide additional liquidity.
The senior unsecured debt ratings are driven by the same rationale as the Viability Ratings.
SUPPORT RATING AND SUPPORT RATING FLOOR FOR HBL

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The Support Rating and Support Rating Floor of HBL reflect Fitch's view that while support for the group
from the New Zealand sovereign is possible, it cannot be relied on. We believe the group's small size and
the existence of the open bank resolution scheme lowers the propensity of the sovereign to support its
banks. The scheme allows for the imposition of losses on depositors and senior debt holders to recapitalise
a failed institution.
HAG
HAG's IDRs are driven by institutional support from its parent, HGL, which fully owns HAG. We believe
HAG, which holds the group's Australia business, is a strategically important part of HGL and has strong
management synergies with the parent and benefits from being part of the wider group.
HAG's IDR is notched down once from the parent to reflect our view that while HAG is important to the
group, its small size means that it is not a key and integral part of the business. HAG's Support Rating of '2'
reflects Fitch's view that there is high probability of support from HGL.
RATING SENSITIVITIES
IDRS AND VIABILITY RATING FOR HGL and HBL
The IDRs and Viability Rating of HGL and HBL are sensitive to a change in Fitch's assessment of the
group's risk appetite. Aggressive expansion by the group into new or existing market segments that
compromise its risk-management practices would be negative for the ratings. Looser underwriting or
sustaining a more aggressive growth strategy over a long 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 franchise were to strengthen significantly
relative to peers, which is not probable without increasing its risk appetite. Fitch expects HGL's ratings to
remain equalised with those of HBL over the next two years. However, bottom-up analysis of the group will
be required for HGL's ratings should HAG become a more material part of the group.
SUPPORT RATING AND SUPPORT RATING FLOOR FOR HBL
The Support Rating and Support Rating Floor of HBL are sensitive to any change in assumptions around
the propensity or ability of the New Zealand government to provide timely support.
HAG
Any change in the propensity or ability of HGL to provide support to HAG is likely to result in changes to
HAG's IDRs and Support Rating.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG
issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the
way in which they are being managed by the entity.
For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com

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FITCH RATINGS ANALYSTS
Primary Rating Analyst
George Hong
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
Leslie Tan
Singapore
+65 6796 7234
leslie.tan@thefitchgroup.com
Peter Hoflich
Singapore
+65 6796 7229
peter.hoflich@thefitchgroup.com
Applicable Criteria
Non-Bank Financial Institutions Rating Criteria (pub. 12 Oct 2018)
Bank Rating Criteria (pub. 12 Oct 2018)
Short-Term Ratings Criteria (pub. 02 May 2019)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
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