Fitch affirms long-term rating of Heartland

NZX/ASX Release

Fitch affirms long-term rating of Heartland

19 May 2020

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 remain Stable.

The affirmation reflects Fitch’s view that the bank has solid buffers to withstand its base-case scenario
and the stable outlook indicates the bank enters the economic downturn with sufficient headroom in
its key financial metrics.

In its attached press release, Fitch noted that “the ratings of [Heartland Group] and [Heartland Bank]
are driven by the group’s consolidated risk profile, which reflect its stronger-than-peer profitability”.
A number of other New Zealand financial institutions have either had their rating downgraded, or their
outlook revised from stable to negative, by Fitch. Heartland is pleased with this recognition which it
attributes to its differentiated strategy, higher relative margin on resilient asset portfolios and strong
cost management through delivery of products to its customers by lower cost digital platforms.

- Ends -

For further information, please contact:

Andrew Dixson
Chief Financial Officer
M: 021 263 2666
E: andrew.dixson@heartland.co.nz


Address:
Level 3, Heartland House
35 Teed Street
Newmarket, Auckland
New Zealand

18 May 2020Affirmation
Fitch Affirms Heartland at 'BBB'; Outlook Stable
Fitch Ratings-Sydney-18 May 2020:
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 Outlook is Stable.
The affirmation reflects our view that the bank has solid buffers to withstand our base-case
scenario at its current rating level. The Stable Outlook indicates that the bank enters the economic
downturn with sufficient headroom in its key financial metrics to remain broadly consistent with its
Viability Ratings of 'bbb'.
Key Rating Drivers
IDRS, VIABILITY RATING AND SENIOR DEBT RATING FOR HGL AND HBL
The ratings of HGL and HBL are driven by the group's consolidated risk profile, which reflect its
stronger-than-peer profitability and higher risk appetite. We expect the coronavirus pandemic to
significantly damage New Zealand's economy and weaken the group's asset quality and
profitability over the next two years.
As part of this rating action, Fitch has revised the outlook on the 'a' operating environment score
for New Zealand banks to negative, from stable, to reflect the significant downside risk posed by
the measures undertaken to slow the spread of the pandemic. We are likely to revise this outlook
to stable if our base case of a recovery starting in 2H20 eventuates. However, an outcome that is
significantly weaker than our base case would see a lowering of the score to 'a-'.
A sharp rise in the unemployment rate in New Zealand would be likely to substantially increase
non-performing loans and cause material deterioration in the asset quality and profitability of HGL
and HBL. As a result, Fitch has revised the factor outlook for asset quality (factor score of 'bbb+')
and earnings and profitability (factor score of 'a-') to negative, from stable.
We expect asset quality to weaken in late 2020 or early 2021, once repayment holidays end, as
there will be a portion of businesses and households that will be unable to resume repayments
despite the high level of support from the government. The bank's exposure to business lending is

higher than that of peers, which could make it more vulnerable to the economic shock.
Profitability has been stronger than that of peers, benefiting from a higher margin and strong cost
management. Nevertheless, we believe low interest rates and a significant rise in impairment
charges will weigh on profitability over the next two years. Credit growth may remain above the
system in the next two years, possibly driven by the bank's reverse mortgage portfolio. This could
offset some of the profitability pressure, however, the negative factor outlook reflects the
possibility of credit costs exceeding our expectation.
HBL's capital position should remain sound in the next two years, although buffers may contract
due to the deterioration in profitability. We believe the Reserve Bank of New Zealand's
requirement to suspend dividend payments could partly offset the pressure from deterioration in
asset quality and internal capital generation. We expect HBL to maintain a common equity Tier 1
(CET1) ratio that is consistent with the current score of 'bbb+'.
HGL's funding profile is weaker than that of domestic peers of similar size, reflecting the group's
higher reliance on wholesale funding, which we believe will continue. Strong support from the
central bank has mitigated short-term liquidity pressure on the bank. We believe the bank has the
ability to attract more deposits, if required, benefiting from its strong margin.
SUPPORT RATING AND SUPPORT RATING FLOOR FOR HBL
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's IDR 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 reflects Fitch's view that there is high probability of support from HGL, if
required.

RATING SENSITIVITIES
IDRS, VIABILITY RATING AND SENIOR DEBT RATING FOR HGL AND HBL
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
The IDRs, Viability Rating and senior debt ratings of HGL and HBL could be downgraded should the
bank substantially increase its risk appetite, possibly in an effort to improve the franchise, resulting
in significant deterioration of its financial profile during an economic downturn, including:
- Stage 3 loans/gross loans of HGL increasing above 4% for a sustained period;
- operating profit/risk-weighted assets of HBL falling below 1% for a sustained period; or
- the common equity Tier 1 ratio of HBL declining below 10.5% without a credible plan to replenish
regulatory capital buffers.
A downgrade of the operating environment score to 'a-' is unlikely to be sufficient by itself to result
in a downgrade of the ratings.
The Short-Term IDRs would only be downgraded if the Viability Rating were to be downgraded by
at least two notches.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Positive rating action is unlikely in the short-term given the challenges from the economic
recession as a result of the coronavirus. It would also require a substantial improvement in the
bank's franchise, an improved funding profile and no compromise in risk appetite.
The Short-Term IDRs may be upgraded to 'F2' if we revised our funding factor score to 'bbb+', from
the current 'bbb'. This would require that HGL consistently maintain a loan/deposit ratio of less
than 110%.
Fitch expects HGL's ratings to remain equalised with those of HBL in the short to medium term.
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
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
The Support Rating and Support Rating Floor are already at the lowest level on Fitch's rating scale
and cannot be downgraded further.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
The Support Rating and Support Rating Floor are sensitive to any change in assumptions around
the propensity or ability of the New Zealand government to provide timely support. An increased
propensity to support would be required for an upgrade, but appears unlikely given the resolution
framework in place.
HAG
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Weakening in the propensity or ability of HGL to provide support to HAG is likely to result in
lowering of HAG's IDRs and Support Rating.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
An upgrade of HGL's IDR could be reflected in the rating of HAG.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade
scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of
three notches over a three-year rating horizon; and a worst-case rating downgrade scenario
(defined as the 99th percentile of rating transitions, measured in a negative direction) of four
notches over three years. The complete span of best- and worst-case scenario credit ratings for all
rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based
on historical performance. For more information about the methodology used to determine
sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/
re/10111579.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The ratings of HAG are linked to the ratings of HGL.
ESG Considerations

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or
to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG
Relevance Scores, visit www.fitchratings.com/esg.
Heartland Australia Group Pty Ltd; Long Term Issuer Default Rating; Affirmed; BBB-; RO:Sta
; Short Term Issuer Default Rating; Affirmed; F3
; Support Rating; Affirmed; 2
Heartland Group Holdings Limited; Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta
; Short Term Issuer Default Rating; Affirmed; F3
; Local Currency Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta
; Local Currency Short Term Issuer Default Rating; Affirmed; F3
; Viability Rating; Affirmed; bbb
Heartland Bank Limited; Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta
; Short Term Issuer Default Rating; Affirmed; F3
; Local Currency Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta
; Local Currency Short Term Issuer Default Rating; Affirmed; F3
; Viability Rating; Affirmed; bbb
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF
----senior unsecured; Long Term Rating; Affirmed; BBB
----senior unsecured; Short Term Rating; Affirmed; F3
Contacts:
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 Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email:
peter.hoflich@thefitchgroup.com
Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com
Additional information is available on www.fitchratings.com
Applicable Criteria
Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity)
Non-Bank Financial Institutions Rating Criteria (pub. 28 Feb 2020) (including rating assumption
sensitivity)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Status
Endorsement Policy
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