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Heartland says new capital rules won't hurt as predicted

Heartland Group Holdings says the impact of the Reserve Bank’s proposal to raise the amount of capital banks have to hold will have a much smaller impact on it than the market expects.

“At this stage, there is some detail to be clarified and the Reserve Bank is yet to have made any final decisions,” Heartland told NZX.

“Heartland’s tier 1 capital ratio is currently approximately 13.2 percent. If the proposal was to be implemented in its current form, Heartland would be required to lift its tier 1 capital ratio to 15 percent over a five-year transitional period,” it says.

“This equates to an increase in tier 1 capital of less than 0.4 percent, or approximately $15 million, per year, based on Heartland’s current financial position.

Investors have shaved more than $96 million off Heartland’s market capitalisation since the Reserve Bank’s consultation was released on Friday afternoon, its shares falling from $1.52 to $1.35 on Tuesday.

This morning, Heartland shares have risen 5 cents to $1.40.

Bank shares have all been hammered since the consultation paper was released and Macquarie Equities had estimated that Heartland would need an additional $1 billion in capital.

Heartland has recently restructured so that its reverse mortgage business in Australia, which has about A$640 million of assets, will not be subject to the capital requirements, whatever rule changes the Reserve Bank eventually implements.

Heartland says it new corporate structure provides for various capital raising options.

“For example, Heartland Group Holdings could potentially raise debt and use the proceeds to subscribe for new tier 1 capital in Heartland Bank,” it says.

“It is too soon to decide how any future capital requirement would be met but, given the quantum of the requirement and the length of the transition period, and based on Heartland’s forecasts, it would be possible for Heartland to satisfy the requirement using its dividend reinvestment plan.”

It also points out that the Reserve Bank hasn’t made any decisions about tier 2 capital.

“Heartland will monitor its position as it becomes clearer. In the meantime, Heartland does not expect the proposal to result in any changes to Heartland’s underlying business model.”

It does believe the proposal may give rise to increased mergers and acquisitions activity.

“Acquisitions remain a part of Heartland’s growth strategy and Heartland will consider any acquisition which is value accretive.”

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