Heartland Group Holdings Ltd (ASX:HGH) (FY 2026) Earnings Call Highlights: Underlying NPAT ...

Negative Points

• Operating expenses increased by $12.2 million, driven by technology investments, staff costs, and growth-related expenses, though cost-to-income ratio improved.

• Gross yields declined by 91 basis points in New Zealand due to intensified pricing competition and soft credit demand, partially offset by lower funding costs.

• Business finance receivables in New Zealand reduced by 18.1% to $639 million, reflecting continued focus on asset quality and subdued market conditions in construction and transport.

• The Australian livestock portfolio saw a marginal retraction in receivables, down 1.7% to $250 million, due to higher trading velocity.

• The accounting change for reverse mortgage commissions in Australia resulted in a $6.6 million one-off adjustment, reducing NIM by 7 basis points.

• FY 2027 NIM is expected to contract by about 13 basis points in Australia due to competitive pressure and higher term deposit rollover rates.

• The proposed TSB merger remains conditional, with uncertainties including trustee approval, shareholder approval, and regulatory approvals, and transaction costs have been incurred.

Q & A Highlights

Q: What are Heartland Group's key financial results and guidance for FY2026 and FY2027? A: Andrew Dixson, CEO, reported underlying net profit after tax (NPAT) of $90.4 million for FY2026, up from $46.9 million in FY2025, with underlying return on equity up 286 basis points to 7.3%. The group met all underlying guidance metrics. For FY2027, the company targets a return on equity of at least 7.5% and NPAT of at least $102 million, excluding any costs related to the proposed TSB merger.

Q: Can you provide an update on the proposed merger between Heartland Bank and TSB? A: Andrew Dixson, CEO, confirmed the conditional agreement to acquire TSB for $620 million and merge it with Heartland Bank to create TSB Heartland Bank, a New Zealand challenger bank with a regional focus. The transaction remains conditional on Toy Foundation trustee approval, Heartland shareholder approval, and regulatory approvals. The company is targeting completion in December, subject to these conditions being satisfied.

Q: What drove the significant improvement in asset quality and reduction in non-performing loans? A: Leanne Lazarus, CEO of Heartland Bank New Zealand, highlighted that the bank significantly improved the quality of its motor finance portfolio, clearing all arrears greater than 180 days past due, and accelerated the exit of non-strategic assets (NSAs). This resulted in the strongest non-performing loan position since 2017, with the NPL ratio down 129 basis points to 1.92%. The impairment expense ratio also reduced by 55 basis points to 0.45%.

Q: What is the outlook for net interest margin (NIM) in FY2027 for both the New Zealand and Australian banks? A: Kerry Conway, CFO, stated that the New Zealand Bank's NIM is expected to remain steady at about 4.05%. For Heartland Bank Australia, excluding the impact of an accounting change, NIM is expected to contract by about 13 basis points to around 3.68%, driven by competitive pressure on reverse mortgage pricing and margin compression from higher term deposit rollover rates.

Q: How is the technology transformation program progressing in both countries? A: Leanne Lazarus (NZ CEO) noted the initial PEGA capability went live in June 2026 for reverse mortgages, with $3.3 million invested in FY2026. Michelle Winzer (Australia CEO) reported that the first phase of reverse mortgage origination went live on the Constantinople platform in July 2026, with approximately 40% of new volumes processed through it. Both programs are on schedule and within budget.

Q: What is the status of the non-strategic asset (NSA) realization program? A: Andrew Dixson, CEO, announced the NSA realization program has successfully concluded. The total value of NSAs reduced by $374 million from December 2024 to June 2026, with a 94% recovery rate, creating $42 million of available capital. The residual portfolio of $94 million is no longer considered material and will be managed as business-as-usual.

Q: Can you explain the change in accounting for reverse mortgage commissions in Australia? A: Kerry Conway, CFO, explained that Heartland Bank Australia now includes both upfront and trail commissions as part of the fair value of reverse mortgage loans, releasing the cost as contra income over the loan's life rather than expensing it immediately. This aligns with major banks and resulted in a $6.6 million pre-tax adjustment, a 7 basis point reduction in NIM, and a 392 basis point improvement in the cost-to-income ratio.

Q: What are the growth targets for the reverse mortgage portfolios in FY2027? A: Andrew Dixson, CEO, stated that the group targets reverse mortgage growth of greater than 18% in both New Zealand and Australia for FY2027. In FY2026, the New Zealand portfolio grew 16.8% to $1.44 billion, while the Australian portfolio grew 19.7% to $2.37 billion, with Heartland capturing 55% of new business market share in Australia.

Q: How has the capital position of the group strengthened, and what are the implications? A: Andrew Dixson, CEO, highlighted that the RBNZ reduced Heartland Bank's transitional capital overlay from 2% to 0.5%, reflecting completed integration activities and an improved risk profile. The group enters FY2027 with considerable excess capital, which is expected to grow with the implementation of new RBNZ capital settings. This provides flexibility to support scale, growth, and improved shareholder returns.

Q: What is the rationale behind the increased final dividend and the payout ratio? A: Andrew Dixson, CEO, announced a final dividend of $0.035 per share, up $0.015 on FY2025. Due to Heartland's strong capital position, the dividend payout ratio of 73% considerably exceeds the target of at least 50% of underlying NPAT. The Dividend Reinvestment Plan (DRP) will not apply to the final dividend.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .