HEARTLAND GROUP HOLDINGS LIMITED
Fitch Ratings has revised the Outlook on the Long-Term Issuer Default Ratings (IDRs) of
The Outlook of another subsidiary,
Fitch has also affirmed the Long-Term IDRs of HGL and HBL at 'BBB' and the Long-Term IDR of HAG at 'BBB-'.
Key Rating Drivers
Outlooks Revised to Stable: Fitch believes the acquisition of
Holdco Ratings Equalised: HGL's VR is equalised with the VR of HBL, which reflects our view that the failure risk of HGL is the same as that of HBL. This considers HGL's simple balance-sheet structure and our expectation for double leverage to be maintained below 120%. HGL's IDRs are driven by and equalised with HBL's VR, in line with Fitch's Bank Rating Criteria.
VR Underpins Bank IDRs: The Long-Term IDRs of HBL are driven by its VR of 'bbb'. HBL's VR is one notch below the implied VR of 'bbb+' because of higher exposure to riskier lending types compared with other domestic peers, which we believe increases the likelihood of earnings and capitalisation volatility through the cycle.
Revision of OE Score: Fitch has upgraded the operating environment (OE) score to 'a+' for HBL to reflect the pending restructure and closing of the CBL acquisition. We believe the Australian operations will continue its growth and remain above 25% of total group assets, which has resulted in a weighted-average approach for the OE assessment. The OE score is below the implied 'aa' category score to reflect high household debt in
We expect low economic growth and a modest rise in unemployment in
Business Model Supports Earnings: HGL is a trans-
Risk Profile Above Peers: The niche markets targeted by HBL typically have a higher risk profile than the residential mortgages that are the focus of most
Further Asset-Quality Deterioration: We expect HBL's stage 3 loans/gross loan ratio to increase moderately for the remainder of 2024 as the full impact of interest-rate increases and a modest uptick in unemployment put more borrowers under stress. However, we expect the ratio to remain below 3% on a sustained basis.
Above-Peer Profitability: HBL's focus on niche markets supports its above-peer profitability metrics, underpinning the 'a-' factor score. We expect this to remain the case in the longer term, although earnings and profitability in the financial year ending
Capitalisation to Steadily Increase: We believe management will continuing to work towards lifting HBL's common equity Tier 1 (CET1) ratio towards the 14% minimum in 2028 to meet regulatory capital requirements in
Funding Profile to Improve: Fitch expects HBL's loan-to-deposit ratio to improve in the longer term as deposits become a larger part of the funding mix. The addition of an Australian banking license will allow the group to gather retail deposits in Australian and reduce its wholesale funding reliance.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The VRs and Long-Term IDRs of HBL and HGL could be downgraded should Fitch observe a substantial increase in HBL's risk profile, possibly in an effort to improve its market position, resulting in significant deterioration of its financial profile during an economic downturn. A combination of the following at HBL would be likely to result in a downgrade:
the four-year average of stage 3 loans/gross loans increasing above 4% on a sustained basis;
the four-year average of operating profit/risk-weighted asset ratio falling below 1% on a sustained basis;
the CET1 ratio declining below 10.5% without a clear path to return above this level;
the four-year average of the group's loan/deposits ratio increasing above 175% on a sustained basis.
The Long-Term IDRs of HGL may also be downgraded if it were to maintain common equity double leverage above 120%, although we do not expect this to occur.
The Short-Term IDRs of both entities would only be downgraded if the Long-Term IDRs were downgraded by at least two notches.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade in HBL's and HGL's VRs and Long-Term IDRs would most likely be reflected in a sustained improvement in the group's risk profile without a significant weakening in any other factors. This appears unlikely in the short term.
The Short-Term IDRs would be upgraded to 'F2' if we upgrade the Long-Term IDRs or revise our funding and liquidity factor score to 'bbb+', from 'bbb'. Neither appears likely in the immediate future.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
HBL
Senior Unsecured Instruments
HBL's senior unsecured debt ratings are aligned with the IDRs. This is consistent with the baseline approach outlined in Fitch's Bank Rating Criteria for markets such as
Short-Term IDR
The Short-Term IDRs are at the lower of the two options available at a Long-Term IDR of 'BBB', as the funding and liquidity scores of 'bbb' for HBL are not high enough to support a rating of 'F2'.
Tier 2 Instruments
HBL's subordinated debt is rated two notches below the anchor rating - the VR of HBL. The debt rating is notched twice from the anchor rating for loss severity and zero notches for non-performance risk, as the latter is already adequately reflected in the VR. None of the reasons for alternative notching, as described in the criteria, are present.
HAG
Guaranteed Instruments
These notes are rated one notch below the Long-Term IDR of HGL, the guarantor, in line with Fitch's Non-Bank Financial Institutions Rating Criteria.
Government Support Ratings
The Government Support Ratings (GSRs) of HGL and HBL reflect our view that there is no reasonable assumption that support from the
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
HBL
The senior unsecured debt ratings of HBL will move in line with its IDRs. The subordinated debt ratings will move in line with its VR, or upgraded if any of the reasons for narrower than standard notching, as outlined in the criteria, apply.
HAG
HAG's guaranteed note ratings will move in line with the IDRs of the guarantor, HGL. The ratings may also be upgraded if HGL builds up sufficient bank holding company senior and group junior debt buffers that would support the equalisation of its senior unsecured debt rating with its IDR. However, this appears unlikely in the short term.
GSR
The GSRs of HBL and HGL are already at the lowest level on Fitch's rating scale and cannot be downgraded. An increased propensity of state support would be required for an upgrade of the GSRs, but this appears unlikely given the resolution framework in place.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
HAG's IDRs and Shareholder Support Rating (SSR) are driven by our assessment that HAG is a strategically important subsidiary of HBL, HAG's most likely support provider following the restructure. HAG is likely to retain a core function in HBL's operations initially, but we envisage its role decreasing over time as new loans and funding are more likely to be originated Australian operating bank level. This is reflected in the one-notch difference in rating from the parent's IDR.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
HAG
HAG's IDRs and SSR will move in line with HBL's ratings, assuming no change in the propensity to support. HAG's IDRs and SSR may also be upgraded if its role within the group increases and it is likely to be maintained as a key and integral part of HBL. Conversely, any factors that might reduce the propensity for parental support could result in a downgrade of the SSR and, therefore, the IDRs.
VR ADJUSTMENTS
HBL
The VR of 'bbb' has been assigned below the 'bbb+' implied score for the following adjustment reason: risk profile (negative).
The OE score of 'a+' has been assigned below the 'aa' category implied score for the following adjustment reason: level and growth of credit (negative).
The business profile score of 'bbb' has been assigned above the 'bb' category implied score for the following adjustment reason: business model (positive).
Sources of Information
The principal sources of information used in the analysis are described in the applicable criteria.
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
HAG's IDR is linked to the IDR of its parent and the likely support provider, HBL. The senior debt ratings of the guaranteed notes issued by HAG are linked to the IDR of HGL.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
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