Heartland Faces Execution Risks Despite Strong Capital and Profit Turnaround

Strong Profit Turnaround

Heartland Group Holdings Limited (NZX/ASX: HGH) has delivered a notable turnaround in profitability for the six months ended 31 December 2025, reporting an underlying net profit after tax (NPAT) of NZD 46.1 million. This marks a significant improvement from the prior comparable period, supported by a 51 basis point expansion in net interest margin (NIM) to 3.92% and enhanced asset quality metrics.

The group’s underlying return on equity (ROE) climbed 540 basis points to 7.3%, reflecting improved operational efficiency and disciplined portfolio management. Heartland affirmed its full-year 2026 guidance, targeting an underlying ROE of at least 7% and NPAT of at least NZD 85 million.

Growth in Core Lending and Asset Quality

Heartland’s growth was underpinned by strong performance in Reverse Mortgages, with gross finance receivables rising 15.2% in New Zealand and 18.9% in Australia. This growth was complemented by steady momentum in the Rural portfolio and solid advances in Australian Livestock Finance.

Conversely, the group strategically retracted Motor Finance receivables by 4.8%, focusing on higher quality used and franchise vehicles, which contributed to significantly improved asset quality. Business Finance receivables contracted amid challenging economic conditions but entered the second half of FY2026 with a promising growth pipeline.

Capital Position Strengthened by Regulatory Changes and Asset Realisation

Heartland’s capital position has been bolstered by accelerated realisation of non-strategic assets (NSAs), achieving a recovery rate exceeding 90%, and recent Reserve Bank of New Zealand (RBNZ) decisions that reduced capital requirements. As of 31 December 2025, the group holds approximately NZD 125 million in regulatory capital excess, potentially rising to NZD 190 million after applying expected risk weight changes.

The RBNZ’s capital relief includes reductions in Tier 1 and total capital ratio requirements and removal of Additional Tier 1 capital instruments, enhancing Heartland’s capacity for organic growth.

Technology Investments to Drive Future Growth

Heartland is investing up to NZD 17 million over three years in technology programmes to modernise and simplify its banking platforms in both New Zealand and Australia. These initiatives involve AI-enabled, cloud-based platforms designed to unify origination and servicing activities, increase automation, and improve customer and employee experiences.

Heartland Bank New Zealand has partnered with Pega to integrate with its upgraded core banking system, while Heartland Bank Australia is consolidating three platforms into a single solution with Constantinople. These investments aim to position both banks for scalable growth and operational efficiency.

Dividend and Outlook

Reflecting its strong performance and capital position, Heartland declared an interim dividend of 3.5 cents per share, up 1.5 cents from the prior year, with a payout ratio of 72% of underlying NPAT. The group will hold an investor day on 5 June 2026 to outline its longer-term strategy and financial ambitions.

While Heartland’s technology investments and regulatory capital relief provide a solid foundation, the group remains cautious about economic headwinds affecting business lending and competitive pressures on pricing.