Heritage Bank moderately optimistic after a bumper financial year

  • By Zilla Efrat

Toowoomba-based mutual Heritage Bank has announced a record pre-tax profit of $64.4 million in the 2020/21 financial year and is moderately optimistic about the current financial year.

CEO Peter Lock says Toowoomba and Queensland have been extremely lucky when it comes to lockdowns and have remained largely immune to the ravages of COVID-19. Plus, there hasn't been a noticeable uptick in hardship requests from recent lockdowns.

Heritage Bank's after-tax profit of $44.81 million was up 23.5 per cent on 2019/20, and just fractionally lower than the record after-tax profit of $45.04 million in 2017/18.

"The emergency measures that the federal government put in place to offset COVID-19 have injected significant amounts of cash into the economy," says Lock.

"With limited travel possible, and with lingering concerns about what COVID meant for the future, many people chose to put more money into savings or pay down their loans."

Lock says many Heritage's members are in advance of their repayments and are repaying their loans more quickly. "That is positive for them but having accelerated payments is tricky for the bank."

He adds: "At the same time, with interest rates at historic lows, investing in property grew in popularity, with real estate markets booming across the country. That has translated into excellent results for us and strong levels of growth."

Looking ahead, Lock says: "The current year will be an exciting one for us because we have announced a proposed merger with People's Choice.

"The merger will immediately give the combined entity a bigger presence in all states. We have a strong presence in southeast Queensland and are moving into NSW through Sydney and northern NSW. People's Choice is strong in South Australia and the Northern Territory but is also pushing into Victoria. It also has a small presence in Western Australia.

"If you put that together, we have most of the map covered, apart from Tasmania and the ACT. That gives us the ability to, with a new brand that will be formed out of the merger, to have a national presence.

"That will also allow us to develop a national brand. That makes it easier to penetrate the broker market and digital market and have a better brand presence and brand recall in the traditional market."

Aside from the merger aside, Lock says Heritage is cautious about a rebound after having Sydney and Melbourne in lockdown for such an extended period. "We are concerned that consumer confidence may have been eroded, although that is not a view shared by the Reserve Bank of Australia, for example. It thinks things will bounce back and once people get out, they will start spending again with reasonable confidence."

He says Heritage has set our 2021/22 budget with moderate optimism. "Those budgets were set before the lockdowns so we are still monitoring them. But our lending flows are really good at the moment.

"The origination volumes are up at record levels. We are having challenges with keeping up with demand and have to adjust our workforce accordingly. We had to put more people on to keep our

service levels up. Our deposit growth and member growth are still really strong so we see 2021/22 as being a good year."

But there are also challenges, especially ongoing pressures on Heritage's net interest margin, resulting from increased repayments on its loan book and its drive to keep rates competitive on its deposit book because most of its members are depositors, not borrowers.

Heritage also faces increased compliance and regulatory costs and complexity in keeping up with new requirements such as open banking, the product disclosure regime and the Anti-Money Laundering and Counter-Terrorism Financing.

Heritage's loan approvals grew by 31.6 per cent to total $2.46 billion for the 2020/21 financial year. Its retail deposits grew by 18.7 per cent to reach $9.38 billion at year's end. Mortgage loan arrears greater than 30 days remained extremely low at 0.45 per cent and its capital adequacy ratio at year's end was 14.28 per cent. The liquidity ratio was 24.3 per cent.