Heritage gets back to basics

Heritage Building Society yesterday reported strong growth in earnings for the 2008/09 year, despite being constrained by funding problems that resulted in modest asset growth of less than three per cent.

The country's biggest building society made a net profit of $25.5 million for the year to June, up 24.6 per cent on the previous year.

Assets grew 2.8 per cent to $7.1 billion. The group has had to adjust to a significant change in its funding mix over the past year.

Heritage chief executive John Minz said that a year ago 48 per cent of the group's funding was off balance sheet. At the end of June it had come down to 38 per cent.

Minz said the proportion of off balance sheet funding would come down to around 30 per cent by the end of the current year.

Heritage issued a $400 million government-guaranteed note in July. Minz said he would continue to look for such opportunities because it lengthened the maturity of the group's liabilities.

He said: "Most depositors like to place their money on quite short terms."

His view is that there is no opportunity to expand the business through securitisation.

"Funding will come through retail deposits and tapping into the wholesale deposit market. What we are about now is developing a very good mutual proposition so we can attract more members."

Retail deposits were up $558 million, an increase of 20.8 per cent.

A significant part of that inflow was low-cost deposits, which helped the group's margin. Another factor that contributed to the 24 per cent increase in profit was a reduction in broker fees.

Heritage established its own exchange settlement account with the Reserve Bank, which helped make its paper more attractive to the market and helped improve its margins.

Arrears were low. Loan repayments overdue 30 days or more were 0.29 per cent.

Minz said: "What we wrote off was the same as the previous year."

A focus for the group will be to get better performance from its expanded branch network. Eighteen months ago Heritage completed an investment program when it added 18 branches, taking the total to 59.

"We filled the gaps in our coverage. Now we have to leverage that investment. We plan to sell more insurance.  

"We have launched a financial planning and superannuation service in a joint venture with a Queensland planning group.

"We have put agribusiness finance in the mix and we are doing more SME finance."

SME loan approvals were up 47 per cent last year, although business lending is still a very small part of the total book.

Minz hopes to see the government guarantee withdrawn during the coming year. "It has allowed our competition to tap into a source of funding where we have been limited.

"The 1.5 per cent we have to pay on top of our issue margin is punitive."