Margin contraction and slowing loan volumes slapped the brakes on earnings growth at New Zealand-based banking group Heartland in the 12 months to the end of June. Heartland, which is in the process of acquiring Challenger Group’s Australian banking subsidiary, posted an annual net profit of NZ$95.9 million – up 0.7 per cent on the 2022 bottom line. Heartland is best known in Australia as the country’s largest writer of reverse mortgage loans, but is progressively widening its presence in the financial services market to include livestock finance, retail lending and deposit-taking activities. The bulk of Heartland’s revenue continues to flow from its New Zealand businesses where it operates a retail bank, car lending and asset finance arms. Heartland Bank is taking market share from the four big Australian-owned banks in the NZ deposits market. For most of 2023 official data show that it was New Zealand’s fastest growing deposit taker. The NZ deposits book increased by NZ$534 million to $4.13 billion in the 12 month period. The withdrawal of Australia’s four major banks from the reverse mortgage market in the last five years has delivered a material free kick to Heartland. Since 2018, Heartland has grown its reverse mortgage book in Australia at a compound annual rate of 22 per cent and it now accounts for 38 per cent of the market. Heartland’s reverse mortgages are marketed through loan broker groups such as AFG and a swathe of mutual banks under white label agreements. The group’s focus on niche lending segments has consistently delivered it one of the highest net interest margins in the overlapping Australian and New Zealand banking sector.  Heartland’s NIM in the 12 months to the end of June fell 8 basis points to 3.97 per cent, which is around double the net interest margins of the four major banks. However, the sustainability of that differential is about to be tested in the rising rate environment where borrower stress is starting to be reflected in higher arrears and defaults. The company’s impairment expenses rose 11 basis points during 2023 to 0.36 per cent. Heartland said it was no longer actively marketing unsecured personal loans in New Zealand following a deterioration in the credit quality of that book in the last year. The credit profile of the motor finance book also deteriorated as economic conditions worsened in New Zealand. “Arrears have trended upward across the year to 3.95 per cent as at 30 June 2023, however the level of losses remains within cyclical norm,” the company said.  “While rates of unemployment remain low, current provisions factor in an allowance for the potential impact of rising unemployment.” Directors declared a final dividend of NZ6 cents per share.