«Investment Statement (Updated 10 December 2014) IMPORTANT INFORMATION (The information in this section is required under the Securities Act 1978) ...»
Credit Risk is the risk that the other party to a financial instrument will fail to discharge their obligation resulting in HBS incurring a financial loss. This usually occurs when borrowers fail to settle their obligations owing to HBS.
All loan applications are subject to careful assessment by HBS and once approved in accordance with HBS’s credit approval policy, all loans are managed and reviewed on an on-going basis. Regular reports are prepared to monitor loan repayments in order to detect delays in repayments early and recovery action is undertaken promptly where appropriate.
HBS has a lending policy that requires lending to always be secured by a first-ranking mortgage security over real property. The risk of losses from the loans undertaken is primarily reduced by the nature and quality of the security taken. HBS can enforce the security by disposing of the secured assets in the event of default.
Loans are made within defined loan-to-value and repayment-to-income ratios. HBS maintains a maximum loan to value ratio of 80% for lending on residential-based security, 60% for lending on commercial-based security
HBS restricts its exposure to any one borrower or group of closely-related borrowers and maintains capital reserves as required by its Trust Deed. These reserves provide a financial buffer to absorb any losses that may be incurred from lending money to customers. As at the date of this Investment Statement, HBS has a concentration of credit risk in one bank loan, with a carrying value totalling $590,861, or 11.35% of HBS's total equity. This loan also exceeds HBS's maximum loan to value ratio by 15%. However, HBS is satisfied that the value of the security that it holds for the loan is more than the value of the loan.
The total loans and advances made by HBS and term investments received by HBS from time to time are set out in the audited financial statements of HBS filed with the Registrar of Companies.
Bank Deposits and Investment Securities HBS's policy is to place its investments either with New Zealand registered banks or other approved entities which carry an investment grade or better credit rating.
The risk of losses from the liquid movements undertaken is reduced by the nature and quality of the independent rating of the investee and the limits to concentration on one entity.
Exposure to the Property Market:
HBS lends to borrowers based on first-ranking mortgage security over residential, commercial and rural properties situated only in New Zealand. HBS's lending is predominantly residential in nature (around 71%) and predominantly secured by properties located in the Hawkes Bay region (with a smaller number of properties located in Taupo, Wellington and other New Zealand locations). Because HBS is heavily exposed to the New Zealand property market, any deterioration in the New Zealand property market could adversely affect the value of properties and may also impact the ability of HBS’s borrowers to repay their loans. This risk is heightened where deterioration occurs in a sector of the property market in which HBS has a concentration of security (such as Hawkes Bay). HBS manages its exposure to the property market through on-going management of loans and ensuring that adequate loan to value ratios are maintained.
Interest Margin Risk:
Interest margin risk is the risk that interest rates will change, thereby increasing or decreasing the cost of borrowing or lending. HBS is exposed to this risk, as its profitability depends on maintaining an appropriate margin between the cost of funds it raises from the public and the interest it receives from borrowers. To mitigate interest margin risk, interest margins are constantly managed and monitored by the HBS.
Economic Downturn Risk:
HBS’s business plan is premised on a reasonably stable New Zealand economy. There is no assurance that such stability will continue and any downturn could adversely affect HBS’s future trading.
Liquidity and Reinvestment Risk:
Liquidity risk is the risk that HBS will encounter difficulty in meeting its commitments. These commitments include repayment of redeemable shares as they mature and interest as it falls due. HBS actively manages the maturity profile of its assets and liabilities, ensuring that there are sufficient funds available to meet its financial obligations as they fall due. On a day-to-day operational basis, HBS is reliant on investment rollovers and new investments to meet its financial commitments. HBS aims to maintain consistent reinvestment rates and new investment inflows for its retail funding to meet its financial commitments. In the ordinary course of business, HBS's re-investment rates are high (95% as at 31 March 2014). If there was to be a significant reduction in reinvestment rates or new investment, HBS would have available to it Westpac undrawn banking facilities totalling up to $700,000.
HBS's Trust Deed prescribes that:
Liquid Assets are to be maintained at a minimum of 15% of Total Tangible Assets less Reserves: and A liquidity mismatch ratio be maintained with Total Liquid Assets not to be less than 115% of the difference between the aggregate amount due to the Society and aggregate amount payable to the security holders(during the following three months and based on various calculations) Liquidity levels are significantly higher than the prescribed minimum of 15% and HBS monitors its liquidity on a daily basis.
In respect of its retail funding, HBS seeks to maintain consistent reinvestment rates and new deposit inflows in order to meet its financial obligations and continue to grow its business. If there was to be any significant 6 reduction in reinvestment rates or new investment inflows, it could (depending on the extent of the reduction) adversely affect HBS's ability to source cost-effective funding (and so adversely affect the financial performance and financial condition of HBS) and ultimately significantly increase the liquidity risk of HBS.
Further detailed information relating to HBS’s liquidity risk can be found in HBS’s latest Annual Report available at www.heretaungabuildingsociety.co.nz.
Consequences of Insolvency:
If HBS was placed in liquidation or became insolvent, the value of its assets may not be sufficient for investors to recover the full value of their original investment. In liquidation or insolvency, claims by redeemable shareholders (depositors) will rank equally with other redeemable shareholders in HBS, and behind unsecured creditors of HBS and those creditors given priority by law. In the event that HBS becomes insolvent, investors will have no additional liability to HBS or to any person whatsoever.
As is the case with other non bank deposit-taking institutions, HBS is subject to regulation by the Reserve Bank, with respect to anti money laundering and counter financing of terrorism, liquidity, governance, minimum capital requirements, restrictions on related party transactions and the requirement to develop and comply with risk management programmes appropriate for the size of the financial institution.
The Board of HBS is confident that each of these compliance requirements are being and will continue to be met by HBS. HBS's risk management programme has been reviewed and approved by HBS’s Trustee in accordance with the requirements of the Reserve Bank Act/NBDTA.
Credit Rating Exemption:
The regulations governing non-bank deposit takers also require every deposit taker (unless otherwise exempted), including building societies, to have a current rating of its creditworthiness given by an approved rating agency.
Credit ratings are alphabetical indicators of the confidence which investors can have in a financial institution's ability to pay back (in full and on time) all the money invested with that institution. In HBS's case, this is the funds its investors have invested with it. Credit ratings are based on detailed research and analysis, which takes into account the financial history and current financial position of the institution. The benefits of credit ratings are that they are widely available, are a simple measure of risk, and allow easy comparison of institutions. They are however, statements of opinion, not statements of fact or recommendations to buy, hold or sell any securities.
HBS is not required to obtain a credit rating, as it operates under the exemption contained in the Deposit Takers (Credit Ratings Minimum Threshold) Exemption Notice 2009. The creditworthiness of HBS is therefore not rated by an approved rating agency under the Reserve Bank Act or NBDTA. The Exemption Notice applies to HBS because it has liabilities of less than $20 million and it would therefore be unduly onerous and burdensome for HBS to comply with the requirement to have a credit rating.
The exemption is conditional on HBS providing to the Reserve Bank annually prior to March in each year a statement from the HBS directors that HBS meets the requirements of the exemption and that HBS will be operating on the basis of the exemption for that forthcoming year. Figures supporting the directors’ statement must be attached to this statement.
As at the date of this Investment Statement, HBS complies with the requirements of the Deposit Takers (Credit Ratings Minimum Threshold) Exemption Notice 2009.
Operational Risks - can arise from inadequate or failed internal processes, people and systems employed by HBS and could expose HBS to potential financial or reputational damage;
Risk of Loss of Key Personnel - the loss of key personnel could make it difficult for HBS to execute its business strategies and may adversely affect HBS’s business until sufficient replacement personnel are employed. Key personnel risk is mitigated by training and rewarding staff to retain them and by attracting high quality new staff through employer branding;
Technology Risks - HBS is reliant on its information technology and other systems in order to operate its business. Any failure of such systems could adversely affect HBS’s ability to operate its business.
Competition Risks - the finance sector is highly competitive and, in the event that HBS is unable to provide competitive products or services, this may have a material adverse affect on HBS’s financial performance. HBS mitigates this risk by continually reviewing competition and anticipating competition pressures and, where possible, evaluating its product range and pursuing new profitable business opportunities when available;
Regulatory and Legislative Risks - could arise if there are substantial changes in law and governmental policies affecting HBS’s business. The commercial impacts of law changes are often not apparent for some time after their introduction;
Tax Rate Risk - could arise if an investor advises HBS of the incorrect tax rate for deducting Resident or Non-Resident Withholding Tax, or if an investor has not advised HBS of a change in his or her applicable tax rate. This could result in HBS either over or underpaying tax on the investor's behalf and the investor will be liable to pay any shortfall to the Inland Revenue Department.
The above risks are inherent in financial institutions, and HBS could not function without assuming these risks in varying degrees. HBS attempts to mitigate and carefully manage all the risks to which it is exposed, and is required by the terms of the Trust Deed to operate within a set of prudential financial ratios, which restrict the maximum risk positions it can assume.
However, if HBS was unable to recover a substantial portion of the secured advances it has made to its borrowers due to extreme changes in the economy or if other adverse factors caused an extensive reduction in the value of its securities (which impacts widely on the financial condition of its borrowers) and HBS’s capital was insufficient to absorb the resulting losses, then HBS may become insolvent or be liquidated and investors may not recover all of their investment and/or the expected returns.
Can the investment be altered?
The Board of HBS may vary the call deposit interest rate at any time without notice.
Once a term deposit investment is made, its terms, including the fixed investment term and fixed interest rate, cannot generally be altered. However, you may request early repayment of the term deposit if your personal needs change or if circumstances arise that were not foreseen by you at the time you made the investment.
HBS will consider such requests at its complete discretion. If HBS agrees to early repayment of your term deposit, HBS may reduce the interest rate payable on your term deposit. The reduced interest rate will reflect, as closely as possible, the interest rate that would have been applicable to your investment had you only invested for that shorter period (up until the time of early withdrawal).
The Board of HBS may vary any interest rates applicable to deposits at any time without notice, however any change in interest rates will not apply to any deposits made before the date of the change which have a fixed rate of interest.
The directors of HBS also reserve the right to repay (subject to 14 days' notice) all or any term deposits at any time.
How do I cash in my investment?
In general, investors may withdraw money from a call investment at any time. Withdrawal methods include in person at the HBS Branch or providing written instruction.
withdraw your investment in cash or by cheque; or have your investment transferred to a nominated bank account; or reinvest your investment for a further term (either in the same product or a different product).
You will be contacted by mail prior to maturity of your term investment. The investment will be reinvested for a similar term as previous term, unless alternative instructions are received by the maturity date.
Early repayment of your Term Investment: