Don’t call us, we’ll call you ‒ Heartland Bank

Wednesday, 30 August 2023

It’s not that Heartland Bank doesn’t want to talk to customers. It just doesn’t want customers to be calling up on the phone.

Heartland Bank is aiming to become a complete “self-serve” bank which receives zero calls from customers.

The owner of Heartland Bank revealed its self-service ambitions on Tuesday when it announced a modest increase in after-tax profit rose despite a boom in reverse mortgage and car finance lending.

The Heartland Group, with operations in New Zealand and Australia, reported an after-tax profit increase of 0.8% to $95.9 million as the challenger bank saw its margins contract during the year to June 30.

Heartland Bank’s New Zealand chief executive Leanne Lazarus says: ‘We do not want to be a mini version of a big bank’.

The bank specialises in reverse mortgages, which let older people borrow against the value of their homes to supplement their retirement income, though it is also active in the small business and vehicle finance lending sectors.

The reverse loans proved particularly popular in Australia, where Heartland’s lending increased by just under 21%. In New Zealand, its reverse mortgage business increased by 23%.

Heartland made another $167m of reverse mortgage loans in New Zealand during the year, and $264m in Australia, taking its total number of reverse loans up to 48,000, with 22,000 of them in New Zealand.

The bank expects demand for reverse mortgages, which are increasingly used by older people to refinance high-cost credit card and personal loan debt, to continue as the average ages of the populations of New Zealand and Australia continue to increase.

Heartland Bank’s New Zealand motor finance lending increased by 13.5%, but it had “subdued” demand for home loans.

Chief executive Leanne Lazarus said the bank was investing in digitising its basic banking services to “enable customers to self-serve via the Heartland Mobile App” to slash in-bound calls for “mundane” activities.

“Heartland’s ambition is to reduce inbound customer call volumes by approximately 73% by June 30, 2025, by developing mobile app self-service features to address the top reasons for inbound calls,” the bank’s investor presentation said.

Lazarus said digitising was also something customers wanted, because they didn’t like calling banks.

“There are long wait times. If you can help yourself, it’s much easier,” she said.

Heartland has only four branches, and has pursued a digital-first growth strategy, so it had a customer-base that was digitally capable.

Bank after bank has reported increased interest income as households have had to spend more of their money on debt repayment, as the Reserve Bank Te Pūtea Matua lifted official interest rates in a bid to bring down inflation.

Rising interest rates saw the net interest Heartland earned on its loans rise 12.7% to $282m as borrowers paid more for their loans.

Heartland’s New Zealand reverse mortgages come with a variable interest rate of 9.75%, but as borrowers are not required to make any repayments until they sell their homes, their debt compounds eroding the equity they own in their homes.

That compounding rate was just over 16% in the past year on Heartland Bank’s reverse home loans, but the bank defended the interest it charges saying it costs more for a bank to fund reverse mortgages than traditional mortgages, and reverse mortgage lending brings risks ordinary home loans do not.

Heartland Bank’s only major challenger in the reverse mortgage market is fellow small bank SBS, which charges an interest rate of 9.75% on its Unwind reverse mortgages.

Heartland Bank is the eighth-largest retail bank in New Zealand, according to KPMG’s analysis, ahead of The Cooperative Bank, but behind the big five of ANZ, ASB, Bank of New Zealand, Kiwibank and Westpac, and also smaller than SBS and TSB.

KPMG scores Heartland high on some profitability measures, including the margins it earns on its loans, but it also has a higher level of defaults on its loans.

Lazarus said Heartland was focused on reducing the risk-profile of its lending.

It had changed its lending strategy for rural loans to bring down its risk, and it had stopped “actively” seeking to make new personal loans.

The Heartland Group is in the process of expanding its operations through the purchase for almost $40m of the Australian Challenger Bank, but that will not affect the operations of its New Zealand banking operation.