Heartland Group Holdings FY2025 Earnings: Can Reverse Mortgage Growth Offset Margin Pressures?

Heartland Group Holdings' FY2025 earnings report paints a mixed picture of resilience and vulnerability. While the company's reverse mortgage (RM) segment delivered robust growth in both New Zealand and Australia, it also faced margin compression, rising impairment costs, and regulatory headwinds. The question for investors is whether this high-growth RM business can sustainably offset declining profitability in other areas and mitigate the risks of an increasingly competitive and regulated environment.

Reverse Mortgage Momentum: A Double-Edged Sword

Heartland's RM segment remains its crown jewel. In FY2025, receivables surged by 15.5% in New Zealand ($1.233 billion) and 18.5% in Australia (A$1.98 billion), driven by aging demographics and rising retirement debt. The company's dominance—over 90% of New Zealand's RM market and 40% in Australia—grants pricing power and customer retention, critical in a sector where trust and long-term relationships matter.

However, profitability in the New Zealand RM segment plummeted by 60% year-over-year to $21.9 million, despite the revenue growth. This was due to a 131% spike in impairment expenses, reflecting economic uncertainties and tighter credit conditions. Australia's RM segment fared better, with a 9.4% increase in net profit after tax (NPAT) to $27.2 million, but this growth was modest compared to the segment's overall expansion.

The key metric here is net interest margin (NIM). New Zealand's NIM reached 4.13%, while Australia's hit 3.59%, both above industry averages. These figures underscore the effectiveness of Heartland's integrated banking model, which now sources 81% of funding from deposits, reducing reliance on costly wholesale markets. Yet, as reveals, NIMs have stabilized rather than expanded, suggesting limited room for further margin improvement in a high-interest-rate environment.

Strategic Repositioning: Capital Efficiency vs. Risk Exposure

Heartland's FY2025 strategy focused on de-risking the business by reallocating capital to high-return segments like RM and livestock finance. The company reduced non-strategic assets by $85 million, a move that strengthened balance sheet stability but also highlighted the fragility of its non-RM operations. For instance, motor and business finance segments faced tighter risk-based pricing, reflecting a broader shift toward capital efficiency.

The integrated banking model—bolstered by an Australian Authorised Deposit-taking Institution (ADI)—has been a success, with deposit funding now accounting for 81% of total funding. This shift not only improves NIMs but also insulates the company from liquidity shocks. However, the Reserve Bank of New Zealand's capital review looms as a potential constraint, and Australia's competitive landscape is heating up, with government-backed schemes like the Home Equity Access Scheme threatening to erode Heartland's pricing power.

Demographic Tailwinds and Structural Risks

The aging populations in New Zealand and Australia—projected to grow by 44% and 47%, respectively, by 2040—provide a structural tailwind for reverse mortgages. With housing prices and retirement debt rising, RM demand is likely to remain strong. Yet, this demographic advantage is not without risks. Regulatory scrutiny over capital adequacy in New Zealand and competitive pressures in Australia could force Heartland to lower margins or increase provisions.

Moreover, the company's heavy reliance on RM—accounting for over 90% of its market share in New Zealand—creates a concentration risk. A downturn in the sector, whether due to economic recession or regulatory intervention, could disproportionately impact Heartland's earnings.

Investment Implications

Heartland's FY2025 results demonstrate that its reverse mortgage business can offset declining profitability in other segments, at least for now. The segment's growth, combined with strong NIMs and demographic tailwinds, provides a buffer against margin compression. However, investors must remain cautious.

1. Monitor Impairment Trends: The 131% increase in impairment expenses in New Zealand's RM segment is a red flag. If economic conditions worsen, further provisions could erode profitability.
2. Track Regulatory Developments: The Reserve Bank of New Zealand's capital review and Australia's regulatory landscape could impose new constraints.
3. Assess Competitive Dynamics: Government-backed schemes and private lenders like Household Capital are gaining traction in Australia, potentially limiting Heartland's pricing power.

For now, Heartland's strategic repositioning—focusing on capital efficiency, digital transformation, and demographic-driven growth—positions it to navigate these challenges. However, the company's long-term success will depend on its ability to maintain pricing discipline, manage credit risk, and adapt to regulatory shifts.

Final Verdict: Heartland Group Holdings remains a compelling long-term play for investors who believe in the structural demand for reverse mortgages. However, the current valuation should reflect the risks of margin compression and regulatory uncertainty. A cautious "hold" recommendation is appropriate until the company demonstrates sustained profitability in its RM segment and navigates regulatory challenges effectively.