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Shake-out pending in finance-lending industry

KPMG New Zealand Date 2nd May 2006

Shake-out pending in finance-lending industry

The slowing economy is likely to lead to a shake-out in the finance lending industry, KPMG predicts in its latest survey of the banking industry.

“Never have so many eyes been focused on the finance company sector,“ says Godfrey Boyce of KPMG’s financial services division. “In recent years it has been the strong growth in assets and profitability that has attracted new entrants to the industry. It is these new entrants that are potentially most at risk in an economic downturn.”

Mr Boyce said this year’s survey includes 49 finance companies each with more than $50 million of assets, an increase of 20 companies in three years. The sector continues to grow rapidly, total assets lifting almost fifteen percent in the 2005 year.

“The real story lies in the almost 30 percent growth in lending for property development and commercial finance and almost 20 percent for consumer finance. Contrast this with only four percent growth in lending for motor vehicles.

“What we’ve seen raises questions about the sustainability of so many players, particularly if the long-forecast economic slow-down takes hold.

“The slowing economy and slowing property market is likely to lead to loan defaults. While the overall interest rate margin for the industry is just over five percent, fifteen companies are operating on margins less than four percent.

“That could make profitability difficult to maintain if credit losses increase. We are conscious that credit issues are now being reported by certain finance companies, notably in the consumer finance and motor vehicle finance areas.

“It may be that the finance company sector is facing a similar scenario to that last experienced in 1996 when asset growth stalled and earnings declined as doubtful debts rose.

“It’s been our experience in conducting the survey that the finance company sector tends to be an early warning indicator for the rest of the banking industry. “

Mr Boyce said the risks for investors in the finance company sector don’t appear to be reflected in the rates being offered, in particular, by companies suffering most from high levels of net bad debt expenses.

“Should a major New Zealand finance company fail, the result could well be a flight of capital which would put the weaker finance companies in the country under extreme pressure.”

Mr Boyce says many in the industry regard consolidation of companies as inevitable.

KPMG’s Financial Services Chairman Andrew Dinsdale said the lack of regulation in the finance industry is not serving the New Zealand public well. He called for a number of initiatives to create a more consistent and comparable regulatory environment, including the use of recognised and comparable credit ratings such as Standard & Poor’s or Moody’s.

“Competition is important and there is little doubt that consumers benefit from having a range of options available to them. Reviewing our regulatory standards will ensure that the industry can retain the confidence of customers and act in a way that holds them all to account,” He said.

ENDS

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