Rebuilding investor confidence

KPMG New Zealand December 4, 2007

For use after noon, December 4, 2007

Finance company performance underpins attempts to rebuild investor confidence

The failure of 13 finance companies in the past two years should be regarded as a purging in the process of a return to health rather than a symptom of terminal illness, KPMG finds in its latest industry survey.

The firm’s Financial Services Deputy Chairman Godfrey Boyce says the failures have resulted in a fundamental change in the finance company sector which will have repercussions for all non-bank financial institutions.

“It’s easy to look at what’s happened from a ‘glass half empty’ point of view. It’s more productive to see the finance sector in the context of an industry with low barriers to entry that has doubled in size in the past seven years.

“If we look ahead five years, we can see the industry returning to its year 2000 scale – around 20 significant companies compared to the 49 that existed before the receivership of Provincial Finance.”

Mr Boyce said the performance of the major finance companies over the past year supports rather than detracts from the industry’s attempts to rebuild investor confidence. Excluding the companies that failed during the year, the overall performance of the companies surveyed had been solid, with only four reporting losses.

KPMG surveys finance companies and savings institutions with assets in excess of $50 million. Mr Boyce said the impact of the receiverships on industry performance is hard to assess because the failed companies had not published their financial statements for 2007, apart from the most recent failure: Capital + Merchant Finance.

Asset growth for the sector slowed during the year to just under seven percent after a long spell of double digit growth dating back to 1999. The aggregate net profit after tax for the sector grew 45 percent, significantly inflated by UDC Finance’s $87 million gain on the sale of their fleet lease business. If the impact of this sale is excluded then the net growth in profit was 14 percent.

The sector divides into two broad groupings. Most of the larger companies operate in the diversified finance, property development and commercial finance fields and are generally achieving asset growth and earnings growth driven by margin improvement.

More of the smaller companies tend to operate in consumer and motor vehicle finance and are reporting a decline in assets and interest margin leading to a fall in earnings.

“There is no doubt that there are fundamental changes happening in the industry in terms of company failures, the depth of the debenture market and the impact of new regulation but it will take up to two years for the full impact of these changes to become evident.

“While the aggregate finance company results are solid the overall picture is one of a continued slow-down in asset and earnings growth with the deterioration in credit quality measures suggesting the favourable credit environment enjoyed by the sector since 2000 has ended.

“In other words, for the finance sector, it’s very much a case of the end of the golden weather. Just how dark the approaching clouds will be is difficult to judge from what we can see at the moment.”

Mr Boyce said that overall there has been a seven percent increase in gross impaired assets (loans likely to result in a loss of some principal or interest) and a 47 percent increase in past due assets (loans with payments in arrears). The largest increase in arrears has come from the large diversified finance companies.

“Although the receiverships point to extreme credit issues in some companies, the industry as a whole has not seen a uniform deterioration in credit quality. In some sectors such as motor vehicle finance, there has been an improvement.”

Mr Boyce said that while there had been some consolidation in the industry over the year, a number of factors such as mandatory credit ratings and funding pressure suggested the trend was likely to accelerate.

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