SCF funds outflow good news for banks

Retail banks could be the winners as $1.6 billion in South Canterbury Finance funds flow back to debenture investors.

Hamilton Hindin Greene client adviser James Smalley said for those investors for whom South Canterbury Finance was their only investment outside of the bank, it was almost certain their payout would end up in the bank.

"People who invested of their own volition, particularly if they are relatively unsavvy investors ... might go running to the safety of 5.5 per cent term investments with the bank."

Fraser Farm Finance adviser Don Fraser agreed, saying most investors were too risk-averse to even consider a finance company.

"I don't think that New Zealanders are that familiar with shares ... so it's either going to go into real estate or into the banks," said Fraser.

"I would say the banks are going to be the winners. It will free up some money into the economy but it's all going to be pretty squirreled."

Although this may only mean several hundreds of millions for each bank, Smalley said it would go some way towards helping the banks meet new Reserve Bank requirements to have more of their funding locally based.

Smalley said investors who had put money into South Canterbury Finance as part of a diversified portfolio would be on the hunt for investments with the appropriate level of risk rather than bunging it in the bank.

He said that might mean looking at some of the new bond issues available.

What investors would have to face was that the 8 per cent the Government guaranteed was an anomaly, Smalley said. The new reality was that they would now get only 6 or 7 per cent interest on any investments.

"It is going to reduce people's income but the main thing is they haven't lost any principal," he said.

ASB chief economist Nick Tuffley said that although there was not any up-to-date data on where investment money was flowing in the current market the ASB's latest investor confidence survey showed that while residential property was still popular, many people were choosing savings or term deposit investments.

With South Canterbury Finance it would come down to the investors' demographics, he said. Older investors were more likely to put money into something where capital was preserved and generating an income.

He did not expect debenture holders to spend the money, rather they would reinvest what was originally investment money in similar income-generating investment types.

Fraser said the sorts of people that invested with SCF's Allan Hubbard, attracted by the seemingly solid brand, were not the types to go out and splurge the return.

Tuffley said anyone in line to receive a reasonable amount of money should sit down with an investment adviser and establish the appropriate level of risk and mix of investments given both their investment goals and what assets they already held.

"It would be quite an opportune moment for people to just have a look at reassessing those goals, the current mix, what's the most appropriate choice given their current circumstances," Tuffley said.

Smalley said given the current low-interest environment it might be advisable for investors to stay relatively liquid.

He said there was an opportunity cost in keeping money in an on-call account at 3 or 4 per cent until interest rates lifted, but that might be outweighed by higher interest rates in 12 to 18 months.

"If people stay liquid and interest rates move up then they can start locking them in," said Smalley.