Finance companies face challenges ahead, say KPMG

A boom in new car sales has contributed to strong profit growth by non-bank lenders. Photo / Brett Phibbs.

New Zealand's finance companies and credit unions face a challenging year ahead after a strong period of growth, according to a KPMG report.

The Non-Bank Financial Institutions Survey found profits across 23 companies grew 8 per cent to $207.78 million and total assets were up 17 per cent to $11 billion in the year to September 30.

John Kensington, KPMG's head of banking and finance, said consumer confidence was the key driver of the growth with people borrowing more on the back of house price growth, strong employment and low interest rates.

"It means New Zealanders are feeling richer as well as confident about their wealth security, meaning they are more willing to borrow."

The non-bank sector had also done well from banks focusing on business and mortgage lending opening up space in the consumer lending market.

But Kensington warned the coming year would be more challenging for the sector, which includes companies like UDC Finance, Avanti Finance and the Nelson Building Society.

"In recent months some of the sector have found it more difficult to secure the funds they require and expected rises in offshore wholesale funding costs as well as competition for funds within the local deposits market, will increase this pressure."

Kensington said non-bank deposit takers were experiencing strong competition from the banks in the deposit market and had found it difficult to match the special rates being offered by the banks.

"Finance companies that are backed and financed by the banks are also being cautioned that they can no longer borrow the same level of funds at the same historically low interest rates that they have enjoyed," he added.

Kensington said non-banks were feeling pressure on both the lending and funding fronts.

It means New Zealanders are feeling richer as well as confident about their wealth security, meaning they are more willing to borrow.

John Kensington, KPMG's head of banking and finance

While the banks were not competing as much for new mortgages the non-bank lenders were seeing more of their existing mortgages churned as banks were more prepared to re-finance people who may not have previously met their lending criteria but now do because they have paid down some debt and the value of their property has increased.

Kensington said on the funding side there had a been a "pronounced dip" in the level of funding that was available to the sector compared to a year ago.

Executives in the sector put that down to increased geopolitical and global economic instability over the last year.

"This puts credit unions and building societies in a particularly difficult position, as their legal structure limits them as to where they are legally allowed to source funds."