KEY POINTS:
Having weathered the high profile collapse of three players this year, the still rapidly-growing finance company sector is facing fresh challenges from the slowing economy and increasing competition from banks, KPMG says in the findings to its latest survey.
Commenting on the accounting firm's annual Financial Institutions Performance Survey of finance companies, KPMG financial services deputy director Godfrey Boyce said the collapses of National Finance 2000, Provincial Finance and Western Bay Finance were a "watershed event" for the industry.
"It resulted in investors re-evaluating their previous investment decisions, investment advisors coming under heavy criticism and renewed calls for increased regulation."
The failures of the firms - which between them owed debenture stock holders just under $400 million - prompted a "drought" of investor funds across the sector. Firms overall came through that "weaker for the experience" but "so far otherwise undamaged".
"We have seen some pressure on some of the smaller finance companies with reinvestment rates below 50 per cent, an increase in wholesale funding and some recalibration upwards in the pricing of certain debenture issues," said Boyce.
But while growth in total assets across the sector slowed considerably, it remained robust, rising 11.5 per cent to over $17 billion in the year to September.
However companies were contending with pressure on interest rate margins and increased operating costs which in turn had reduced overall profitability across the sector. Annual earnings growth fell into the single digits for the first time in five year and net profits rose by just 1.8 per cent.
The slower growth was also partly a result of the general softening of the economy.
"Falling discretionary spending has affected consumer finance while high oil prices for much of the year impacted on motor vehicle finance," said Boyce.
Nevertheless the growth and profitability across the sector in recent years "has made the major banks sit up and take notice".
Banks had moved into finance company territory by offering mortgage-backed lending products and lower interest rate credit cards to consumer finance customers and also by financing commercial and property developement transactions that were previously outside their lending criteria.
Banks had also targeted finance companies' funding base using online cash management accounts.
One of the leaders in that space, RaboBank, yesterday introduced a high interest online business savings account.
"This competition, in tandem with a slowing economy, is a whole new challenge for a finance company sector that has come through the last six months rattled but not rolled."
KPMG has split its annual Financial Institutions Performance Survey into two parts, today releasing its research into finance companies and savings institutions. It will release its banking survey next year.
Today's survey shows savings institutions, largely consisting of building societies and credit unions, were also able to maintain double digit asset growth. Assets rose by 12 per cent over the year but pressure on interest rate margins also took a bite out of their profitability with net profits rising 6 per cent.
