More finance firms tipped to fail

Hanover Finance said that the ongoing property market weakness meant it would be unable to make full repayment to debenture investors. Photo / Brett Phibbs

A big chunk of the surviving finance company sector is unlikely to outlive the retail deposit guarantee, the Reserve Bank indicated yesterday.

In its twice yearly report on the stability of New Zealand's financial system, the RBNZ noted that the local banks and their Australian parents had "withstood the crisis better than most" overseas, although they remained overly dependent on offshore money markets and asset quality had deteriorated as reflected in recent results.

However, Deputy Governor and head of financial stability Grant Spencer said the non-bank finance sector, "remains under pressure".

"Strains are particularly evident in the deposit taking finance company sector where a substantial number of companies are in moratorium or receivership."

The RBNZ said the same underlying economic issues that were driving surviving finance companies to the wall were also negatively affecting those companies that have secured moratoriums from investors, already driving one into receivership.

The comments come just a day after Hanover Finance said ongoing property market weakness meant it would be unable to make full repayment to debenture investors, as forecast when it sought their approval for a moratorium last year.

As well as having to repair the damage to their balance sheets stemming from the recession, surviving non-bank deposit takers must over the coming year meet the requirements of the new RBNZ prudential regime.

While initial requirements for finance companies to have and comply with a risk management programme came into effect two months ago, regulations setting out capital adequacy requirements tougher than those applying to banks, limits on related party lending, and credit ratings, come into force in September.

Shortly after that, the Government's initial Retail Deposit Guarantee expires. The extended scheme which replaces it carries more onerous requirements including a minimum "BB" credit rating.

"As a consequence of these challenges we fully expect to see further rationalisations and some closures in the non-bank sector" Spencer said yesterday.

Treasury set aside $816 million in Crown accounts to cover claims stemming from the current guarantee that it regarded as more likely than not to occur.

Governor Alan Bollard confirmed that this was based on information supplied by the RBNZ.

The RBNZ's report noted finance companies had received "an immediate boost" when the deposit guarantee scheme was introduced in October last year, but retail funding had weakened again over the course of this year. As a consequence the ability to continue lending had been "heavily curtailed".

Some major finance companies have announced plans to move away from property lending toward the small and medium-sized enterprise sector.

But the bank said it was "not likely that all deposit taking finance companies will be able to successfully raise additional capital and some failures among the guaranteed finance companies are to be expected."