KEY POINTS:
The prospect of tougher regulation for finance companies will continue to drive consolidation in the sector despite Government moves to abandon the centrepiece of its proposed new regime.
As predicted by commentators, there has been an increase in transactions involving the acquisition or consolidation of finance companies in the past few months.
Godfrey Boyce, of KPMG, said some of the deals seen were "situation specific" but others reflected "some of the pressures and drivers for size and critical mass".
NZ Finance chief executive John Callaghan said the deals, including his company's purchase of Finance Direct, were a sign of things to come.
"It's only the tip of the iceberg. I think you'll see a lot more rationalisation. There's a huge proliferation of companies in the industry still. You'll see a continued merging together of operations to grow."
Callaghan said the consolidation was driven by a combination of factors including the new regulatory requirements likely to come into force over the next couple of years.
"Really, size is what you'll need to be able to deliver the efficiencies to do that."
After receiving a negative response from the industry to its proposal to introduce a two-tier regime for finance companies, building societies and credit unions, Commerce Minister Lianne Dalziel last week said the Goverment was "evaluating alternative options".
Under the two-tier model, finance companies wishing to be seen as top-quality outfits would have been obliged to become "authorised deposit takers" with increased governance and disclosure obligations, mandatory credit ratings and minimum cash reserves under the supervision of the Reserve Bank.
But while the Ministry of Economic Development is now going back to the drawing board, Boyce says KPMG, which has had input into the ministry's review of the sector, had "strong views that there should be strong minimum capital levels".
"I would expect something like that will still carry through," he said.
Last week Dalziel didn't rule out the possibility that the Reserve Bank would have some role in supervising non-bank financial institutions' capital requirements.
However, submissions on the ministry's original proposals revealed some satisfaction with the role of trustee companies as the frontline regulators. Boyce expects the final proposals will see more consistency in standards for how trust deeds work and how trustees operate.
In the end such an approach would tend to favour companies with scale.
"I don't see that changing. One has to assume that we're going to get enhanced regulation and certain minimum standards that will get applied regardless of size if you're a deposit taker."
Meanwhile the rosy economic conditions of recent years, which fuelled the rapid growth in the number of companies and the amount of cash they received from investors and lent to consumers and businesses, have faded. And investors, having seen three finance companies go into receivership last year, were more discerning.
Many smaller companies were feeling the squeeze.
Callaghan says Finance Direct, while a firm with excellent people and systems, was "put in a position where depositors were looking for bigger companies with the history and background and it lacked the fuel to accelerate its growth".
On the other side of the ledger, Boyce said that outside of the housing market, "we are seeing a slowdown in general growth as industries that are feeling pressure are not wanting to take on too much ... new finance."
A good example was the rural sector, where the unfavourable exchange rate was crimping returns and many farmers were unwilling to take on debt to make capital improvements.
"The combination of the business pressures and I believe the real likelihood of greater regulation will continue to encourage consolidation among finance companies.
"At the small end, companies facing funding pressures where the owners don't have ready sources of additional capital, the logical step for them is to sell the business into a larger organisation. That's where the most likely activity is, with the bigger players doing add-on transactions."
KPMG believes those pressures will force some of the smaller players out of the market.
Come Together
Recent deals include:
* New Zealand Finance's acquisition of consumer finance firm Finance Direct.
* Allied Farmers' acquisition of Nationwide Finance.
* Allco Finance Group's acquisition of Strategic Finance.
* The cross shareholding arrangements between St Laurence and Dorchester Pacific.
* Property Finance Group's acquisition of a stake in Canterbury Building Society.
