Stability, safety nets & research mean investors can have both – General Finance.
These are little-known figures: 1.6 million New Zealand households held term deposits at the end of November last year* – 49 per cent more than the start of 2022 – with the average deposit nearly $89,000.
That is a rare bright spot in an otherwise static economic environment, says Brent King, managing director of NZ-listed financial services group General Capital, the owner of General Finance. Those lucky or careful enough to have some spare cash are investing for their future, he says, many with institutions like General Finance – a licensed non-bank deposit taker offering higher secured term deposit rates than the banks are offering.
For instance, a 12-month term deposit of $100,000 with General Finance at a 7.5 per cent interest will deliver a pre-tax yield of $7500. In comparison, the best interest rate on offer from the ‘big four’ banks, as of writing, is 6 per cent, yielding $5900-$6136 pre-tax on $100,000. The higher figure is a result of re-investing returns so the amount compounds quarterly.
King says that equates to a return of $1364 or 22.2 per cent higher ($7500 versus $6136) when a saver opts for a General Finance term deposit.
With the bulk of term deposits deposited with the big four banks, and many billions sitting in low-interest savings and cheque accounts, it is prime time to look at alternative options, says King.
“The only way to get ahead of inflation at the moment is to deposit your money at a higher rate than the big banks are currently offering,” he says. “Smart investors know that risk increases as the interest rate goes up, but they balance risk and reward knowing they are not going to get ahead of inflation while leaving their money in low interest rates where it may be safer.”
The task facing savers is to do their due diligence on the alternatives to the big banks, which range from smaller banks to building societies, credit unions, and finance companies. Memories of the global financial crisis, which saw the collapse of companies like Hanover, Capital + Merchant, Lombard, and South Canterbury Finance, left many Kiwis fearful of investing beyond the big banks.
But deposits with those big banks are by no means guaranteed, says King. Those with long memories will remember the $380m Government bail-out of BNZ in 1990. While the big banks are well-capitalised, they are not immune to financial difficulties.
General Finance has offered secured term deposits since 2004, surviving the GFC with a business model focused on lending in the residential property sector, and by taking a conservative stance on the gearing of the business and conservative liquidity management which remains in place today, he says.
Regulatory changes since the GFC have also significantly tightened up of rules and regulations of non-bank deposit takers: “Compared to 2007, the regulation of the non-bank deposit takers is probably three times what it was before the GFC,” says King.
Up to $100,000 compensation
A significant safety net for depositors will also be put in place from June 30 next year when the Depositor Compensation Scheme (DCS) takes effect, offering up to $100,000 for each depositor per qualifying licensed deposit taker – in the event of a deposit taker failing.
The DCS and its enabling legislation, the Deposit Takers Act, were put in place by the previous Government, with almost unanimous support in Parliament.
“The legislation and the compensation scheme were recommended by the International Monetary Fund and are very pragmatic measures that see New Zealand in line with many other countries,” says King. “If you’ve put $150,000 into a bank, a finance company, building society or credit union that has been admitted to the deposit compensation scheme, you will be covered up to the $100,000 if a problem occurs.”
The new provisions should give the average term deposit holder peace of mind – but King emphasises that every investor needs to do due diligence on the company they are depositing with. Is the company regulated? Is it part of the Deposit Compensation Scheme? Does it have to file accounts and meet capital adequacy ratios with the Reserve Bank? Does it have a Trustee, regular audits, and a good board of directors? These are some of the questions prospective depositors should ask when researching companies to deposit their money with.
“You should start by looking at a company’s credit rating and by reading their product disclosure statement,” King suggests. That document will outline the types of loans and investments a company is making with the deposits it takes from depositors.
For example, General Finance has a BB credit rating with a “stable outlook”, as reaffirmed by credit rating firm Equifax in December 2023. In the year to March 31, General Finance grew its total assets by 20 per cent to $163.3m. Revenue was up 25 per cent and the company reported a $2.6m after-tax profit.
“Despite the prevailing headwinds faced by the New Zealand economy, our commitment to prudent financial management has enabled us to maintain stability and foster growth,” General Finance told the market at the time.
King says because General Capital is listed on the NZX, General Finance has significant advantage as its parent company is able to raise funds if the group needs additional capital.
Each investor needs to decide how they invest their wealth and consider seeking independent financial advice in doing so, he says. “Your investment profile will depend on factors such as your age, how far from retirement you are, and your ability to bounce back if an investment goes wrong.”
“These new protections certainly make it more attractive to have a portion of your wealth with the likes of General Finance where the risk-reward equation is attractive, and you can make a healthier return.”
*Data from Reserve Bank of New Zealand.
For more information visit generalfinance.co.nz/service/deposit-rates/