Shakeout in finance company sector expected

Two finance company executives are predicting a shakeout in that market.

Wednesday, 9 November 2005

by Rob Hosking

South Canterbury Finance’s Lachie McLeod told a recent Institute of Finance Professionals New Zealand conference that the tide has turned after three years of boom for the industry.

McLeod says the return on equity has been above 30% in many cases, with most of the growth in property and consumer lending, and interest rates have been in a range of 12% to 30%.

The trading banks have been slow to realise the potential of this market and may have lost their best staff to finance companies during the boom.

“There exists some very sound prudent finance companies who want repeat business,” says McLeod.

And although the tide has turned “the major finance companies are well prepared,” with signs funding is “moving to higher ground” to prepare for the expected slowdown.

One of the factors in the slowdown is a downturn in the property market, and McLeod says it is already happening in certain areas.

Some finance companies have been “gouging” consumers during the boom but the new powers granted to the Commerce Commission under the Credit Contracts and Consumer Finance Act, which came into force in April, will prevent that going any further.

However he warns that “a major loss” from a finance company could scare investors out of the market. And he says the banks, which have been slow to enter the market, are taking more consumer and property market risks.

McLeod declined to talk further about the issues, citing the imminent float of South Canterbury Finance and Securities Commission rules.

Marac Finance’s Alan Williams, who also spoke at the conference, likewise predicted a shakeout and a “consolidation” of finance companies after the three-year boom.

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