Small finance companies likely to be forced out: KPMG

This year is set to be the year of consolidation amongst non-bank deposit takers after a dismal 2009 when the sector racked up more than half a billion dollars worth of losses.

Thursday, 18 February 2010

by Paul McBeth

Accounting firm KPMG expects the drive towards greater regulation and the burden of meeting new requirements will drive smaller entities out of the sector, according to its 2009 Financial Institutions Performance Survey - Non-banks Review.

"We understand that a range of merger discussions are currently occurring across a number of entities in both the finance and savings sector. 2010 may well be the year where rationalisation occurs by way of consolidation," the firm said in its report.

It cites the mounting regulatory burden and compliance costs, the need to optimise credit ratings, diversify funding and building a sustainable model as the key factors behind its prediction.

This comes after the finance company sector posted a $549 million loss last year compared to a profit of $163 million in 2008 as gross impaired assets almost tripled to $962 million. Total assets fell 5.5% to $15.6 billion.

Of the 31 companies surveyed by KPMG, only six reported an increase in net earnings and another eight made a profit. Six of the 10 property development and commercial finance companies included in last year's survey survived 2009, though only Equitable Group has kept "what could be termed normal operations," the survey said. This sub-sector makes up 59% of the finance company sector's total assets.

KPMG also found there had been a 35 basis point fall in net interest margins to 4.23%. It attributed the decline to the increased competition for retail deposits, which forced the cost of funding upwards, and the burden of the government's deposit guarantee scheme.

The survey's authors do not expect costs associated with the government's guarantee scheme will fall away when it ends in December next year, rather they "think it probable that the banking and finance industry will adopt some form of deposit insurance at the conclusion" of the scheme.

KPMG expects this year to be one of repositioning for finance companies, with 2011 "the first opportunity to achieve a new level of normality."

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