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Finance companies profit as credit unions struggle

The finance company sector in New Zealand continues to shrink but the surviving companies have seen an increase in profitability, according to a new report.

Friday, 16 December 2011

by Niko Kloeten

However, building societies and other credit unions are finding the going tough, with falling interest margins hurting profits.

The number of finance companies in KPMG’s Financial Institutions Performance Survey: non bank sector 2011 dropped to 13, down from 16 last year, due to the receiverships by Equitable Mortgages and NZF Money and the voluntary administration of GMAC Financial Services NZ.

This was accompanied by a 3.4% reduction in assets across the sector, down from $9,041.3 million to $8,731.7 million.

However, the aggregate profitability of finance companies has increased 33.1% from $150.4 million in 2010 to $199.9 million this year. This increase has been driven by a reduction of $85.5 million in operating expenses, mainly through impaired asset expenses reducing from $182.2 million to $123.7 million.

Meanwhile, “net interest income has been flat and there have only been marginal reductions in non-interest income and the level of tax expense,” according to KPMG’s report.

As a result of the contraction in assets and the increase in profitability, the gearing ratio for finance companies has improved from 6.11% in 2010 to 7.25% this year, while the average interest margin improved from 5.61% to 6.29%.

However, companies classed as “savings institutions” (building societies and credit unions) haven’t performed so well – net profit after tax for the sector was $16.9 million, an increase of only $1.2 million over the previous year.

And the report noted that “was it not for the inclusion of Heartland [which achieved profits of $7.1 million], profits for the sector would have decreased compared to the prior year.”

The average interest margin for the sector has decreased by 64 basis points from 4.25% to 3.61%, with credit unions decreasing from 7.24% to 6.82% and building societies decreasing 3.46% to 2.86%. Wairarapa Building Society was the only company in the sector to see an increase in interest margin but it remains the lowest of all entities in the survey, increasing 11 basis points to 1.63%.

Impaired asset expense across the sector rose from $17.7 million to $22.4 million, mainly due to the inclusion of the former Marac book in this section of the survey; if Heartland numbers were excluded the impairment expense would have decreased.

Total assets for the sector increased by $1,250 million to $4,457 million, again due to the inclusion of Heartland Group; excluding this the increase was only $77,000.

There has been strong growth in customer deposits, which are up by $80.0 million compared to last year (excluding Heartland).

“This is consistent with the increased saving trend we have seen in the banking sector, a result of deleveraging in the New Zealand economy,” the report said.

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Cash PIE Rates
Institution Rate 30% 33%
ANZ 2.60 2.67 2.79
ASB Bank 3.15 3.29 3.44
BNZ 3.70 3.44 3.60
Direct Broking Call Account 2.80 2.92 3.05
Heartland Bank 4.00 4.28 4.48
Kiwibank 2.40 2.50 2.61
Kiwibank 3.15 3.29 3.44
Nelson Building Society 3.75 3.90 4.08
RaboDirect 3.30 3.44 3.60
SBS Bank 3.25 3.11 3.28
TSB Bank 3.50 3.63 3.80
Westpac 3.00 3.12 3.26
Westpac 0.10 0.10 0.11
Westpac 4.00 4.18 4.37

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