Banks behind marginal lending
Australian-owned banks are a growing force behind second and third tier lenders offering vehicle and personal loans to people who often can't borrow from the banks directly.
Banks such as BNZ, ANZ and Westpac are profiting from multimillion-dollar loans to smaller lenders servicing people with less than perfect credit records or low or irregular incomes.
Darryl Evans, chief executive of Mangere Budgeting Service, said in effect the banks were behind loans that earned them profits but which were not covered by the Banking Code of Conduct.
It was ironic, he said, that when budgeting services seek to refinance high interest loans from second and third tier lenders, they try to do so first through the banks.
Sources in the lower tier lending market say that's not the only bob-each-way the banks have. In the past 12 months lenders such as Instant Finance have spoken openly about losing customers to the banks, customers the banks would previously not have lent to.
Most recently Westpac has agreed to provide a $30 million line of funding to vehicle lender Geneva Finance. As with many finance companies, Geneva's funding lines were disrupted in 2006 and 2007 when mum and dad debenture investors withdrew their money during a collective loss of confidence in the finance company sector.
Now that the dust has settled, the banks are stepping in to fill the funding void.
Geneva Finance's deal is the second Westpac has put in place in the last year-and-a-half. In May last year it provided a $60m facility to Instant Finance, the company Geneva Finance was originally set up in opposition to.
Another finance company sector survivor, Dorchester Finance, is now partly funded by a $22m line of credit from Bank of New Zealand. It also boasts of a facility with KiwiBank, which funds Dorchester's home equity release loans used by elderly homeowners to borrow against the value of their homes.
F&P Finance, which is behind the Farmers Card and the Q Card, also switched from debenture finance to a stable banking facility, with $280m provided in 2010 by a syndicate of banks including ANZ, BNZ and Westpac.
Banks are also stepping in to replace other funders affected by the global financial crisis. Motor Trades Finance, a force in making vehicle loans through car yards, shifted its funding to Australian-owned banks following disruption to its European funding sources in 2007 and 2008.
It is now funded through a programme of loan securitisation enabled by funding from Westpac and Commonwealth Bank of Australia, which committed a combined $298m in October 2011, and with a $37m line of funding from Bank of New Zealand.
BNZ and Westpac's combined funding for Geneva, Instant and MTF is $127m.
However, the longest-standing funding arrangement of a larger lender is that of Avanti Finance, to which ANZ National Bank has provided funding since 1996. Currently, the bank provides a $40m line of funding to Avanti through the finance company's sister company Galatos Finance, though Avanti still raises money from private investors.
The big banks have other rivals in the second and third tier lending sector, though. Giants such as GE Money and Toyota Finance, both of which have loan books of more than $1 billion, are funded by their overseas multinational parents.
However, one highly placed finance company executive said the lesson of the last five years was to not rely on a single funding source. Lower tier lenders could be expected to diversify their lending again - and that could mean returning to income-starved mum and dad investors.
Evans said there would always be somebody funding non-bank finance company loans because there were profits to be made.
"If it is not the banks, it would be other big businesses that would back them," he said.
Sunday Star Times