Finance firm helps 'wean' its investors

BY MARTA STEEMAN

Big finance companies are mulling whether to offer customers non-guaranteed deposits in the New Year but PGG Wrightson Finance is the first off the rank.

From January 1 banks, finance companies, building societies and others whose deposits are covered by the crown deposit guarantee will be able to offer new deposits that are not guaranteed alongside the ones that are.

It is designed to slowly wean investors and the deposit-taking companies off the government guarantee, which insures deposits of up to $1 million for each depositor.

The finance sector is watching what appetite there is among investors for the non-guaranteed deposits. Many investors have been burned by the collapse of finance companies over the past three years and by the global sharemarket rout in 2008.

All deposits made under the guarantee before January 1 will continue to be guaranteed and only those offered as non-guaranteed from January 1 will not be covered.

The government is covering about $130 billion of deposits under the guarantee scheme, a massive liability on its books.

PGG Wrightson Finance, one of the country's big four finance companies, will from the New Year offer what it is labelling "excluded securities".

The interest rate will be about 1 per cent higher than those with guarantees.

PGGW Finance head Mark Darrow said it would be one of the first finance companies to offer both types of deposits and had registered a new prospectus on December 21 to cover the "excluded securities".

Darrow said many of its just over 6000 depositors and investors had invested more than $250,000 with PGGW Finance and a good number more than $1m.

PGGW Finance was offering investors additional choice at no extra cost to the company. PGGW Finance had about $400m of investor deposits.

Marac Finance chief investment officer Craig Stephens said Marac planned to offer investors the choice of non-guaranteed investments.

It preferred that investors invested in Marac rather than in the guarantee. Offering non-guaranteed deposits would test that but it had no need for new capital immediately.

It had had a big injection of capital in the past three months so had not yet decided when it would offer non-guaranteed products.

"We just don't need the money at this point in time," Stephens said.

But it would probably look at non-guaranteed deposits in March or April. Marac had close to $1 billion of deposits.

Stephens said theoretically the interest rate on guaranteed deposits should be the same as the "risk-free" rate on Government bonds but in practice the interest rates had been higher because of competition for investors' money.

For non-guaranteed deposits, investors should get the 1 per cent Marac was paying the Government for the guarantee, Stephens said.

Marac and South Canterbury Finance pay a fee of 1 per cent of any increase in investors' funds they hold above what they had on October 12, 2008 when the Government guarantee started. Most of the fees for the guarantee scheme come from the big banks.

Stephens reckons the effect of offering non-guaranteed deposits would be a fall in interest rates for guaranteed investments.

"Certainly, my expectation is that the guaranteed rate that people are receiving will come down to reflect what is the risk-free rate and move closer to the government bond rate, and for the non-guaranteed product there will be a premium associated with that which will ultimately be for the investors' benefit."

Big banks are not yet keen on offering non-guaranteed deposits.

BNZ bank spokesman Diane Maxwell said the bank had no plans to kick off the New Year with non-guaranteed deposits.

"There is a view we will wait and see and review it mid year."

It took time to develop products and train staff in handling them, she said. "It will be interesting if customers come in and ask for it."

ASB Bank spokeswoman Debby Bell said the bank had no plans to offer non-guaranteed deposits.

The finance company sector is speculating that the big banks will choose to opt out of the guarantee scheme when it expires in October 2010 and will not seek to be covered by the extension to the guarantee to December 2011.

The Government's criteria for the extension are tougher and more expensive than for the current two-year guarantee.

Small finance companies are not expected to be able to meet the extension criteria which include a minimum level of capital and a credit rating of at least BB or its equivalent.

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