Banks put heat on finance companies

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Last updated 05:00 17/12/2013

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Finance companies and credit unions are gradually growing their lending, but profits are down sharply in the face of increased competition from banks, according to the latest KPMG annual report card on the sector.

The report covers 17 finance companies and six credit union with assets of $75m or more.

The finance companies increased their total assets by 1.6 per cent at $8.66 billion, with just over half of that held by GE Capital and ANZ-owned UDC Finance.

But the combined net profits for the finance company sector fell by 54 per cent from $234.6m in 2012 to $108.2m.

Credit unions and building societies' combined net profits fell by 11.7 per cent, to $5.95m on total asset growth of 4.8 per cent to $1.14b.

KPMG said the hit on profits in the sector came from some non-bank financial institutions experiencing margin pressure as the big banks increasingly competed for personal and vehicle loan business previously the domain for non-bank lenders.

Finance companies and credit unions also face extra compliance costs with new regulations such as anti-money laundering laws which came into full force in June.

Several one-off events at large finance companies dragged the overall sector profit down, including the $138 million charge GE Capital suffered as a result of one of its subsidiaries failing to adequately insure a book of mortgages which was securitised.

Next year promises tough going for finance companies and credit unions.

"The upcoming year could see further strains on margin as there are expectations for increases in the Official Cash Rate and signs that the US Federal Reserve rate could increase as stimulus measures are removed," KPMG says.

Some in the sector fear that the Reserve Bank's new rules restricting low-equity home lending will mean the banks will seek to continue growth by competing more aggressively in non-home lending.

"One view is that with banks being limited in their ability to lend in the high LVR (loan to value ratio) mortgage area, they may try to bolster their lending books in other areas, primarily serviced by the non-bank sector," KPMG says.

"Some banks were also big funders of finance companies. Avanti, Motor Trade Finance and Instant Finance all have large lines of funding from major banks, according to KPMG.

Lending growth by finance companies and credit unions could also be restricted by the proposed Credit Contract and Consumer Finance Amendments Act requirement for "responsible lending".

While the Act is not expected to be in place until late 2015, if the bill passes into law, "the impact . . . could potentially restrict sector participants from lending to certain customers as the onus will be on the lender to ensure lending is ‘responsible"', KPMG says.

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There are also uncertainties caused by high house prices, which have caused ratings agencies and the Reserve Bank to express concern for the banking sector.

MARGIN SQUEEZE

KPMG monitors 17 finance companies and six non-bank savings institutions.

Finance company combined net profits fall by 54 per cent to $108.2m from $234.6m in 2012.

Total assets grew 1.6 per cent at $8.66 billion.

Operating expenses increased from 48 per cent to 63 per cent of operating income.

The six credit unions and building societies covered by KPMG saw their combined net profits fall by 11.7 per cent, to $5.95m.

Total assets for credit unions and building societies rose 4.8 per cent to $1.14b.

- BusinessDay

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