Finance company profits have risen 14.4 per cent in the past year following a big drop in the cost of bad loans, steady lending rates and a decreased cost of funding, according to KPMG's 2012 Financial Institutions Performance Survey.
The survey covering 16 non-financial lenders shows profits have seen a healthy aggregate increase from $205 million in 2001 to $234.6m in the 2012 financial year.
But there has been a mixed bag of results from those surveyed - Mercedes-Benz Financial Services showed growth of a whopping 121 per cent in profits while Avanti Finance recorded a 69 per cent rise and Orix Finance a 52 per cent increase. On the other hand, Toyota Finance was down 24 per cent, Motor Trade Finance dropped 18 per cent and Fisher & Paykel Finance fell 14 per cent.
The overall increases were fuelled by improved net interest margins - the gap between what you borrow the money at and what you lend it out for. Interest margins were up from 6.48 per cent last year to 7.21 per cent, with 10 out of the 12 survey participants showing a boost in this area. There was a large increase in net interest income from $542m to $593m, offset by a $22m drop in non-interest income to $175m.
There's also been a substantial drop in the cost of bad loans. Impairment expenses fell from $117m to $63m. Participants are also seeing improvements across all major credit quality measures as distressed assets of the past are exited, written off and carefully managed. Management remain cautious though around the writing of new business, the report said.
The swathe of finance company failures are stark reminders of the risks involved in this sector, the survey said. The past five years have seen numerous receiverships as depositors fled, and lending assets went sour. Receivers continue to seek to recover funds for depositors left out of pocket, but asset recovery has proved difficult.
The survey said the resilient survived the global financial crisis by consolidating their positions in the market and focussing on acquiring good assets at a level that doesn't constrain growth through being too conservative on lending.
But asset growth in the sector remains flat and competition for new lending has intensified, particularly in the mortgage market with the banks once again being seen in the sector.
KPMG predicts there will be continuing pressure on margins over the next year.