Non-banking sector record year reported

John Kensington.
John Kensington.
Cheaper funding costs and strengthening loan book quality helped keep the non-banking sector stay competitive and produce sound financial results.

The KPMG financial institutions performance survey of non-banks released this morning showed 2014 had been another record year for the non-banking sector.

Profits increased by $133 million compared with the previous year, driven mainly by a large-one off expense in the previous year not recurring and good lending growth.

The net profit after tax for the sector was $263 million which was an increase of more than 100% from 2013.

The non-banking sector also showed significant asset growth, increasing 8.4% from the previous year.

Companies are buying new cars to replace tired fleet vehicles. Photo by Peter McIntosh.
Companies are buying new cars to replace tired fleet vehicles. Photo by Peter McIntosh.
KPMG head of financial services John Kensington said although the headline level of the growth indicated another strong year, executives interviewed said the profit targets were getting harder to achieve due to both competitive pressures and further increases in operating expenses, driven mainly by compliance costs.

Improvements in economic conditions and a strengthening New Zealand dollar had led to a growth in assets during the year, he said.

Motor vehicle leasing entities fared well, as the majority of their vehicles to be leased were imported and the dollar was strong.

During the post global financial crisis, the New Zealand fleet aged significantly as replacement was deferred.

Sector participants acknowledged the key to remaining competitive in the environment was to understand their customers, knowing how to provide them with exactly the nature of finance they needed, developing strong client relationships over time and sticking to their core business and not getting into products or markets in which they did not normally operate, Mr Kensington said.

''Margins on the lending side continue to be under pressure due to the current competitive environment but this has been offset by the borrowing side by a lower cost of funds.''

Sector participants acknowledged they had benefited from the lower cost of funds although they had recently seen those costs starting to increase. The result was a decrease in the sector interest margin of 0.19%.

A consistent theme coming from executives surveyed was of extreme competition for lending and the consequential effect on margins, stemming from both industry incumbents and the intrusion of banks into the market, he said.

The banks had proved to be agile, entering and exiting the market at will.

Executives surveyed had indicated the banks had not been afraid to act in a predatory manner by undercutting rates to secure lending, despite borrowers having pre-established relationships with non-bank participants.

''There is also the notion in the non-banking sector that, given the rate afforded to some borrowers without credit ratings, some of the lending is questionable as to whether it is sustainable.''

The one advantage the non-banking sector had was the ability to work with and offer flexibility to its customers, Mr Kensington said.

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