Provincial chief predicts crunch-time for finance companies

Consolidation in New Zealand’s over-crowded finance company sector is inevitable and would begin shortly, John Edilson, Provincial Finance CEO.

Tuesday, November 15th 2005, 6:22AM

by David Chaplin

However, Edilson said his personal view was that none of the 81 finance companies currently operating in New Zealand would fail despite the fact that several of them are already unprofitable.

“Finance companies are run by sensible people… they either have to grow or will get taken over,” he told delegates at last week's Society of Independent Financial Advisers conference. “And I believe unprofitable companies will be taken over by bigger ones.”

Edilson said the current media focus on the finance company sector, while to some degree fair, has focused on the wrong things.

“They [the media] never analyse the P and L of finance companies and just talk about the potential of investors and borrowers to get burned,” he said.

Asset growth in the industry has been high but unevenly distributed, Edilson said, with profit growth across the 81 finance companies in the last year amounting to only $38 million.

He pointed out a number of factors that are contributing to a coming crunch in the non-bank finance sector: an expected general economic downturn; rising interest rates; and, the added costs of more regulation.

“Everyone is predicting an economic contraction to happen sooner rather than later and the non-bank finance sector will be hit harder, as we operate on the edges,” he said.

The introduction of the Credit Contract Act in April this year has also added costs and risks to the sector with the Commerce Commission now empowered to carry out court action on behalf of disgruntled finance company investors and the “unusual” prospect of class actions now allowable under the law.

Edilson said more regulation of finance companies is also probable and he picked out the Reserve Bank, which currently polices the trading banks, as the likely prudential overseer of the industry.

Rising interest rates would only add further to the woes of the highly-leveraged non bank finance sector.

“If interest rates keep going up, our margins will be squeezed even further,” he said.

According to Edilson, the combination of these factors could cause finance companies to seek extra return in riskier assets or accept a lower return for the same amount of risk.

“In a risky environment you need the right return,” he said.

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