S&P expects more finance companies will collapse

Rating agency Standard & Poor’s expects more finance companies will collapse in the coming year as liquidity becomes a major concern once the first tranche of the government’s retail deposit guarantee comes due in October.

Friday, April 9th 2010, 6:00AM

by Paul McBeth

In a report on the country's non-bank deposit takers (NBDT), S&P flagged the lack of back-up external liquidity through bank facilities or credit lines as a weakness of many finance companies, and analysts Peter Sikora and Brendan Flynn say they expect more consolidation across the sector.

"The smaller mutual savings institutions, which are facing increasing regulatory and compliance requirements and associated costs, are particularly exposed to sector consolidation as are finance companies where over-servicing remains across some asset classes," the report said. "So far, credit unions have counted for most of the sector's anticipated consolidation while finance companies have seen very few mergers but have counted for nearly all the failures."

The report flags the government guarantee as a major risk for NBDTs in that most debenture stock will mature before the expiry of the initial scheme on Oct. 12, and the "most vulnerable to liquidity and refinancing risks are those not covered by the deposit guarantee through the extension period."

This would be compounded if the Reserve Bank goes ahead and introduces new liquidity ratio requirements, reducing NBDTs' profitability and forcing them to hold more lower-yielding liquid assets. The RBNZ is currently reviewing submissions on a discussion document regarding potential liquidity requirements for non-bank lenders.

Still, the S&P report says it believes the sector's poor asset quality problems have passed, and that many NBDTs have been able to adequately raise provisions to cover possible losses.

"We derive some comfort from evidence that most NBDTs have sought to fortify their capital positions and buffer against possible losses on problem loans, but liquidity and refinancing vulnerabilities continue to trouble our view of the sector's creditworthiness and are likely to result in further company failures," Sikora and Flynn said in their report.

Paul is a staff writer for Good Returns based in Wellington.

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