14 Dec 2022

Profits for non-banking sector rise by more than half

10:50 am on 14 December 2022

Photo: 123RF

Profits for the non-banking finance sector have risen sharply over the past year, but it faces an uncertain future amid a slowing economy and tougher regulation.

Business consultancy KPMG's annual survey of 26 finance companies, building societies and credit unions showed combined profits rose nearly 57 percent to $395.3 million.

Their assets rose about 13 percent to $18.6 billion as business rebounded and margins increased 75 basis points to 6.07 percent.

KPMG Banking head John Kensington said the sector was valuable, serving a range of customers, which the main retail banks either ignored or serviced poorly.

"The role that it plays in providing alternative types of finance to 1.7 million New Zealanders is not to be underestimated.

"A lot of what the non-bank sector provides is critical for households and businesses in New Zealand to survive."

John Kensington

Head of KPMG Banking John Kensington. Photo: Supplied/KPMG

Kensington said political and regulators seemed to misunderstand the importance of the sector and the need for it to survive, and suggestions that it was predatory or shady could not be further from the truth.

The survey included specialist business lenders such as car and machinery finance, as well as building societies and credit unions owned by their members.

Kensington said the sector had enjoyed solid growth on the back of low interest rates, improved demand, and a lack of competition from the mainstream banks.

However, he said the future was looking tougher for the sector with high inflation, rising interest rates, slowing economy, and the prospect of more tight regulation.

"There is going to be new regulation, they find that very difficult and expensive, and it'll be tougher to make money as we go into a potentially Reserve Bank-engineered recession.

"It's the future they're worried about, will there be a recession, how will our customers fare, and what's this big regulatory overlay that is coming ... are they going to have their ability to do business reduced and reduced and reduced?"

Regulation threat

Parliament was currently considering the Deposit Takers Bill which would bring in tougher capital and reserve requirements for all banks and finance concerns taking deposits, as well as bringing in a deposit guarantee scheme offering protection of up to $100,000 of deposits for individual consumers.

Kensington said the small finance concerns could not easily raise new capital and would struggle to get the necessary credit ratings.

Last week, a group of building societies and credit unions told a select committee the bill in its current form could wipe them out because of the heavy costs of regulation.

Group spokesperson Ray Greenwood said they wanted a graduated system, which applied some core principle through the sector but gave them breathing space from the more onerous provisions and costs.

"We support a new regime in principle, but it has to be made proportional to risk and our size. Right now, many of our boards have frozen forward planning, and some of us are having to turn away customers because of the uncertainty.

"Compared to even a single trading bank we're hardly a threat to financial stability ... What's at risk here is the competition and choice that our institutions provide."

Kensington echoed their calls.

"Regulation is needed, but it needs to be scalable and proportional, so that even the smallest entities can implement it without a massive drain on their resources."

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