By Gareth Vaughan
Finance company, building society and credit union bosses are concerned about the potential for new entities to win business off them through using a combination of technology and big data, KPMG says.
In its annual non-banks Financial Institutions Performance Survey (FIPS), KPMG says a key theme on the mind of executives surveyed is the potential threat of a "disrupter" entering the market and the subsequent impact on their businesses.
"We have seen examples in industries such as retail and insurance where a disrupter has been able to come in and shake up the marketplace. Where, when and how a disrupter may manifest itself within the industry is still unclear to many of the executives, but they agree that it will probably come from someone who has access to customer and data information and have the ability to use this data," KPMG says.
"With technology increasing significantly over the past few years, and this very likely to continue in the future, there are more and more methods being developed to capitalise on the 'big data' captured by businesses, such as learning more about their customers and their habits, and using this information to provide additional and different products and services to their current customers."
"This provides an opportunity for a 'disrupter' entering the sector, in the same capacity Amazon captured the retail market," KPMG adds.
"It is yet to be seen in what form and what impact this entity may have, or when or if this would occur. But a real concern was identified around all the data that is moved around, and stored, as to exactly who does own it, the financial institution, the telco, the payment system or the cloud storage entity."
Eyes on P2P
One entity all executives in the sector are watching is Harmoney, New Zealand's first licenced peer-to-peer (P2P) lender. Harmoney's founder and CEO is Neil Roberts, a former general manager at Pacific Retail Finance. And Wayne Croad, managing director and 70% owner of non-bank deposit taker Finance Direct, is also applying to the Financial Markets Authority for a P2P licence for Lending Crowd.
Squirrel Money, set up by Squirrel Mortgages founder John Bolton, is also seeking a P2P licence, and the likes of RateSetter and SocietyOne, both operating in Australia, have also expressed interest in New Zealand P2P licences. Internationally P2P, with its low cost internet-based business model matching borrowers and lenders with the latter sometimes institutions rather than retail investors, is gaining momentum. Lending Club, the biggest US P2P lender, had a highly successful float on the New York Stock Exchange last week.
Although there were no major mergers or acquisitions in the sector over the past year, KPMG makes the point there may well be next year. GE Capital, New Zealand's biggest finance company by assets, has its consumer finance division - GE Money - on the block. And KPMG also notes the unsolicited and rebuffed approach by Heartland Bank to acquire Motor Trade Finances. Elsewhere there has been consolidation in the credit union sector against a backdrop of increased costs and more competition.
"Given the substantial size of GE and its Trans-Tasman operation, we would expect that the number of potential purchasers maybe limited to the large banks, private equity firms, or specialist lenders who may look to bolster or create their presence in the consumer finance space," says KPMG.
"Of the executives surveyed, the common theme was many are on the lookout for potential acquisition targets to achieve growth and scale that cannot be obtained organically. It therefore appears that the lack of activity in this space is not down to a lack of will, but rather a lack of suitable acquisition targets at the right price. We expect this momentum in the inorganic growth space to continue, as the growing costs due to regulation and pressure on margins due to increasing competition continue to indicate future consolidation of the sector is inevitable," KPMG adds.
KPMG says a consistent theme from executives surveyed is "extreme" lending competition both from other non-bank lenders and from banks. The firm says banks have "proved to be quite agile, entering and exiting the market at will." Executives complained of banks acting in a "predatory manner" by undercutting rates to secure lending, despite borrowers having pre-established relationships with non-bank lenders.
"There is also the notion in the non-banking sector that, given the rate afforded to some borrowers without credit ratings, some of the (bank) lending is questionable as to whether it is sustainable."
Against this backdrop there's also a new wave of regulation washing over the sector through the likes of being required to obtain a non-bank deposit taker licence from the Reserve Bank, the Financial Markets Conduct Act which has overhauled financial markets regulation, adapting to FATCA (the US Foreign Account Tax Compliance Act), and preparing for the Responsible Lending Code.
Strong asset growth
Although annual net profit for the sector surged $133 million, or almost 103%, to $263 million, KPMG points out the big jump is largely due to GE Capital making a $138 million one-off payment the previous year. Stripping this out, the sector's operating expenses rose 11% year-on-year, reducing net profit by $5 million, or 2%.
Annual asset growth was, however, strong rising 8.41% to $11 billion with asset growth recorded by 19 of the 23 entities surveyed. This was helped by sector-wide growth in net loans and advances of 7%. Riding the wave of strong car sales, Motor Trade Finances was the best performing entity with gross loan growth of 23%.
Interest income increased by $10 million and interest expense fell by $9 million across the sector, leading to an overall increase in net interest income of $19 million, or 2.8% year-on-year with 16 of the 23 surveyed entities improving net interest income. However, the sector-wide net interest margin fell 19 basis points to 6.78% in 2014 from 6.97% in 2013.
"The (net interest income) result comes on the back of cheaper costs of funding, which has been fully eroded by extensive competitive pressures across all sectors. Wholesale debt funding costs have continued to decline over the survey period and are now at levels pre-GFC (global financial crisis) in 2008," KPMG says.
"When combined with strong retail deposits for deposit taking entities, participants have seen further savings on the expense side of their net interest margin, with interest expense having reduced by 2.54% in the current survey year from $361 million to $352 million, despite an increase in interest bearing liabilities of 9%."
* The 23 entities surveyed by KPMG included the three individual GE entities that make up GE Capital, being GE Finance and Insurance Limited, GE Commercial Finance (USD) Limited, and GE Commercial Finance NZ Limited. The threshold for inclusion in the FIPS was total assets of at least $75 million.
This story was first published in our email for paying subscribers. See here for more details and how to subscribe.