Strong performance in New Zealand’s non-bank sector during 2017 driven by lending slowdown in the banking sector.
New Zealand finance companies, credit unions and other non-bank entities have again experienced strong growth in 2017, with net profit after tax up 10.20% to $216.67 million and an increase in gross lending of 13.92% or $1.08bn.
Released today, KPMG’s Non-Bank Financial Institutions Performance Survey (FIPS) surveyed 25 of New Zealand’s non-bank financial institutions, and analysed the sector’s performance to 30 September 2017.
John Kensington, KPMG’s Head of Banking and Finance, says that a key driver of the non-bank sector’s strong performance has been the slowdown in lending in the banking sector.
“The banks have been lending in a more cautious manner as a result of LVR restrictions on mortgage lending, their voluntary non-recognition of offshore income in repayment calculations and funding pressures due to higher regulatory capital requirements affecting the big four Australian-owned banks. This has meant that most non-bank lenders have been able to capitalise on the flow of business the banks have said ‘no’ to that in the past they might have accepted.”
Credit quality in the sector is robust, with impairment losses and provisioning appearing to be close to cyclical lows in spite of the generally strong demand for loans.
However, Kensington reflected: “Many participants noted that the historic love affair with looking after the borrower may be over; it appears that the liquid cash of retail depositors will be the kingmaker as far as funding is concerned going forward.”
The availability of low cost funding appears to have reduced slightly in the sector. In some instances, restrictive covenants have been included which dictate where funds can and cannot be lent. In other instances, interest rates have increased – unsurprising given the inflationary pressures across the globe and in New Zealand.
“A competitive lending market seems to have reigned in the ability of non-bank lenders to pass on the funding rate increase to their customers. Margins seem to be pressed at both ends,” commented Kensington, pointing to the reduction in sector interest margin by 40 bps to 5.58.
A few survey participants noted an increase in the presence of brokers in the market, charging fees that are high in comparison to the establishment fees that a non-bank would be permitted to charge under the CCFA should the customer approach them directly.
Fintech was a popular topic of conversation again this year, and not only with ‘Peer-to-Peer’ lenders. “Instant, uncomplicated finance for discretionary goods and services provided on-demand to time-poor customers has clear appeal,” said Kensington.
So-called ‘millennial’ customer experience expectations and behaviours have largely become mainstream, making non-bank providers very conscious that their ability to innovate is crucial to their survival. “A solid understanding of the customer is unmistakeably required to ensure that product and technological innovations are relevant. Equally when something goes wrong in the fast-paced app world, customers don’t want to read the FAQ’s, they want a person to speak to.”
Just how the next Fintech wave will come about and by whom the next buzz tool will be developed are questions on the mind of the industry as a whole. Many participants we spoke to felt that NZ’s advanced banking system may be delaying the impact of Fintechs, as the market is already comparatively efficient.