Recent Trends for Non-Bank Financial Institutions in New Zealand: Non-Bank Financial Institutions Have Delivered Outstanding Results in the Past Four Years, Outperforming Banks Both in Asset and Profit Growth (1)
Kerr, Justin, Journal of Banking and Financial Services
Let the good times roll
Over the past four years, both banks and non-bank financial institutions have enjoyed strong growth in assets and profitability, due to a combination of:
* Low and stable interest rates;
* Strong economic growth and low unemployment;
* High levels of consumer demand, boosted by high net immigration; and
* A willingness by households to take on higher levels of debt for housing and consumer goods.
Although registered banks dominate the New Zealand financial landscape the non-bank sector has outperformed them in recent times. Growth in total assets, by both finance companies and savings institutions (2), has exceeded that of registered banks (3). The profit growth of finance companies has also been stronger than for the banks. The more moderate profit growth of savings institutions partly reflects the fact that as most are mutual organisations, without dividends to pay, they price their products on a different basis.
Why has the sector done so well?
The prosperity of the non-bank sector in recent years largely reflects its ability to focus on a specific business area and its flexible approach to business. The diversity of the sector is clearly illustrated by the membership (4) of the peak industry association, the Financial Services Federation.
The key features of the non-bank sector in New Zealand are:
* It has tended to stay closer to its markets and customers;
* It has remained responsive and flexible in terms of product offerings;
* The sector provides a good mix of New Zealand-owned and overseas businesses;
* Most participants operate in defined niche markets with business cultural values appropriate to these;
* Most institutions are very innovative and use technology to provide new and very cost-effective solutions to customers; and
* There has been an enormous growth both in numbers of participants in the sector and business volumes.
Some of these features can be illustrated by looking at various parts of the sector in more detail.
Finance and leasing companies represent a major part of the sector and operate in one or more of the following areas:
a) Business finance: The financing needs of small and medium-sized businesses have long been a particular focus for this group. Capital constraints for these companies pose a problem for which asset financing is a tried and true solution. The item of plant and equipment that the business purchases provides the lender with its security. For the business, financing also requires that the benefits of such incremental acquisition are estimated and assessed against the costs. Leasing is another option for meeting business finance needs and can provide a combination of quite specific benefits. It enables more efficient capital use and, in the case of full maintenance leases, cost-effective asset maintenance in use.
Most businesses in New Zealand fall into the SME category and the number of these businesses is growing steadily. There are few very large companies operating and these are increasingly able to go direct to market for their financing needs. Over the past three years opportunities for business financing have been assisted by buoyant demand conditions.
b)Property finance: Another growth area has been in the property development market. With high levels of demand for property, both residential and commercial, has come a parallel demand for development finance. This comparatively short-term finance offers considerable rewards to those who have developed the capability and strategies to manage the risks peculiar to this business activity. Building consent figures provide an indication of levels of activity in this sector. Residential consents for the 12 months to April 2004 are 22.8 per cent up on corresponding 2003 figures. Commercial consents are up 12. …