Banks fend off finance companies

A new report from Moodys says that while finance companies have been active in the deposit rate market they haven't had much impact on banks.

Wednesday, December 15th 2004, 6:23AM

New Zealand's finance companies have increased their activities but are unlikely to pose a threat to the banks or impact their ratings.

Most notably, the finance companies have intensified deposit-taking in recent times by offering attractive rates say Marina Ip and Patrick Winsbury, the authors of the report.

As such, the finance companies have raised their share of household deposits to 15% but have not taken away substantial, overall deposit market share from the banks.

The report does not expect such activities to impact the ratings of the country's banks for various reasons, including the fact that the finance companies only hold a small percentage of system customer deposits and are unlikely to impose a margin squeeze on the banks.

"And in the unlikely event that the banks might be called upon to support finance company sector liquidity (for example during a market disruption) the strong financial condition of the banks, and their large size relative to finance companies, should underpin bank rating stability," the report says.

The authors note that the banks continue to dominate New Zealand's customer deposits, accounting for 95% of the total market in 2002 and 2003.

"Furthermore, as interest rates rise, depositor focus on rates may decline somewhat. Hence, we do not believe there is too much pressure on the banks to compete on deposit rates," the authors add.

The report further points out that although New Zealand's sound regulatory environment greatly reduces the risk of systemic issues besetting the finance company sector, Moody's does believe that it is worthwhile considering -- for the purpose of its ratings analysis -- the contingent risk that such a scenario would hold for the banks.

The liquidity profiles of New Zealand's finance companies appear to vary widely, but on average are on par with those of the banks - short-term assets to short-term liabilities are in the 10% range.

By global comparison, this is a relatively low level. The banks mitigate this concern by virtue of their good access to international wholesale markets and they can also look to their highly-rated parents for additional funding, the report says.

But many of the finance companies do not have such flexibility. Nevertheless, the report says that liquidity support may be provided through the country's banking system -- in particular if difficulties in the finance company sector threaten systemic stability.

Given the substantial portion of household deposits held by the finance company sector, this is not merely an academic consideration.

"In this circumstance, we do not see any ratings implications for New Zealand's banks. Their intrinsic financial condition is strong; they can rely on the support from highly-rated parents who are committed to the New Zealand market; and their size is large relative to the finance company sector. All these factors should underpin bank rating stability," the report concludes.

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