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Finance company sustainability questioned

KPMG questions the sustainability of some finance companies in the face of an economic slowdown.

Tuesday, May 2nd 2006, 11:14PM
KPMG predicts the biggest shakedown in the coming year would be in the finance lending industry, which has blossomed during the past few years of solid economic growth.

This year's survey included 49 finance companies with loan books of more than $50 million -- with 20 new companies passing that asset threshold in the past three years.

The sector continued to grow rapidly, with total assets lifting almost 15% in the 2005 year.

Much of that lending growth came from property and commercial finance, which expanded around 30% in 2005. Consumer finance grew 20%, while motor vehicle financing rose by just 4%.

"What we've seen raises questions about the sustainability of so many players, particularly if the long-forecast economic slowdown takes hold," Boyce said.

"The slowing economy and slowing property market is likely to lead to loan defaults."

While most of the industry was operating at interest rate margins of more than 5%, 15 finance companies were operating on margins of less than 4%.

Credit issues were being reported, particularly in the areas of consumer and motor vehicle finance.

Boyce said the industry was facing a similar scenario to 1996, when asset growth stalled and earnings declined as doubtful debts rose.

The KPMG survey -- now in its 20th year -- has previously shown links between trouble in the finance sector and a broader banking downturn.

"Should a major New Zealand finance company fail, the result could well be a flight of capital which would put the weaker finance companies in the country under extreme pressure," Boyce said.

KPMG's financial services chairman Andrew Dinsdale called for tougher regulation of the New Zealand finance industry and the use of globally recognised credit ratings agencies like Moody's and Standard & Poor's.

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