How Equitable Group managed to be the last man standing

By Gareth Vaughan Equitable Group, the country's only major fully functional property development and commercial finance company left, has survived while those around it failed, by being "steady, boring and unexciting." KPMG's annual Financial Institutions Performance Survey out last week, noted that of the 10 companies with total assets of at least NZ$50 million covered in last year's survey, only one - Equitable - was left with what could be termed "normal" operations. Equitable chief executive Peter Thomas told interest.co.nz there was no great secret to his firm's survival while the likes of Hanover Finance, Strategic Finance and St Laurence suffered high profile demises. "There hasn’t been any trickery or magic or running around saying 'we’re the Warren Buffet’s of the property finance world and we’re legends.' What we’ve done is we just did property finance and kept to the basics 101," Thomas says. "Steady, boring and unexciting. That’s our approach." He said Equitable's hierarchy had watched on somewhat bemused as previously smaller rival companies achieved massive growth over short time periods and moved outside what he terms prudently acceptable business in terms of risk and return. For Equitable, sticking to its knitting included being a first mortgage lender and making sure customers who paid their interest on a monthly basis comprised at least 70-80% of its loan book. "We’ve always had cashflow coming in the door every month whereas a lot of these others, they were roll ups of capitalized interest and so therefore if you didn’t get the asset price appreciation then there were significant difficulties." Most of the property financing finance companies that collapsed lent on a capitalised interest basis, which meant interest was not paid through the course of the loan but was accounted for as a performing loan. This was even if the term of the loan was extended when it expired because the development had not been completed or sold. Furthermore, property finance only represents about 10% of Equitable's loan book. The rest covers commercial finance, mortgages on buildings, land developments, industrial finance and a couple of hotels. The group's loan book is now valued at about NZ$220 million, well down on the its NZ$370 million pre-global financial crisis level of three years ago. Thomas says the firm choose to shrink its book as the commercial property cycle neared its peak and the global financial crisis eroded investor confidence. Now Equitable is looking to write new business, be an early adopter of the Reserve Bank's new rules for non-bank deposit takers, and keep an eye out for acquisition opportunities. When the property development finance company bubble was peaking, Thomas suggests Equitable's conservative approach came under some pressure. He says about two and a half years ago he pitched to a stock broking firm, suggesting Equitable would be a good fixed interest investment offering for its clients. The stock brokers weren't interested, saying they only wanted one fixed interest investment opportunity from the property sector and they already had one with "vastly superior" management skills and credit origination. Equitable, which consists of Equitable Life and Equitable Mortgages, has a BB credit rating from Standard & Poor's. Covered by the existing Crown Retail Deposit Guarantee Scheme, Equitable has also been accepted into the extended scheme which kicks off in October. The group is owned by Rich listers, the Spencer family. They, Thomas notes, haven't demanded high dividends every year, which helped lead to the comeuppance of some of the failed companies, and have been prepared to reinvest in Equitable. Nonetheless he insists the Spencer's aren't subsidizing Equitable. "We stand up on our own two feet but it is quite good to have a strong shareholder who also provides a quality board and governance," Thomas says. Standard and Poor's commented in its report that the Spencer family's backing helped underpin Equitable's credit rating. Equitable's March year accounts, currently being audited, are likely to show a small annual operating profit. Reinvestment rates are currently above 60% (in the high 60s). Thomas suggests, however, Equitable has faced what he terms “winners' curse.” This is investors wanting to cash up their Equitable investment because other parts of their investment portfolio have been frozen. Despite emerging opportunities with rivals off the scene, Equitable isn't getting any delusions of grandeur. The group doesn't aspire to be New Zealand’s largest finance company and doesn't have a "growth for the sake of growth" mentality. "We just want to write assets that we’re comfortable with and have a good understanding of," says Thomas. "I don’t think we’d want to be in the billion dollar balance sheet camp because that’s pretty hard to fund if you don’t have a very high investment grade rating. Within New Zealand maybe NZ$500 million is a more appropriate size relative to the economy." This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.