By Gareth Vaughan
UDC, the country's biggest finance company, has posted a near seven-fold increase in annual profit after recording a huge drop in credit impairments from its retail loans.
However, new Reserve Bank non-bank deposit taker (NBDT) governance rules mean UDC needs to appoint two independent directors by June and a chairman to replace current chairman Graham Turley, who is also parent ANZ's commercial managing director.
UDC's annual accounts for the year to September 30 show profit after tax of NZ$18.2 million compared to just NZ$2.7 million last year. The profit jump for the provider of asset finance for plant, equipment and vehicles, came as it more than halved annual provisions for credit impairments to NZ$17.3 million from NZ$35.5 million.
The reduction in provisions included a NZ$2.9 million drop in provisions from loans to corporate customers to NZ$14.4 million and a massive NZ$15.2 million fall in retail provisions to just NZ$2.8 million.
The company increased loans and advances over the year by NZ$139.6 million to NZ$1.96 billion. UDC ran television advertisements this year saying it had "lots" of money to lend.
Secured debenture stock, including both stock due for repayment within 12 months and longer-term stock, fell by NZ$158.4 million to NZ$1.38 billion.
Meanwhile, UDC's on-demand committed credit facility from ANZ was increased to NZ$800 million from NZ$500 million a year earlier. As of September 30, UDC had drawn down NZ$450 million of this compared to just NZ$50 million a year earlier. It has, however, paid back NZ$150 million since September 30 meaning the ANZ loan was drawn down by NZ$300 million as of December 6. As of September 30, UDC was paying 4.20% interest on its ANZ loan, up from 3.81% a year earlier.
UDC had NZ$135.5 million of cash and cash equivalents held with ANZ at September 30, up from just NZ$27.2 million a year earlier. It receives interest on this at wholesale rates, 3% at September 30 up from 2.50% a year earlier.
The finance company's total operating income rose to NZ$79.3 million from NZ$69 million and operating expenses fell slightly to NZ$34.3 million from NZ$34.9 million.
'Taking up the slack'
ANZ New Zealand CEO David Hisco recently told interest.co.nz that UDC "probably" lent NZ$1 billion over the past financial year and hoped to lend NZ$1.5 billion this year. Hisco was UDC's managing director between 1998 and 2000. He said after the collapse of dozens of finance companies over the past four years (see our Deep Freeze list here for the full list of failed companies) UDC was "taking up the slack" in terms of funding equipment finance and auto finance.
UDC has also confirmed that it successfully obtained six-month exemptions from the Reserve Bank's new NBDT regulations covering minimum capital requirements, related party exposures and governance requirements. The central bank introduced a series of new NBDT regulations on December 1. The finance company argued it should receive exemptions from some of these because, as an ANZ subsidiary, it's already subject to some of the Reserve Bank's registered bank regulations.
The Reserve Bank has granted temporary exemption from the three requirements until May 31, 2011. UDC says it's now consulting with the Reserve Bank on the nature and extent of a longer-term exemption to the minimum capital and related party rules.
"There is no certainty as to the availability or scope of any further exemption," the company says. "If no further exemption is granted, from June 1, 2011 UDC will only have limited exemptions to the related party exposure requirements and calculation requirements of the minimum capital requirement."
These exemptions would mean: UDC would be allowed to have total exposure to related parties as a percentage of its capital not exceeding 75% instead of the 15% limit prescribed by the NBDT rules. Furthermore, UDC wouldn't be obliged to use the prescribed calculation model to calculate the risk-weighted amount for credit risk so long as it instead uses ANZ's capital calculation model approved by the Reserve Bank.
New chairman, independent directors needed
From June UDC will have to comply with the Reserve Bank's governance requirements which state that NBDTs' or building societies must have a chairperson who isn't an employee of either the NBDT or a related party, and must have at least two independent directors. Aside from Turley, ANZ's deputy CEO Steven Fyfe is also on UDC's board, alongside the bank's chief credit officer Richard Wilks and Penelope Ford, head of ANZ's foreign exchange sales in Auckland.
A spokeswoman for UDC said the six month exemptions would give the company time to comply with the new NBDT regulations.
The central bank also says NBDTs like UDC, that are subsidiaries, are prohibited from including provisions in their constitutions that would allow directors' to act otherwise than in the best interests of the NBDT.
The NBDT regulations set out that a minimum capital ratio must be included in NBDTs’ trust deeds. This must be at least 8% for those with a credit rating from an approved credit rating agency, and at least 10% for those lacking a credit rating.
Chris Cowell, UDC's chief executive, told interest.co.nz in September that UDC had survived in recent years amid carnage among other finance companies, because being part of ANZ gave it strength and the company had "stuck to its knitting" and avoided financing property development. UDC has an AA credit rating from Standard & Poor's.
UDC's main competitor is Marac Finance, which is merging with CBS Canterbury and Southern Cross Building Society with the aim of getting a banking licence.
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