'Demand driven' opportunities for finance companies are out there in three sectors, but are there any takers?

By Gareth Vaughan

The opportunities are out there, but is anyone willing to take them?

At last week's media conference launching KPMG's annual Financial Institutions Performance Survey (FIPS) John Kensington, the firm's Head of Financial Services, outlined three areas of opportunity in the finance company sector.

Kensington said everywhere KPMG staff had been whilst putting the FIPS review together, they heard about these opportunities. Kensington also noted "very strong" annual interest margin growth in the finance company sector with the annual average up to 6.47% from 5.64% among the 15 finance companies included in the FIPS. Remember this is a sector where dozens of companies have bitten the dust since 2006. See our Deep Freeze List for details.

The three areas of opportunity highlighted by Kensington were;

1) The second hand car market.

2) Asset financing for the likes of machinery such as diggers and trucks.

3) Property development.

Sitting there listening to Kensington I thought these three areas of opportunity rang a bell and I was right. A look back at KPMG's non-bank FIPS review of 2010 shows the same three areas of opportunity cropped up then. See full story here.

So why hasn't anyone stepped in take up these opportunities yet, or have they?

"I think the situation is that those are areas where there is demand," Kensington told interest.co.nz. "When I say opportunity I'm perhaps saying there is demand."

Credit unions step in at bottom of used car market

In the used car market he's talking about the bottom of the market - loans of up to NZ$10,000. That's a space that used to be occupied by the likes of Provincial Finance, National Finance 2000, Western Bay Finance and Geneva Finance - with Provincial, National and Western Bay having since become the first three entries in our Deep Freeze List.

"We're seeing that (bottom of the market used car lending) is where credit unions are getting some growth in their books," Kensington said. "And there's a lot of people we talk to in that sector who said 'there's (loan) books for sale that people want to get out of' that they'd like to purchase but they just aren't absolutely certain it's a perfect fit with their book."

"There's still strong demand for car loans and the players in that market have all indicated a willingness to grow their book if they can get something that fits nicely into their existing business," added Kensington.

Used car financiers - largely operating further up the market than where KPMG cites opportunities - include the likes of ANZ's UDC Finance, Heartland New Zealand (created in January 2011 through the merger of Marac Finance, CBS Canterbury and Southern Cross Building Society), Motor Trade Finances and manufacturer-distributor firms such as Toyota Finance New Zealand and BMW Financial Services New Zealand.

Kensington said where credit unions had stepped in was with loans to families that really need a car.

"Mum drops dad off at work, then the kids at school and then goes and works part time herself and then does the reverse on the way home," Kensington said.

"Some of the credit unions and some of the other players, of necessity, have had to pick some of that (lending) up."

'Not an overly attractive market'

However, an industry veteran told interest.co.nz the low end of the used car financing market had always been tricky. It can be made to work but was cyclical with some good years, but borrower defaults mounting in other years.

"I think it's a market you can make money out of but you need (to charge) high interest rates, you need a big team, and you need to take a long-term view and weather the storm in bad years and make hay in good years. As a consequence it's not a market that's overly attractive."

Meanwhile, the industry veteran agrees with Kensington that there are opportunities in the asset finance market where UDC, Heartland, GE having bought AGC from Westpac in 2002, and the banks are the major players.

However, although Kensington argues opportunities in a depressed economy don't look quite as attractive to banks to fund as they did back in the heyday of 2003-04, the industry veteran suggests banks will drift in and out of the asset finance market, where customers are predominantly SMEs, and in a low lending growth environment such as now, they'll be quite active.

That said, both suggest lending against diggers, trucks and the like isn't core business for banks, which generally prefer property as security.

"The key to it (asset financing) is you have to have experts in the area and you have to get your distribution model right. It is important to know what a truck is worth, what a digger is worth, what the secondary market for those products is like, what contracts they've got, (and) who the competition is," the industry veteran said.

One new player to enter the market - in late 2010 - has been Kiwi Asset Finance, which is a subsidiary of Kiwibank and is being run by two asset financing veterans in Stephen Cole and Leo Davis who have a 20% stake in the business. See more on Kiwi Asset Finance here.

UDC, big kahuna of asset financing, has lowest interest margins in the sector

A sobering feature of the FIPS survey, and perhaps for opportunities in asset and car lending, is that interest margins at UDC - the biggest player in the asset financing space - were the lowest of the 15 finance companies (with total assets of at least NZ$75 million) in the survey at just 3.69%. And one of the major car financiers, Toyota Finance's, weren't far ahead at 4.15%.

As for the property development financiers, there's been a complete clear out there since 2007 with the likes of Bridgecorp, Hanover, St Laurence, Strategic and South Canterbury Finance having failed, and others such as Marac and Dorchester having withdrawn from the market.

Few - if any - are picking a return to retail debenture funded finance companies sinking money raised from the public into property developments. Instead the likes of Wellington's Willis Bond & Co, which raised NZ$128 million from institutional investors such as the New Zealand Superannuation Fund and wealthy individuals including Sam Morgan, to invest in property development, alongside the likes of Bluestone Group, which sources funding from US vulture fund Varde Partners, are bidding their time. Then there are the big boys like AMP Capital and Fletcher Building who have big balance sheets to draw on.

Others have stepped in buying up distressed loans on the cheap, hoping to make a killing when times improve.

These include Goldman Sachs and Brookfield Asset Management who snapped up Bank of Scotland International's New Zealand loan portfolio, reportedly paying between $450 million and $470 million for loans with an original face value of about $1.3 billion. See more on these loans here.  Singapore's Quilington is another, buying up loans from the defunct St Laurence and Bank of Scotland, with George Kerr's Torchlight fund another seeking distressed assets.

Kensington said property developers today probably need at least 25% equity in the project to be at a point where a bank may be prepared to lend them money, assuming high levels of pre-sales. That compares with just 0-10% equity during the boom times a few years ago, where banks may have been prepared to provide 50-60% of the funding, leaving the balance to finance companies.

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