FundSource Launches Finance Company Research
FundSource is pleased to announce the launch of FinanceWatch, an initiative that analyses and reports on finance company
debentures to assist financial advisers in making robust, diligent and defensible debenture investment decisions.
FinanceWatch has been formed to answer advisers’ calls for increased transparency and readily available comparisons of
the key financial characteristics of finance companies. The research comes at a time when finance company investments
are likely to once again come under the microscope following the Reserve Bank’s decision to raise the official interest
rate to 6.75%. This reiterates FundSource’s view that NZ is nearing a peak in the business cycle with tougher economic
conditions imminent.
Key Initial Findings
Notable are the wide ranging findings across many of the key performance figures in the FundSource Research. A few of
the more interesting findings are highlighted below.
Profitability
It is of no dispute that the finance company industry has been an extremely profitable industry for the vast majority of
participants in recent years. The average net profit margin for companies three years or older is 15%, with a range of
34.73% down to -4.14%. Interest margins, the difference between what money is sourced and loaned out at, ranges from
29.66% to 3.3%, with an average of 7%.
Capitalisation
The primary risk to a debenture holder is the potential for the company to become insolvent - as the only security
provided is over the assets of the company. Therefore the level of equity within a finance company represents a buffer
to debenture investors against any loss that the loan portfolio may suffer. Equity within a finance company should be at
a sufficient level so as to absorb any foreseeable or unforeseeable shocks – such as defaults on loans. If equity is
insufficient to cover any loan default the loss may be born by the investor.
FinanceWatch has found that New Zealand finance companies are highly leveraged investments with some having adequate to
inadequate levels of equity to cover the future risk of default. While consumer lenders have average equity of 13.8%,
they range from having 32.81% equity down to just 4.37%.
Property lenders, who across the board have much larger loans as is demonstrated below, average just 9.7% equity and
range from 18.54% equity to just 0.90%.
Asset quality
Many finance companies, especially those that lend on property, have been found to have concentration (lack of
diversity) within their loan book, where a default by a single loan, or in a single industry has the potential to expose
investors to risk not compensated for.
For example, property finance companies average single loan size - on average - is near 30% of their entire equity,
while their largest single loan on average is 171.3% of the entire equity of the company. Conversely, consumer lenders
average loan size is typically 1.2% of equity, and their largest exposures average 50% of equity.
In general, non-performing loans and bad debts have been declining over recent years, largely enjoying favorable
economic conditions. Companies ranged from having no non-performing loans to some with over 10% of their assets
non-performing. The challenge for finance companies will be to cater for and manage escalating non-performing loans as
the environment turns toward a less favourable economic environment.
Asset/Liability Management
A theme that has emerged from our survey is the level of liabilities outstanding in the industry that are not matched by
assets. While on average around 30% of liabilities are not matched by assets companies ranged from some with over 90% of
liabilities not matched by assets while others enjoy an excess of assets maturing in the coming year or so over their
liabilities.
While any such mis-matches may be made up by issue of debentures the profitability of such strategies will be challenged
by any slowdown in the economy.
FinanceWatch Research
The research consists of individual and specific profiles of the top 30 finance companies by size, where key risk
assessment factors are disclosed. In addition, FundSource has produced a comprehensive report and guide on the finance
company industry, aggregating the findings and providing risk assessment guidance. Finance companies that lend the
majority of their loan book (70%) to property are treated separately to consumer and commercial lenders. Key finance
company analysis includes:
Profitability analysis Asset quality analysis Capitalisation analysis Asset/liability management analysis
The service is open to all financial advisers, brokers, accountants, and trustees. The general public will only be able
to access this research via their local financial adviser, as FundSource has found the risks associated with investing
in finance companies to be multi-dimensional and complex in nature.
FinanceWatch Methodology
FundSource has profiled 30 individual finance companies by way of direct contact and a comprehensive survey. During the
process, finance companies have been asked to provide a combination of public and non-public data, with 85% of finance
companies providing the non-public data.