Non-bank sector thrives despite uneven playing field – KPMG

And the good profits sustained in the past year could be under threat in the current year.

These are among several findings of the annual KPMG Financial Institutions Performance Survey (FIPS).

At first sight, the raw statistics look positive for New Zealand's 26 non-bank lenders.

It found non-bank net profit after tax (NPAT) grew by a massive 56.82% in the year to September.

This was even faster than the 47.92% increase KPMG reported for mainstream banks' NPAT nine months ago.

There were other strong indicators: assets grew, lending grew and profitability of interest payments grew as well, with the average net interest margin (NIM) rising from 5.32% to 6.07%.

These good tidings might not last, however, with the next 12 months looking very uncertain, according to KPMG's Head of Banking and Finance, John Kensington.

But good years or bad, the non-bank sector is still being made to work harder for its profits than mainstream banks, according to the FIPS report.

For one thing, the Money for Lending programme, which the Reserve Bank used to ward off a potential Covid-driven recession, was only made available to banks.

In addition, banks could securitise certain assets, but non-banks could not.

As in previous reports, Kensington produced a thesaurus of criticism of the Credit Contracts and Consumer Finance Act (CCCFA). It was “strangling” the industry, he said, it was “misguided and poorly executed”, and it slowed lending down by 50% and sometimes caused it to stop.

But FIPS found the CCCFA was even worse for smaller finance companies than it was for large banks.

For one thing, smaller companies could not afford the same complex CCCFA implementation systems that large banks could buy, yet the law was based on the principle of one-size-fits-all. In addition, the law's hefty $500,000 fines could prove fatal for some non-bank lenders, while a major bank could cope.

The FIPS report added that while the government had made changes to the CCCFA, it “had never apologised or admitted the shortfalls of the legislation.”

Defaults and overdue payments were very low in the mortgage space, despite frequent complaints of hard times.

It attributed this trend to people being able to save money during the low-interest rate environment of the Covid era, as well as not having very much to spend it on during lockdowns. Further, some people got pay rises due to wage inflation, and collectively, these trends enabled them to pay down debt. But FIPS noted this happy situation might not last.

Kensington said the year had been a strong one for the non-bank sector. However this might not last.

“The next 12 months look very uncertain, with rising interest rates and rising inflation likely to continue for another 6-9 months,” he said.

“(Inflation and interest rates) have gone a lot higher and done so a lot faster than predicted, and as a result no one really knows how high it's going to go or when it gets to its peak, how long it's going to stay there.”

Kensington said in the circumstances, poor quality rulemaking, such as the CCCFA, had to be looked at closely.

“Regulation is needed, but it needs to be scalable and proportional, so that even the smallest entities can implement it without a massive drain on their resources,” he said.

“It also needs to address an actual issue, not a perceived one, it needs to have no unintended consequences, and ultimately it needs to be fit for purpose.”