Jenny Ruth: Geneva gets set to step out of the minor league

Geneva Finance shares one major characteristic with other finance companies: it has enjoyed exponential growth over the last few years.

Managing director Glenn Walker founded Geneva in October 2002 and, by March 2004, total assets had reached $31.4 million. A year later, they had reached $63.5 million.

That growth seems to have continued this year. Walker says Geneva's loan book is about $92 million and it has about $73 million in debentures on issue, up from $46.8 million at the end of March.

The sector's explosive growth has drawn the attention of the Securities Commission and others who have raised concerns about the financial stability of many finance companies.

Some market participants have acknowledged that those concerns have led to slower growth in debenture issuance, finance companies' key funding mechanism.

Not surprisingly, those with a strong story to tell have been searching for ways to differentiate themselves from those in the worrying category.

Geneva's answer was to seek a credit rating from international ratings agency Standard & Poor's, the first non-bank, locally-owned organisation in New Zealand to do so.

In May this year, it gained a "B+" rating, halfway between a "B" and "BB" rating with a stable outlook.

S&P said at the time that Geneva was limited by its relatively small size and market position and relative youth and its heavy reliance on debentures.

On the positive side, it assessed the company as having good earnings potential, strong net interest margins and good asset quality experience. That was qualified by the comment that "Geneva's loan portfolio is unseasoned and is exposed to a higher risk market segment that is highly competitive".

Given Geneva's relative youth, and if it continues to grow at its present rate, it's reasonable to expect there's scope for it to improve its rating.

Walker says having such an independent assessment also provides the company with a kind of blueprint for how to develop and improve its credit worthiness.

While much of the finance sector has focused on property-related lending, which involves relatively large loans, Geneva's focus is very much on consumer lending, which is considerably more labour intensive - the company has about 185 staff.

Walker says the average loan is just over $3000 and the average term is about two years. Most personal loans are repaid within 18 months and car loans are usually repaid in 26 to 28 months.

While many customers could simply add such debt to their existing mortgages, they prefer to have much shorter repayment periods.

Geneva has opted for a strong retail presence and has established a 20-branch network throughout the North Island and one branch in Christchurch. Another indicator of its strong growth is that in its first year it had seven branches.

Its branches are typically located on high street shop fronts and their orange livery is highly visible.

Walker says the company may open another two or three branches but otherwise its network is largely complete.

One indication of the importance he attaches to branding is that he deliberately chose a building overlooking Auckland's Southern Motorway as the company's head office so that passing motorists are exposed to the brand.

"It's important that our investors can see where we are, as opposed to being on the 10th floor of a building on Queen St. We're visible right around the country and it gives people comfort that we're a real company."

Walker says Geneva is positioned between the major banks and the lenders of last resort.

His background is in the consumer market, and he was managing director of Instant Finance for several years.

"I saw an opportunity for a feet-on-the-ground, well-run, customer-driven finance company. I'm from provincial New Zealand [Wanganui]. A lot of big finance companies are based in Auckland, Wellington and Christchurch, but there's a strong commercial base in provincial New Zealand," Walker says.

"Our model is based around being local and having local people dealing with local people. It's about being face to face with people. When we lend money, we like to know who we're lending to."

As part of that "down home" approach, Walker is in the habit of conducting investment seminars around the country at the rate of about 20 a year and says he tries to be as accessible to his investors as possible.

Geneva also provides third-party finance to retail customers for purchases such as furniture and appliances and to car dealerships, which Walker says accounts for about 50 per cent of lending.

About 98 per cent of all lending is secured.

Walker's major financial backer is Peter Francis, founder of cinema company Force Corp, now owned by Sky City Entertainment. Francis is a 30 per cent shareholder and a director. Walker says 50 per cent of the company is owned by management and the other 20 per cent was contributed by other investors.

At its last balance date, the company was still using the ugly structure common to many finance companies of having subordinated loans on top of a thin sliver of equity. Equity at March 31 was $1.35 million, although that was an improvement on the negative equity of $924,482 a year earlier. Subordination loans at March 31 were $3.73 million but that was converted into equity from July 1.

That makes a pro-forma $5.08 million in shareholders' equity at March 31 look a whole lot healthier against the $63.5 million in total assets.

Walker says the decision to convert the subordinated loans to equity resulted from the process of gaining the S&P rating. Equity has since grown to about $8 million.

The company has an independent chairman, Brian Walsh, formerly a director of Countrywide Bank (since taken over by National Bank).

Walker's vision for the future is to turn Geneva into a more complete retail services organisation and it is expanding its product range as well as debentures. It now takes deposits and offers a range of general insurance products.

"It's a matter of taking one step at a time," he says.

As time goes on, he sees the company moving towards a more middle-market position and further away from the riskier end of the business.

Walker says he's been working to a five-year plan and "the next two years are about putting the cream on the cake".

Some of that cream started coming in during the year ended March when the company made a $2.27 million net profit compared with a $1.89 million loss the previous year.

Walker says he did no intend to create a small company and the previous year's losses reflected investment in growing the business.