Finance companies in not too bad a shape: RB

The failure of finance companies at the lower end of the market such as National Finance 2000 is not an indicator of wider problems for the sector, the Reserve Banks says.

However, it said in its six-monthly Financial Stability Report yesterday that more severe problems involving finance companies with property market exposure might yet emerge further down the track.

While Reserve Bank Governor Alan Bollard said the financial system was well placed to weather the economic slowdown, warnings to finance companies and to highly geared homeowners again figured highly in the report.

Among those "who may need to reassess their positions" were "institutions exposed to property investment and consumer finance".

The banking sector was "profitable, well-capitalised and able to bear increases in impaired assets as economic conditions become more challenging" but the rapid growth among young institutions with little experience in managing a downturn, made "a significant part of the finance company sector particularly vulnerable to a more challenging economic environment".

Nevertheless, "isolated and individual failures among these institutions are unlikely to threaten overall financial stability".

The bank said there were indications that non-bank financial institutions were adequately managed and capitalised, "the major area of uncertainty in the sector is the adequacy of pricing and management of credit risks, especially in property lending".

Property lending losses typically took much longer to emerge than consumer credit problems and could be more severe.

Meanwhile, the bank also predicted mortgage rate competition among the major banks would continue, despite its effect on their profitability.

The banks' Australian parents might see scope for further price competition in New Zealand, suggesting "there is little likelihood of pressure on margins easing in the New Zealand market and, if anything, we expect the pressures to intensify".

That can only be good news for the about one-third of households the Reserve Bank estimates will have to refinance home loans this year.

The sector's smaller new entrants such as Kiwibank could find it harder going in a softer economic climate.

Failures Tipped

More second- and third-tier finance firms will fall over in coming months, a leading corporate receiver predicts.

Speaking on condition of anonymity, the accountant for one of the leading accounting firms said liquidity in used car and secondhand goods markets had dried up.

Publicity about thousands of small investors facing losses of several million dollars from the collapse of finance company National Finance 2000 had made other investors wary.

"There are concerns about two or three others as well," the receivership expert said. "It's liquidity based."

Liquidity had seriously tightened in recent weeks.

- NZPA