Manufacturers setting high targets before car yards can earn rebate as competition rises in lending market.

Competition in motor vehicle lending is driving down the cost of cars.

According to KPMG's Non-Bank Financial Institutions Performance Survey, vehicle dealers and their lenders are under increasing pressure to make ends meet.

KPMG's Head of Financial Services John Kensington said surveyed participants reported vehicle dealers' overall margins were being eroded by high sales targets set by overseas manufacturers.

"Our participants commented that vehicle manufacturers are placing very high expectations on brand retailers - and setting high targets before any rebate can be achieved."

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Kensington said this has forced dealers to pre-register vehicles and build inventory, funded by both bank and non-bank lenders.

"Dealers are starting to see low margins become even lower. The increased need to sell vehicles to get rebates is driving down the price of second-hand vehicles."

Kensington said the squeeze is also making dealerships more reliant on finance and insurance income, as well as service and parts revenue.

"We've heard that although the number of vehicles registered has increased, a large proportion of this increase has been to the rental market, where margins are traditionally low."

Motor vehicle lenders were also facing increased competition, with a number of new players entering the market and seeking to gain share with attractive deals.

On the positive side the report said participants in the motor vehicle financing sector continued to show good improvements in impairment asset expenses.

It outlined that after just over two years of operating, Nissan Financial Services has gained a 1.19 per cent share of New Zealand's non-banking lending market.

The non-bank sector achieved profits of $254.62 million. Overall, net profit dropped by 6.67 per cent, or $18.20 million, compared to last year, mainly as a result of an increase in operating expenses of $48.49 million that more than offset the strong increases in interest and other income.

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The non-bank sector experienced contraction in margins, down 32 basis points despite the underlying net interest income increasing by $23.36 million.

The sector has also continued to show significant asset growth, increasing by $487.64 million over the prior year, the report said.

Asset quality had remained strong and was not showing significant signs of deterioration with impaired asset expense only increasing by $2.3 million compared to the previous year.

Executives commented that as interest rates continue to be low with plenty of liquidity and a stable market, it was a good time to dispose of any problematic exposures.