Key Points:

Investors should be heartened by the performance of major finance companies over the past year, and the string of 13 failures in the sector over the last 18 months is a "purging in the process of a return to health," says KPMG.

The accountancy and advisory firm yesterday released its annual survey of the non-bank financial sector, using it as an opportunity to try and engender some sorely needed confidence in the sector.

It found the overall performance of finance companies had been "solid" over the last 12 months - as long as the failed companies were excluded from consideration.

"Obviously the thing that's very hard to reflect is the impact of the failures in terms of those numbers because of course there aren't any financials that we can analyse and bring through," said KPMG financial services deputy chairman Godfrey Boyce.

The failed companies aside, the sector had grown total assets by 7 per cent against the double digit increases seen in recent years, and net profits were up 14 per cent when adjusted for big one offs. The bigger, better placed companies had also been enjoying bigger interest margins.

Boyce said: "Based on these results the sector's financial performance should support, rather than detract from, the industry's current efforts to rebuild investor confidence. It's easy to look at what's happened from a 'glass half empty' point of view."

The failures have to date, put close to $1.5 billion in New Zealanders' savings at risk, with the latest - Capital + Merchant Finance - placed in receivership last Thursday, after KPMG finished its report.

Boyce said while the aggregate results were solid the overall picture was one of "a continued slowdown in asset and earnings growth with the deterioration in credit quality measures suggesting the favourable credit environment enjoyed by the sector since 2000 has ended".

Investors' flight from the finance company debenture market was only one of a number of issues facing the industry. Others included increased compliance costs related to the new regulatory regime which takes effect over the next three years.

Under the new rules firms will be obliged to go through the costly process of obtaining a credit rating from a recognised international agency. Most, not including the biggest and best companies, will likely be rated equivalent to "sub-investment grade".

The combination of factors would see consolidation, which as yet had not played out as KPMG had anticipated.

Nevertheless, KPMG expects the number of significantly sized finance companies will more than halve from 49 at the beginning of last year to about 20 within five years.

KPMG financial services chairman Andrew Dinsdale said it wasn't his firm's role to make predictions or provide detailed comment on the sector.

SURVEY FINDINGS

* The 13 recent finance company failures are a "purging in the process of a return to health" says KPMG.

* The sector's performance over the last year excluding the failed firms was "solid" but KPMG says the going is getting much tougher.

* It expects less than half of the present day's finance companies will be around in five years.