The Reserve Bank says credit unions and finance companies need to consolidate to stay viable – but the sector says it’s heavy regulation that is threatening their survival

Lockdowns, takeovers, job worries for members – the credit union for steel and refinery workers has had one of its toughest years. That has culminated in its board finance group meeting weekly to chart a way through the problems.

Steelsands had $31 million total assets last year, mostly short-term investments and loans to members. Its 2021 financial statements will be presented to members at its AGM next week but it’s already known to be on the Reserve Bank’s watch list of 12 small financial institutions licensed to take cash deposits.

Chair Bhikhu Bhana has put his report online, saying the credit union’s financial bottom line has been “severely impacted”.

“The Board have had to make difficult decisions, to improve the income stream we have had to increase fees,” he reports. “It was a decision not taken lightly, we do hope that members will understand that this current environment is unprecedented.”

Steelsands’ asset base is small enough to be included in a grouping of a dozen smaller financial institutions for whom, the Reserve Bank’s new financial stability report says, “scale is an issue”.

NZCU Baywide took over Aotearoa Credit Union, Credit Union South and Credit Union Central two years ago. That was followed by Steelsands Credit Union taking over NZCU Employees Credit Union this year.

The number of licensed finance companies is also shrinking. UDC Finance Ltd asked to have its licence cancelled last year. 

And FE Investments went into liquidation holding around $55m of depositors’ funds. Liquidator Rhys Cain says in his latest official report that he has identified “potential claims” against the company, and is inviting creditors to let him know if they’d be prepared to fund recovery action, including into the action of the conduct of the company’s directors.

FE Investments’ Australian chief executive Marcus Ritchie was also a director of the New Zealand business that has been put into liquidation. He and his partner Natalie Michaels were regulars in the social pages of the Sydney media. Photo: Getty Images

Cain says any decision on whether to pursue legal action will depend on the available evidence, the likelihood of success, the expected quantum of recoveries and the potential costs to recover. “The merits of pursuing these recovery actions for the benefit of creditors are being considered,” his liquidator’s report says.

The collapses and consolidations have reduced the number of licensed non-bank deposit takers, as the Reserve Bank calls them, to just 18. These include building societies, credit unions, and deposit-taking finance companies.

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The Bank’s report says they have a diverse range of business models, with credit unions having a high share of their lending in a mix of residential and consumer loans to their members, while building societies and finance companies tend to focus on a range of types of property lending. 

Together, they have nearly $3 billion in loans and other assets, making up a relatively small part of the New Zealand financial system.

Non-bank deposit takers assets (August 2021)

Source: RBNZ Non-bank Deposit Takers survey

The sector has shown resilience throughout Covid-19, with most entities experiencing stable asset performance and profitability over the past 18 months. As a result, capital ratios have been stable for most.

Return on assets has improved since the latter half of 2020, with both finance companies and building societies recovering from a decline at the onset of Covid-19. They have experienced increased demand for some loan and investment products, particularly residential mortgages. Building societies grew their mortgage lending by 15 percent in the year to August 2021, with finance companies growing 50 percent.

The sector has seen increased activity in agriculture, business, and small property development lending. Many non-bank deposit takers use their member or local ownership, and focus on regional communities, to position themselves as an attractive proposition for their customers, the report says.

But as with banks, regulatory and technological changes will place additional operational demands on them. “Some smaller credit unions and many deposit-taking finance companies do not operate with the same economies of scale as larger lenders, which weighs on their profitability and ability to meet compliance costs in some instances.”

The Government’s new deposit insurance scheme will protect up to $100,000 per depositor, in the event of an institution’s failure. It will also create a single regulatory regime for
all deposit takers, with standards that entities will be required to comply with.

And they will be subject to the new Financial Markets (Conduct of Institutions) Bill and the Credit Contracts and Consumer Finance Act, which may limit some lending growth.

Cooperative Business NZ chief executive Roz Henry said the financial stability report echoed its own concerns about the “prohibitive” compliance costs likely impacting on the smaller credit unions’ survival – the very point they had made in a letter to financial regulators. “It notes the breadth the speed of change and the way that the policy applied is going to have significant impacts to these smaller players.”

The letter was on behalf of 10 financial services co-ops including two of the bigger of the eight credit unions, Baywide and First Credit Union. It said they supported regulatory change in the desire for good customer outcomes, but the pace and breadth of change was a problem.

“Smaller or lower risk financial institutions are being hit with the same regulatory impost as large or higher risk ones, further increasing demand for skill sets which are already in short supply,” Henry warned in the letter.

Baywide has $463m total assets, serving 63,000 members; chief executive Gavin Earle told Newsroom it had the scale and strength to continue to grow. But he echoed Henry’s concerns for the smallest players: “The costs of compliance and regulatory burden are disproportionately higher, which makes it more challenging, however, I’m not aware of any further proposed consolidation activity at this time.”

Another bigger operator is Christian Savings. 

It is the smaller institutions (deposit takers with less than $100 million in assets) that the Reserve Bank is most concerned about.

Some business models may need to adapt to be sustainable in the long term, the Reserve Bank says. “There remains significant diversity within the non-bank deposit takers sector, with some entities adapting to the changing landscape and others struggling more.”

Scale is an issue for some, with 12 of the 18 entities having total assets of less than $100m. “As details of the future deposit takers framework become clearer, some business
models may need to be reviewed for their long-term viability.

“As has been seen in recent years, the small scale of some players creates a challenge for their ability to adapt as needed, and further consolidation in the sector may occur over time as firms merge to achieve scale economies and build resilience.”

“I hope you can gather from my response that we are very committed and are certainly not like the finance companies of the past that have tarnished the sector.”
– Daniel McGrath, Xceda Finance

One of the small finance companies is Xceda Finance NZ, which has disclosed its assets at $54m.

Chief executive Daniel McGrath said the company was one of only a small number of non-bank deposit taker fincos, and as such it was extremely committed to remaining within the prudentially regulated regime of the Reserve Bank.

“Many finance companies have opted out of the deposit-taking regime, but we continue to value our depositor base and believe we provide a reputable alternative for them to achieve a premium to the term deposit rate offered by the banks,” he told Newsroom.

“I hope you can gather from my response that we are very committed and are certainly not like the finance companies of the past that have tarnished the sector.”

Like the credit unions, he said the compliance framework for the sector was “certainly significant for our size”.

“But we continue to meet these requirements as it provides all our customers with comfort as to our governance and responsible lending practices,” he said. “We report to the Reserve Bank regularly as to our operations and financial position.

“Furthermore, we consistently maintain a healthy capital adequacy ratio well above the required limits, and continue to serve a sector of the community that is not always able to be serviced by the banks.

“We work very closely with our customers who value the personalised service we can provide, and therefore believe we play an important role in the financial services sector despite our current size. At Xceda we offer terms deposit investments, and our lending products range from personal loans, SME loans and property loans.”

Among the bigger of the six licensed finance companies is Christian Savings Ltd, with $240m in total assets under management. Chief financial officer Bruce Anderson said: “Christian Savings has been in operation for around 60 years, and therefore has demonstrated that we are viably sustainable in the long-term.

“For example, Christian Savings over the last two years has had its best period of growth in equity, loans and deposits and surplus,” he said. “There are however some smaller NBDT’s as indicated.”

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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