Australia / Industry Insights
Competition is Troubling Non-banking Financial Institutions in NZ
by Tommy Wu
Jan 08 2019

The Non-Banks and Other Financial Institutions industry in New Zealand has suffered from a combination of exits from the industry and an overall fall in interest rates over the past five years. Non-banks and other financial institutions have failed to capitalise on surging residential housing prices over the period. Overall, industry revenue is expected to fall at an annualised 3.3% over the five years through 2018-19, to $2.4 billion.

“Despite a strong property market over the past five years, consistent cash rate cuts and fierce competition from the major banks have led to non-banks and other financial institutions struggling over the period,” said Senior Industry Analyst Tommy Wu.

Building societies and credit unions account for a large proportion of the industry. Traditionally, building societies focused on providing mortgage finance for members looking to buy a home, while credit unions serve their members by providing competitive pricing on loans for personal and business use. These organisations are typically owned by members and operated for their benefit as opposed to banks, which are for-profit organisations. Funding for mutual organisations is also relatively limited compared with banks, as they tend to rely on retail deposits to fund their lending.

Competition is expected to remain fierce over the next five years, with a projected slowdown in the residential property market and mortgage activity further weighing on operating conditions. However, higher regulatory capital requirements affecting the Australian parents of the four major banks are anticipated to keep non-bank lenders competitive. The higher regulatory capital requirements are projected to limit competition from major banks, but they are likely to continue posing a threat in other areas. Rising capital expenditure by the private sector is forecast to boost demand for credit from commercial clients. However, as mortgage lending slows, banks are likely to switch their focus to business lending.

Personal lending is projected to remain the core focus of non-bank lenders, and continued strong consumer sentiment is anticipated to support growth in this area for industry operators over the next five years. Personal lending, such as credit cards and unsecured loans, typically offers higher margins than commercial and mortgage lending. As a result, higher margins will likely help bolster the operations of smaller for-profit lenders and continue to provide opportunities for prospective entrants. Furthermore, technological advances and more fintech disruptions in lending and in the overall finance sector are anticipated to present more opportunities for non-bank lenders and other financial institutions over the period.

A projected rise in the cash rate over the next five years is forecast to raise market interest rates, boosting interest revenue generated on industry operators’ loan books. Tighter monetary policy overseas and anticipated rate hikes by the RBNZ over the next five years are likely to boost revenue growth. However, weaker than expected inflation data has delayed the next increase in the cash rate, with forecasts now keeping the cash rate unchanged until 2020. Overall, industry revenue is forecast to grow at an annualised 4.9% over the five years through 2023-24, to total $3.1 billion.