Withdrawal symptoms

The turmoil on global financial markets does not bode well for non-bank deposit taking finance companies, which will also be hit by a slowing economy, increased competition, rising costs and even the drought. IBISWorld general manager ROBERT BRYANT explai

By Robert Bryant

The turmoil on global financial markets in recent weeks has changed the financial services world forever.

Even the biggest banks in the world have found themselves under pressure, squeezed by the twin pressures of rising funding costs and slowing growth as businesses shelve plans to borrow and invest in expansionary activities.

If the world’s biggest banks are getting hammered, spare a thought for Australia’s non-bank deposit taking financiers. Their outlook appears very grim indeed.

The recent crash comes after a very strong period of financial services companies all over the world, and IBISWorld estimates that non-bank deposit taking financiers grew at an average annual rate of 4.5% a year during the five year period to 2007-08.

The industry enjoyed good growth in 2004-05 and again in 2005-06, when revenue expanded impressively thanks to growth in loans and advances as well as rising interest rates. A strong performance in 2006-07 saw revenue rise again, as favourable economic and financial market conditions resulted in continued strong demand for credit. Even 2007-08 wasn’t too bad, as businesses and households continued to take out loans and advances.

One of the few areas for concern during this period was the drought, which hit the Australian agricultural sector hard, forcing a number of farmers off the land. This hurt pastoral finance companies, who saw demand plummet.

The non-bank deposit taking finance companies have a lot more to worry about now. IBISWorld forecasts that this industry will grow at an average annual rate of 2.1% during the five year period to 2012-13. Industry revenue is expected to slow in 2008-09 and then decline in 2009-10.

Over this two year period, interest rates are predicted to fall as consistent increases in the cash rate over the past five years reduce spending and inflationary pressures. Furthermore, over these two years, capital expenditure for machinery and equipment is expected to grow only marginally, further emphasising the fact that revenue growth is likely to be low in the initial years of the outlook period.

But there may be some light at the end of the tunnel. Between 2010-11 and 2012-13, the “other deposit taking financiers” industry is forecast to once again experience strong growth in revenue as the economy starts to turn and credit demand picks up.

However, with increased industry competition and an environment of tightening lending margins, profitability is expected to reduce.

The drought is expected to continue to create problems for pastoral finance companies in the outlook period. If the lack of rain persists, revenue from farmers who require loans to maintain production may dry up as they are forced out of the agricultural industry.

Key success factors for operators in the industry

• Undertaking technical research and development. A strong commitment to developing new technology that can reduce costs and produce new product offerings.
• Access to highly skilled workforce. Expertise in specialised finance company activities.
• Having an extensive distribution/collection network. Having an extensive customer base.
• Management of a high quality assets portfolio. Prudent risk reward profile and balanced portfolio composition.
• Financial position of the company (as against financial structure). Strong funding base.
• Having a high profile in the market. Strong market presence including established referral base.

Products and service segmentation

Major market segments

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au