Conservative positioning strengthens finance firm

27 February 2009

Conservative positioning strengthens South Canterbury Finance

A conservative stance and a strong inflow of new funds marked the performance of South Canterbury Finance Group for the six months to 31 December 2008.

South Canterbury Finance’s emphasis has been on consolidation and building a sustainable business model to provide a platform for future business, Chief Executive Lachie McLeod says.

“In addition, the group has been working closely with clients to assist them through the difficult trading conditions many are enduring.”

The group, with an investment grade rating from rating agency Standard & Poor’s, increased total assets by $138 million to $2.16 billion at 31 December 2008. Loans and receivables rose to $1.541 billion ($1.456 billion in June 2008). Net Equity remained strong at $249 million.

“Extended analysis of all new lending proposals has led to a low level of new loan activity with the focus moving to experienced, resilient businesses, particularly in the provinces where trading conditions are more favourable.” More than half of South Canterbury Finance’s assets are now domiciled outside the main centres.

“One of the mainstays of South Canterbury Finance is its experience from operating through numerous business cycles since it was founded in 1926. This is further augmented by the commitment of its shareholder, the Southbury Group Ltd.”

During the six months under review, South Canterbury Finance enjoyed a strong inflow of new funds and a solid reinvestment rate. This was further boosted when the company entered into a Deed of Guarantee with the New Zealand Government, providing qualifying investors with a Government Guarantee for a two year period from 12 October 2008. Cash reserves totalled $322 million at 31 December 2008.

“Retaining cash reserves gives investors assurance and is prudent at this time but there is a cost which is reflected in the reduced earnings for the period,” Mr McLeod says.

Net profit before tax, adjusted for one off items, reduced from $24 million (December 2007) to $13.2 million. This was principally due to the holding costs of these large cash reserves, lower lending activity and fee income, and a rise in bad debts and provisioning. The level of bad debts remains very acceptable in today's environment.

Looking forward, conditions in the current half year remain tough. The environment will be particularly difficult for the property and business markets in the next 12 months and will require close monitoring.

The group has a large portion of loans to the business, plant, and property sectors. In a further precautionary move, provisions for bad debts were increased to 1.54% of total receivables.

“The effectiveness of the economic policies being put in place by government and the lower interest rate regime will be keenly watched by many in business. A great deal of uncertainty is still evident, but there are some encouraging signs and we are hoping the market is close to the bottom of the cycle,” Mr McLeod says.

“South Canterbury Finance will maintain a cautious stance to new lending and focus on improving the quality of its assets. We are working closely with clients to assist them to fulfil their obligations.”

‘The finance sector has an important role to play now - and in facilitating growth as the economy recovers. To fully achieve that purpose, the Government can provide certainty by making an early announcement on the future of the deposit guarantee scheme, its extension, and the transition arrangements for its phased removal,” Mr McLeod says.

Financial summary

6 months to
31-12-08 6 months to
31-12-07
Net profit before tax (adjusted for one off items) $13.2m $24.4m
Total assets $2.16 billion $1.84 billion
Net loans and receivables $1.54 billion $1.42 billion
Cash in hand $322m $272m

Standard & Poor’s rating BBB- (investment grade). Due for annual review in April 2009

ends

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