Struggle for survival reshapes the banking and finance sector

The SmartCompany Dun & Bradstreet Industry Growth List for the banking and finance sector, while revealing an industry reeling from the global crisis, has also uncovered the successful fallback tactic of finding a niche and making it your own.

Australia’s financial services sector is bracing for a horror year. Economic growth is slowing, sharemarkets continue to tumble and the cost of wholesale funding has gone through the roof.

Yet despite the gloom, a number of smaller companies on the SmartCompany Dun & Bradstreet Industry Growth List (see end of this story) for the financial services sector are maintaining growth by focusing on specific niches of the sector. Specialist fund managers, data providers, research companies and finance companies continue to look for growth opportunities in a difficult market.

Compare this year’s financial services industry growth list to the list from 2008 and it is easy to see the toll extracted on the sector by the global financial crisis.

The company that led last year’s list, Allco Finance Group, is in the hands of receivers. Investment banking giants such as Macquarie Bank and Babcock & Brown have failed to make this year’s list, and Babcock is on the brink of not surviving.

The non-bank lenders who did so well out of the property boom are gone, as are the mortgage providers. The superannuation funds that dominated last year’s list are nowhere near as prominent in 2009, due to tumbling investment returns.

For all that, the growth rates recorded by this year’s top 50 are impressive. Total revenue increased 33.4% from $86.9 billion to $115.9 billion in the 2007-08 financial year. The average growth rate of the companies on the list is just over 80%.

(See the top 10 below right, and the full list of 50 at the end of this feature.)

Leading the pack is investment firm Plato Investment Management, which posted revenue growth of 480% to $684,511 in the 2008 financial year.

The company, which was established in September 2006, operates five separate investment funds and has won roles managing capital for ING and Russell Investment Group.

This is one of a number of smaller companies that feature towards the top of the list, many of which have been operating for less than three years – proof of the sheer number of financial services companies that were started at the height of the economic and sharemarket boom.

Of course, those conditions are only a memory, and many of the companies are bunkering down for a difficult year. Smaller financial services sector companies are likely to find it particularly difficult this year as customers move back towards the larger – and in the case of the big banks, government-backed – players.

Still searching for growth opportunities

Despite the downturn, financial services companies remain determined to find ways to grow. One such company is financial planner Snowball Group, which increased revenue by 73% to $28.5 million in the 2008 financial year.

In January the company announced two acquisitions, buying Brisbane-based groups Money Mentors and a small Adelaide planning group. Snowball managing director Tony McDonald says acquisitions have been one of the company’s strengths in recent years and he is continuing to look for new targets.

Snowball concentrates on picking up small financial planning firms with well-established client bases where either the founder is getting close to retirement or the principals are looking for the support of a larger group to take the next step.

He says the downturn has helped make acquisition prices “more realistic”, but says Snowball will resist the temptation to rush out on a buying spree.

“We have this absolutely unshakable belief that it’s not about price at all – it’s about whether people fit the family photo. By that we mean a shared belief in where the industry’s going and how financial planning should be done,” McDonald says.

“There is still a good demand for high-quality businesses.”

The economic downturn, and particularly shocking investment returns many clients have suffered, has made life tough for financial planners and the sector’s reputation has been damaged by the collapse of high-profiled financial planners like Storm Financial.

But McDonald says Snowball was very careful to manage client expectations during the bull market and managed to spot the potential downturn very early, shifting clients into cash and out of high-risk investments such as listed property trusts. More importantly, Snowball managed to resist the temptation of products such as margin loans, which have caused so much grief in the Storm situation.

“I think clients are looking more good help and there’s an ocean between good help and not so good help. There’s a big difference between advice that is generally holistic, strategic, customer-comes-first financial and product sales that is dressed up as advice.

“We’ve managed to increase our client numbers and that’s the test for any financial planning group.”

McDonald acknowledges that the explosive growth rates of the last few years are not likely to be repeated in the short term given the climate, but says delivering solid, consistent results for clients and shareholders is the aim.

“If I get accused of being a bit mundane at times, I accept that,” he jokes.

The funding crisis

Another company bracing for more steady growth figures is listed finance company Ask Funding. The company, which focuses on lending money to people involved in personal injury legal cases, divorce cases and estate cases before their settlements come through, ranked 16th on the SmartCompany Dun & Bradstreet Industry Growth List, with revenue increasing 63% to $10.9 million in the 2008 financial year,

“In the current climate if you can firstly survive and secondly grow, then you’ve done very well,” says managing director Russell Templeton.

The economic downturn is good for demand – if you are involved in a personal injury case that might run for two years, you are probably pretty keen to get an advance to tide you over during the recession.

But Ask Funding’s resources have been stretched by the credit crunch. It has $20 million in shareholder funds and a $55 million debt facility from BankWest, but obtaining further funding from the frozen credit markets is near impossible.

“Currently we are in a position where we have more demand than we are able to meet,” Templeton says.

“Our ability to grow the loan book is constrained by capital. We’re working on that every month, but it’s very difficult.”

Templeton is extremely pessimistic about the state of the global economy and expects credit markets will remain tight well into 2010 and beyond.

In response to this, Ask Funding plans to reweight its loan book, concentrating on the relatively low-risk personal injury case funding, where payouts are contingent on government-owned workers compensation authorities, and away from divorce case funding, where payouts are contingent on household asset values, which are falling rapidly.

“We’ve seen cases where the value of assets involved has fallen from $4 million last year to just $1 million.”

Templeton expects assets to keep falling, particularly as house prices come under pressure.

“We think it’s got a long way to go – we want to be pessimistic for good reason.”

The products sold by Ask Funding are relatively new in Australia and the company as invested a lot of time in educating the market, concentrating first on the lawyers who form the basis of the company’s referral network.

The next step is educating the wider community Ask is about to launch a media campaign focusing particularly on its personal injury product. Templeton is currently looking for a “face” for the campaign.

“It’s a tough call. If you have someone who has controversy in their life, then you wear it too.”