Late payment

IBISWorld estimates that over the five years to 2008-09, the finance and insurance sector’s revenue will decline at an average annualised rate of 6%.

Revenue within this division depends on the level of activity in financial markets, flow of funds, the value of assets, and the return on assets – all of which have headed south in the last 15 months.

The reversal of fortunes in Australian financial markets began around early 2008, sparked by the rising sense of unease in global markets as the effects of the sub-prime crisis in the US started to bite.

This unease escalated into a crisis of confidence in global financial markets with the bankruptcy in September 2008 of the investment bank Lehman Brothers. Australian financial institutions have generally avoided the large write downs savaging many overseas firms, but the impact of the global credit crunch was unavoidable.

The escalation in borrowing costs was felt in Australia, with these costs soaring after the events of September 2008. As asset prices around the globe fell in value, so too did the return on funds under management.

Profits within the division are expected to fall and the drop in revenue within the finance sector has not been matched by a similar reduction in costs. One of the largest costs within this division are wages, which are estimated to decline.

The impact of the drop in markets and returns has been so damaging to investor confidence in part because of the strong performance of the sector in prior years.

The financial system and global economy will take some time to recover from the current downturn before returning to more normal growth conditions around 2012-13.

IBISWorld estimates that revenue in the division will increase by an estimated 15.4% a year in the five years ending 2013-14.

The biggest driver to industry revenue will again be the superannuation funds industry, which will continue to grow largely due to compulsory superannuation contributions.

These contributions are required to be paid by all employers, which suggests that the two key demand drivers will be the level of employment and real wage growth, with contributions set at a percentage of an employee’s annual salary.

While an upturn in the sharemarket normally precedes improvements in the general economy, it may take several years for world sharemarkets to regain the ground lost.

Activity in the Australian bond market will increase as the Government finances its expected budget deficit by issuing Australian Commonwealth Securities.

The current financial crisis is expected to engender a marked change in attitude towards borrowing, risk and returns both in Australia and more widely by investors, institutions and governments.

Key success factors for operators in the industry

• Having an extensive distribution/collection network. Having an extensive customer base to cross sell a range of products and services.
• Automation – reduces costs, particularly those associated with labour. Investment in communication and technology infrastructure to reduce processing and labour costs.
• Degree of globalisation in the firm. Major players need to be pursuing a regional or global strategy. A strong brand name and reputation is important.
• Well developed internal processes. Sound prudential guidelines and controls.
• Ability to effectively manage risk. Strong portfolio skills (levels of exposure consistent with size and risk of each of the industries comprising the economy).
• Ability to carry out credit checks on clients. This is particularly important for those involved in lending money such as commercial banks.
• Ability to pass on cost increases. Banks must be able to pass on increases in interest rates to recover costs.
• Ensuring pricing policy is appropriate. Pricing risk is particularly important for enterprises engaged in the Insurance sub-division.
• Having a good reputation. This helps to build customer loyalty, which in turn contributes to more stable revenue streams.

Products and service segmentation

Geographic spread

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