First City down 19% in first half of year

Press, 3 December 1987, Page 32

First City down 19% in first half of year

First City Corporation has reported a 19 per cent drop in net profit to $413,000 for the six months ended September 30, 1987. The profit was on turnover that nearly doubled for the period to $12,040,410 ($5,774,851 for the comparable six months). The company said it will pay an interim dividend of 5c a share. The directors of the finance and credit company said that in the last six months pressure on margins in the traditional finance sector of the company’s business were squeezed. "A few years ago it was possible to set interest rates on both sides of the ledger in such a way that the future profits of a finance business were fairly predictable,” the directors said.

They said there had been signs of reducing

margins for some time but the real bite began last March. They cited a number of reasons for this.

“There were more financial intermediaries of various sorts competing for deposits than ever before,” they said. “This held the cost of money up.” The directors said depositors were far more conscious of the return they were getting and were more demanding than ever.

Also, “With high short term rates being paid, there was more money being held at call or for short terms. This made cash flow management harder than it used to be,” they said. Floating call rates — unheard of until two or three years ago — became universal, the directors said, and the rate paid on them is linked to money markets.

“When the market rises, the cost of the entire call ledger goes up,” they said. “In 1987 the money market had a number of sharp upward surges. First City’s lending rates were generally maintained, but not easily, the directors said.

In spite of these difficulties, First City could return to its former level of profitibility, the directors said.

“We have a lending ledger containing good fixed rate contracts which will show us excellent margins as soon as the cost of money falls,” they say. “In the meantime, we are holding assets at around the $75-80 million level.” The directors said that above half of the profit from the last six months had been gained from the company’s new activities.