MUST WATCH ITS SECURITIES

NZ Truth, Issue 1291, 4 September 1930, Page 21

MUST WATCH ITS SECURITIES

Financial Reviews by "Fiat Lux "

Critical Item Is Mortgage Advances In Dominion Investment and Banking Association

REMARKABLE EXPANSION OF BUSINESS

The accounts of The Dominion Investment and Banking Association, Auckland, which combines the triple functions of a savings bank, a building society, and an investment company, disclose a remarkable expansion of business over the four years of its existence; capital, deposits, advances, gross profits, and net earnings having all grown at a rapid rate. ' The association is maintaining a satisfactory proportion of liquids to short time liabilities, and thus comparing favorably with a number of similar concerns m the Dominion at the present time; and if its mortgage advances are sound is m a satisfactory position.

IT is, however, expanding its advances at a quick rate, and m view of the prevailing trend of land ' value levels to lower figures, will have to watch its securities, and especially new advances, -with much care. The crucial issue m concerns of this kind Is prudence and caution' m management and selection of securities. Capital is growing rapidly. It is divided into three classes. Class A shares are permanent, and, like the ordinary, share capital of companies, cannot be withdrawn; but since shares of classes B and C are withdrawable on notice, such shares are really m the nature of deposits, and must be so regarded m estimating the position of the association. The B and C shares, however, though expanding, are not growing at the same rate as A shares, and the great bulk of the capital is permanent, a satisfactory feature that gives stability to the capital position. The situation, as regards funds is as follows: — Re- De- . i £ Shayes, serves posits A B&C Total £ £ 1927.. 55,025 3,170 58,195 — 33,257 1928.. 129, 337 8,221137,558 500 45,944 1929.. 142,570 10,995 153,565 1,000 106,556 1930 .'.150,549 17,373 167,922 2,000 133,364 Up to 1928 deposits were shown tinder the two headings of fixed deposits and savings bank deposits, the latter presumably withdrawable on demand. It is a matter for regret that the association m its later accounts has seen fit to cover up this vital poi nil, since obviously the liability for moneys withdrawable without notice is of a somewhat different character from that for funds withdrawable on notice. ' The latter are more calculable, and can be provided for more easily; whereas with deposits withdrawable on demand a more rigid reserve policy is desirable, and more liquids must be kept handy for emergency. In 1928 of, a total of deposits of £45,944, £19,294 were fixed deposits and £26,651 were "savings bank" deposits. It is impossible tb estimate the position of the association accurately without this information, for later years. „ However, the savings bank deposits ■are probably .; good r'iying, money,", _, and are hot 'likely" to. be subject to serious fluctuation. Experience shows that even m depressed times deposits of savings banks that enjoy public confidence remain comparatively steady, thpugh of course they show a downward tendency as a rule. -- • The reserve policy, is commendable. In addition to the £2000 - disclosed above, Xz. further £1000 has been allocated to reserve, arid the profit and loss carry over/ stands at £ 992, making aggregate reserves £3992. It cannot, however, be said that this is a sufficient reserve' to support so large a burden of securities and to provide adequately for security depreciation. Still, it is a good' start. Reserves, however, must be governed by the magnitude 'of 'the contingencies against which they are provided, and by probable business expansion, .and not merely by the age of the concern. The association has clearly paid out m dividends more than is judicious m view of its mounting, liabilities,, huge security list, and profits realised.

provision is not adequate to responsibilities. It is regrettable that reserve requirements are so generally underestimated ,m the Dominion. As an eminent English banker, recently said: "One of the greatest- essentials , to prosperity m business, whatever business it might be, is the creation of reserves. Reserves are the. backbone of every business, to meet contingencies, to keep the business up to date, and to provide ' the power to expand. It is the putting back into a business of as large a proportion of the profits as possible that ensures success; it is the paying out of tod large a proportion that weakens it. "Reserves are infinitely pre- • ferable to borrowed capital; and the most successful businesses m the country have been built up through the creation of reserves," The directors of this association might well paste this quotation m 1 • " i

to £2000 m the amount on which the department allows interest. It would be informative to know where the deposits at call are lying, but no information is given | on this point. ' The position of the liquids, howI ever, is satisfactory. At present the association can be called upon, either |on demand or upon notice, to find £ 133,364 of* deposits and £ 17,373 of j B and C shares, a contingent call of £150,737. As an immediately available resource, or very nearly so, it> has m hand m cash and deposits a sum of £37,456, giving a liquid ratio of 25 per cent. From the nature of the business this is probably adequate, but not excessive. " V The profit position is satisfactory, as below: — 1927 ' 1928 1929 1930 '£ £ £ £ ' Gross earnings .. 2,456 9,693 14,000 15,324 Expenses . . 371 1,323 2,431 2,154 Preliminaries written off 81 .. 120 180 . 300 Balance to Apprn.A/c. 2,004 8,297 11,696 12,870 P. & li. carry forward .. - 47 307 453 992 Preliminary expenses, on a quite moderate scale, have been completely written off, and management has not been extravagant. Net profit has grown steadily, and has been allocated as below:'— 1927 »1928 1929 1930 £ £ £ £ Net profit ... 2,004 8,250 11,389 12,870 Dividend .. 1,457 7,491 10,243 11,331 Reserve ... 500 500 1,000 1,000 Forward .. 47 307 453 992 Dividend has been throughout at the rate of 7 per cent, bn all classes of shares, except that m 1930 6 per cent, only was paid on second issues of B and C shares, but this absorbed £136 only. Dividends are clearly too close to the limit for this stage of the association's life and operations. The critical item is mortgage advances. If these are'«. m a sound position, and there is of course no indication to the contrary, the association is also m a sound position. It is a type Of investment to be commended.

Assets Situation

their hats, and so could ' a lot more directors of finance companes, for that matter. We want m our business concerns, if investors ' are to receive adequate protection, more backbone m | the form of reserves, and less wishbone m the form of flambuoyant anticipations. The assets situation is satisfactory, as below: — B.N.Z. » Mort- fixed Call Cash at gages deposit deposits blVik £ £ £ £ 1927 . . 81,337 — 6,041 1,936 1928 .. 181,425 5,034 2,075 1,128 1929 .. 256,310 10,045 4,263 1,178 1930 . y-'291,277 20,162 14,160 3,134 It is thus seen that mortgages are increasing, but at a diminishing rate, and that liquids are growing more than m proportion ;to other assets. Post Office v- Savjpgs Bank ' deposits shown m 1927' arid '1928 bave disappeared, N bein|:. ; jipub|Jess.:transf erred to other headirig^.6[^#g^