Competition drives spreads down on deposits and lending
(21 September 2005 – Australia) After sustained periods of upwards repricing, banks continue re-pricing their lending spreads downwards in the Corporate, Commercial and SME segments as competition increases, the latest banking survey by JPMorgan and East & Partners reveals.
The joint JPMorgan and East & Partners report, titled Australian Corporate, Commercial and SME Banking Survey (Volume 8: August 2005), surveyed Australia’s Top 500 corporations, the Commercial sector (A$20m-$340m annual turnover) and SMEs (A$5m-$20m) on their forward intentions to borrow and repay debt, credit re-pricing and banking relationships.
"Market share driven strategies, the entry of new players and an apparent acceptance that the current asset quality conditions will persist are structurally driving lending spreads down," said Brian Johnson, Banking Analyst at JPMorgan.
According to the survey, the pace of this downward pressure is most evident in the Corporate segment.
"Over the last three months, a net 21.5 percent of Corporate respondents cited a reduction in loan spreads above the published reference rate and 32.7 percent indicated the loan fees were being re-priced downwards.
"In the Corporate segment, this downward shift in the lending spread environment is significant given Australian banks are allocating capital away from low-return exposures to higher yielding segments," said Mr Johnson.
Similarly, lending credit spreads within the Commercial and SME segments are also being re-priced downwards.
"With a net 19.1 percent of Commercial respondents citing a reduction in spreads above the reference rate, Commercial lending spreads are also being re-priced downwards after many years of upwards re-pricing. Likewise, a net 13.2 percent of SME respondents cited downward re-pricing of SME lending spreads. Loan fees are also being lowered in each segment of the market.
"This evidence of downward re-pricing for risk is in line with many other indicators which suggest a sharp increase in competition as banks adopt either predatory or defensive pricing strategies," said Mr Johnson.
The survey continues to see the relentless diverging trend between the increasingly cautious Top 500 Corporate and the ever more confident Commercial companies and SMEs.
"In addition to strong operating cashflows reducing the need for increased debt, the adverse impact of a strengthening Australian dollar and continuing concerns regarding the over-reliance in the strength of the domestic housing market, we believe Corporate borrowing intentions may slip even further in the face of sagging consumer confidence and falling house prices," said Mr Johnson.
"The August 2005 borrowing intention reading of 9.3 percent does not bode well for a rebound in Corporate loan volume growth into 2006, particularly given demand is not expected to materialise for a further 12 months," said Mr Johnson.
In contrast, the survey suggests that the greatest loan growth is poised to come from the Commercial and SME segments of the market.
"Given a strong domestic economy, the perceived increased spending power afforded by the stronger Australian dollar and the cumulative impact of many years of lagging capital expenditure, the Commercial and SME segments forward borrowing intentions continue to escalate at 76.7 percent and 80.4 percent, respectively," said Mr Johnson.
According to the survey, there is a propensity towards increased fluidity in the banking landscape with relationships back on the agenda in the face of increased competition and changing banking requirements.
"Churn rates are accelerating across the Corporate, Commercial and SME segments with 20.3 percent, 25.7 percent and 23.4 percent of respective respondents, indicating their more aggressive interest in exploring alternative banking relationships or providers," said Mr Dowling, Principal Analyst at East & Partners.
"Business customers are looking beyond their present banks, for flexible and innovative liquidity funding solutions to grow their businesses and in doing so are actively entertaining alternative service providers.
"The survey suggests that banks are responding accordingly, re-engineering their entire customer facing propositions, their product lines, pricing, service platforms and delivery channels, as well as dealing with the impacts arriving on their lending books from the escalating influence of broker origination.
"Banks such as SGB, CBA, HSBC and BankWest are simultaneously hiring new Relationship Managers to harness the perceived opportunity to grow share given new or enhanced business product and service offerings," said Mr Dowling.
"Market share driven strategies, the entry of new players and an apparent acceptance that the current asset quality conditions will persist are structurally driving lending spreads down," said Brian Johnson, Banking Analyst at JPMorgan.
According to the survey, the pace of this downward pressure is most evident in the Corporate segment.
"Over the last three months, a net 21.5 percent of Corporate respondents cited a reduction in loan spreads above the published reference rate and 32.7 percent indicated the loan fees were being re-priced downwards.
"In the Corporate segment, this downward shift in the lending spread environment is significant given Australian banks are allocating capital away from low-return exposures to higher yielding segments," said Mr Johnson.
Similarly, lending credit spreads within the Commercial and SME segments are also being re-priced downwards.
"With a net 19.1 percent of Commercial respondents citing a reduction in spreads above the reference rate, Commercial lending spreads are also being re-priced downwards after many years of upwards re-pricing. Likewise, a net 13.2 percent of SME respondents cited downward re-pricing of SME lending spreads. Loan fees are also being lowered in each segment of the market.
"This evidence of downward re-pricing for risk is in line with many other indicators which suggest a sharp increase in competition as banks adopt either predatory or defensive pricing strategies," said Mr Johnson.
The survey continues to see the relentless diverging trend between the increasingly cautious Top 500 Corporate and the ever more confident Commercial companies and SMEs.
"In addition to strong operating cashflows reducing the need for increased debt, the adverse impact of a strengthening Australian dollar and continuing concerns regarding the over-reliance in the strength of the domestic housing market, we believe Corporate borrowing intentions may slip even further in the face of sagging consumer confidence and falling house prices," said Mr Johnson.
"The August 2005 borrowing intention reading of 9.3 percent does not bode well for a rebound in Corporate loan volume growth into 2006, particularly given demand is not expected to materialise for a further 12 months," said Mr Johnson.
In contrast, the survey suggests that the greatest loan growth is poised to come from the Commercial and SME segments of the market.
"Given a strong domestic economy, the perceived increased spending power afforded by the stronger Australian dollar and the cumulative impact of many years of lagging capital expenditure, the Commercial and SME segments forward borrowing intentions continue to escalate at 76.7 percent and 80.4 percent, respectively," said Mr Johnson.
According to the survey, there is a propensity towards increased fluidity in the banking landscape with relationships back on the agenda in the face of increased competition and changing banking requirements.
"Churn rates are accelerating across the Corporate, Commercial and SME segments with 20.3 percent, 25.7 percent and 23.4 percent of respective respondents, indicating their more aggressive interest in exploring alternative banking relationships or providers," said Mr Dowling, Principal Analyst at East & Partners.
"Business customers are looking beyond their present banks, for flexible and innovative liquidity funding solutions to grow their businesses and in doing so are actively entertaining alternative service providers.
"The survey suggests that banks are responding accordingly, re-engineering their entire customer facing propositions, their product lines, pricing, service platforms and delivery channels, as well as dealing with the impacts arriving on their lending books from the escalating influence of broker origination.
"Banks such as SGB, CBA, HSBC and BankWest are simultaneously hiring new Relationship Managers to harness the perceived opportunity to grow share given new or enhanced business product and service offerings," said Mr Dowling.
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