Gap between corporate pessimism and commercial/ SME optimism is widening
(9 November 2004 – Australia) There is a diverging trend between increasingly cautious Top 500 corporates and increasingly confident commercial and SME sectors as evidenced in their intention to borrow. According to the latest banking markets survey by JPMorgan and East & Partners the appetite to borrow among corporates continues to fade, while the borrowing intentions of companies in the commercial and SME segment continues to strengthen.
The joint JPMorgan and East & Partners report, titled Australian Corporate, Commercial and SME Banking Survey (Volume 6: October, 2004), surveyed Australia’s Top 500 corporations, the commercial sector (A$20m-$100m annual turnover) and SMEs (A$5m-$20m) on their intentions to borrow and repay debt, credit re-pricing and banking relationships.
"The survey found that the 12 month forward borrowing intentions of Australia’s Top 500 corporates continue to fade from 34 per cent in November 2002 to 12 per cent in August 2004," JPMorgan Banking Analyst Brian Johnson said. "This implied forward-looking decline in corporate confidence contrasts sharply with the strength of the recent August 2004 corporate reporting season."
In contrast, the survey found that the borrowing intentions of the commercial and SME sectors remains extremely high at 70.4 per cent and 71.7 per cent, respectively.
"Much of this new finance in the commercial space will be used to fund capital expenditure rather than refinancing," said Mr Johnson. "We are already seeing anecdotal evidence from ANZ, CBA, NAB, WBC and SCG suggesting that commercial lending has already picked up."
"In the SME segment 81 per cent of borrowed funds will be used for capital expenditure, capital projects and project finance," said Mr Johnson.
The survey continues to see the gap between corporate pessimism and commercial/ SME optimism widening.
"The increasingly cautious corporates intend using strong operating cashflows to repay debt, while the bullish attitude on the part of the commercial and SME respondents is to gear up and increase borrowings, with little intention to pay down debt in the next 12 months," said Mr Johnson.
According to this forward borrowing market share measure, NAB continues to lose market share across all corporate, commercial and SME segments.
"Westpac remains the dominant bank amongst the Top 500, but is slipping with only ANZ and BankWest gaining share off a low base. In the Commercial segment, CBA continues to dominate and on the SME front, despite some slippage, NAB continues to lead the intention to borrow measure," said Mr Johnson.
East & Partners Principal Analyst Paul Dowling said that despite the optimism and appetite for borrowing displayed by SMEs, banks had to work hard to capitalize on a market segment they viewed as the "next big opportunity".
"The major banks have treated SMEs as low priority for many years but are now targeting the sector with new products and services. Not surprisingly, small businesses, which have not traditionally been great product users, view this sudden interest in them with a certain amount of suspicion and cynicism," said Mr Dowling.
The SME and lower end of the commercial market segments have become incredibly competitive over the past six months.
"Not only are the majors coming down the scale ladder to focus on this part of the market, but you also have St George as a major player there, regionals such as Suncorp and Bank of Queensland moving interstate, as well as BankWest’s big push east, and they’re all targeting SMEs and smaller commercial businesses," said Mr Dowling.
"Despite the intense level of competition, there are major opportunities for the banks that are able to establish relationships with these companies. Typically, SMEs have an average of 1.3 banking relationships and use 5.4 products while Commercial companies have 2.6 relationships and use 11.3 separate products. The trick for banks is to deepen their relationships with SMEs and help them grow their business – from cradle to grave in some cases," concluded Mr Dowling.
"The survey found that the 12 month forward borrowing intentions of Australia’s Top 500 corporates continue to fade from 34 per cent in November 2002 to 12 per cent in August 2004," JPMorgan Banking Analyst Brian Johnson said. "This implied forward-looking decline in corporate confidence contrasts sharply with the strength of the recent August 2004 corporate reporting season."
In contrast, the survey found that the borrowing intentions of the commercial and SME sectors remains extremely high at 70.4 per cent and 71.7 per cent, respectively.
"Much of this new finance in the commercial space will be used to fund capital expenditure rather than refinancing," said Mr Johnson. "We are already seeing anecdotal evidence from ANZ, CBA, NAB, WBC and SCG suggesting that commercial lending has already picked up."
"In the SME segment 81 per cent of borrowed funds will be used for capital expenditure, capital projects and project finance," said Mr Johnson.
The survey continues to see the gap between corporate pessimism and commercial/ SME optimism widening.
"The increasingly cautious corporates intend using strong operating cashflows to repay debt, while the bullish attitude on the part of the commercial and SME respondents is to gear up and increase borrowings, with little intention to pay down debt in the next 12 months," said Mr Johnson.
According to this forward borrowing market share measure, NAB continues to lose market share across all corporate, commercial and SME segments.
"Westpac remains the dominant bank amongst the Top 500, but is slipping with only ANZ and BankWest gaining share off a low base. In the Commercial segment, CBA continues to dominate and on the SME front, despite some slippage, NAB continues to lead the intention to borrow measure," said Mr Johnson.
East & Partners Principal Analyst Paul Dowling said that despite the optimism and appetite for borrowing displayed by SMEs, banks had to work hard to capitalize on a market segment they viewed as the "next big opportunity".
"The major banks have treated SMEs as low priority for many years but are now targeting the sector with new products and services. Not surprisingly, small businesses, which have not traditionally been great product users, view this sudden interest in them with a certain amount of suspicion and cynicism," said Mr Dowling.
The SME and lower end of the commercial market segments have become incredibly competitive over the past six months.
"Not only are the majors coming down the scale ladder to focus on this part of the market, but you also have St George as a major player there, regionals such as Suncorp and Bank of Queensland moving interstate, as well as BankWest’s big push east, and they’re all targeting SMEs and smaller commercial businesses," said Mr Dowling.
"Despite the intense level of competition, there are major opportunities for the banks that are able to establish relationships with these companies. Typically, SMEs have an average of 1.3 banking relationships and use 5.4 products while Commercial companies have 2.6 relationships and use 11.3 separate products. The trick for banks is to deepen their relationships with SMEs and help them grow their business – from cradle to grave in some cases," concluded Mr Dowling.
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