Greatest growth to come from SME sector as borrowing among Top 500 slows

(Australia) – Banks should focus their attention on the SME sector because it has the greatest growth prospects whilst borrowing amongst the Top 500 corporations is expected to slow, a joint survey on Australia’s banking sector has revealed.

The
Australian Corporate Banking Quarterly Survey Volume II (January-March,
2003), jointly published by JPMorgan and East & Partners every quarter,
is a poll of the Top 500 Australian corporates and their opinions on credit
re-pricing, banking relationships and their future intentions to borrow.

“This
quarter’s survey (January-March, 2003) confirmed that the greatest growth
area for major banks is poised to come from the SME sector because larger
companies have direct access to wholesale capital markets as opposed to
using banks as credit intermediaries,” said Mr Brian Johnson,
JPMorgan’s Chief Banking Analyst.

“SMEs
appear to have a far greater appetite for borrowing than their larger peers,
with much of the new finance being used to fund capital expenditure rather
than simply refinancing, which is the most popular preference for the larger
companies.

“At the
same time, the appetite for borrowing among the Top 500 Australian
corporates remains intact, with the current turmoil in the world increasing
the caution exercised by companies as a result of significant event
risk.”

“Despite
this trend, more than 30 per cent of the Top 500 corporates surveyed
indicated an intention to borrow in the next 12 months so our expectation is
that business lending will pick-up to around 8 per cent per annum in the
medium term. Our anecdotal evidence also supports this expectation,”
explained Mr Johnson.

According to
East & Partners, competition in the banking sector is intensifying with
the CBA winning business at the expense of Westpac and NAB during the
January-March, 2003 period.

“In the
previous survey (October – December 2002), Westpac and NAB were the two most
popular sources of additional finance for the Top 500 corporates however the
most recent survey shows that while Westpac remains number one, its share
has been eroded by CBA. St George has also clearly consolidated its fifth
ranking,” said Mr Paul Dowling, Principal Director of East &
Partners.

“In
addition, banks outside the Big Four have substantially more penetration in
terms of secondary transaction banking relationships with over 40 per cent
of this group using secondary transactional services against 28 per cent six
months ago.”

The survey
also showed that banks are continuing to actively re-price credit in terms
of overall interest rates and increases in the spread above the banks’
published reference rates.

“This
evidence of pricing for risk on the part of the Australian banks is
consistent with JPMorgan’s view that the asset quality if domestic banks is
extremely high, particularly in comparison with their global peers,”
added Mr Dowling.

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