(19 September 2006 – Australia) The 12 month forward borrowing intentions of Australia’s Top 500 Corporates fell to new lows despite apparent confidence in the prospects for global economic growth, the latest banking survey by JPMorgan and East & Partners has revealed.The joint report by JPMorgan and East & Partners, titled Australian Corporate,
Commercial and SME Banking Survey (Vol 10: September 2006), surveyed over 2,770
Australian businesses including Top 500 Corporates, Commercial enterprises, and
Small to Medium Sized enterprises (SMEs).
“The major feature of this survey continues to be the relentless diverging trend
between increasingly cautious Top 500 Corporates and increasingly confident SMEs
and Commercial enterprises,” said Brian Johnson, banking analyst at JPMorgan.
The continuing weakness in Top 500 Corporate confidence and the negative impact
on their 12 month forward borrowing intentions likely reflects:
| ● | Continuing strong profitability and operating cash flows, thus reducing the requirement for incremental debt funding |
| ● | The adverse impact of the continuing strength of the A$ with Top 500 Corporate net exporters |
| ● | Concerns over the high price of oil, rising interest rates, rising commodity input prices, and rising unit labour prices |
| ● | Concerns over the sluggish performance of the NSW economy which is being masked at the national level by the surging resource driven WA economy |
| ● | Continued concerns regarding the “over-reliance” of the Australian economy on the strength of the domestic housing market |
“Since surveying Top 500 Corporates in July 2006, the underlying market
sentiment has likely deteriorated slightly given a sharp 16 percent decline in
the August 2006 Consumer Confidence Index following the 25bp hike in the
official cash rate to six percent on 2 August,” said Mr Johnson.
“The extent of the collapse in the forward borrowing intention reading for Top
500 Corporates from 34.2 percent in November 2002 to 8.9 percent in July 2006 is
of major concern and does not bode well for a rebound in Top 500 Corporate loan
volume growth into CY2007.
“However, 12.5 percent of Corporate respondents who intend to borrow in the next
12 months cited ‘acquisitions’ as the purpose, suggesting the recent surge in
domestic M&A activity will continue.” he said.
In contrast, the 12-month forward borrowing intentions of Commercial Enterprises
tracked even higher to 82.3 percent and SMEs surged to a staggeringly high 86.9
percent.
“The survey continues to suggest that the greatest growth (and thus potentially
where the banks should be focusing their attention) is poised to come from the
Commercial and SME segments of the market,” said Mr Johnson.
“In the Commercial segment CBA and NAB forward share is rebounding while WBC and
ANZ are lagging. SGB has made good progress. Despite some slippage, NAB
dominates the intention to borrow measure in the SME segment,” he said.
There is some risk of a major uptick in volatility in business lending market
shares, particularly in the Commercial and SME segments, with many banks
simultaneously moving to hire new Relationship Managers to harness the perceived
opportunity to grow market share.
ANZ, WBC, SGB, CBA, Citibank and BankWest have all recently employed, or are
attempting to employ, an additional 100 experienced business banking
Relationship Managers each, which in conjunction with increased automation of
business credit and approval processes could see Commercial/SME market shares
increasingly volatile going forward.
“Much of the recruitment of new Relationship Managers is focused on hiring
business originators who have been given a mandate to aggressively acquire new
customers, in large part to replace the customers that banks are losing to other
providers, which is a very expensive strategy,” said Paul Dowling, principal
analyst at East & Partners.
“Banks seem fixated with market share, particularly in business lending, and are
pricing ever more competitively to win and retain customers, but this is a
fairly blunt strategy than will only result in short term gains and shallow
relationships if they don’t provide service to these business customers,” he
said.
“Corporate and Commercial customers tend to be happier with the service banks
are providing them than SMEs, which for all the rhetoric over the past couple of
years still feel ignored by banks. This is why the SME segment continues to
churn heavily and why a huge number now source their debt through brokers rather
than banks,” said Mr Dowling.
For more information please contact:
Paul Bartholomew
Senior Consultant
East & Partners
Tel: +61-2-9004 7848
Mob: +61-410 400 156
paul.b@eastandpartners.com