(29 March 2006 – Australia) The recent rebound in business lending is being driven by SME and Commercial enterprises with Top 500 Corporates disinclined to borrow and focused on repaying debt, the latest banking survey by JPMorgan and East & Partners has found.The joint JPMorgan and East & Partners report, titled Australian Corporate,
Commercial and SME Banking Survey (Volume 9: March 2006), surveyed 456 of
Australia’s Top 500 corporations, 836 Commercial enterprises (A$20m-$340m annual
turnover) and 1,447 Small to Medium Enterprises (A$5m-$20m) on their forward
intentions to borrow and repay debt, credit re-pricing and banking
relationships.
The report reveals that systemic business lending is rebounding sharply after
many years of lackluster growth and more than offsetting declining home mortgage
growth. However, the relentless diverging trend between increasingly cautious
Top 500 Corporates and increasingly confident Commercial and SME segments
continues.
“Forward borrowing intentions for the Commercial and SME segments remains
extremely high while the intentions of the Top 500 Corporates continue to
weaken,” said Brian Johnson, Banking Analyst at JPMorgan.
“Despite the strength of the recent February 2006 Corporate reporting season and
a flat outlook for official interest rates, low consumer confidence indices and
the prospect of further falls in house prices are dragging on Corporate
borrowing intentions,” said Mr Johnson.
Anecdotal evidence suggests the only major source of borrowing demand from Top
500 Corporates is from the resources sector (where foreign banks are grabbing
balance sheet lending market share from the local banks) and infrastructure
funds where gearing levels are systematically increasing on fine margin bank
lending facilities.
“Companies are generally very lowly geared; however we note an increased
intention to repay borrowings amongst Corporate respondents.
“Conversely, our survey shows that very few companies in the Commercial or SME
segments are anticipating paying down debt in the next 12 months.
“The survey continues to suggest that the greatest growth potential is poised to
come from the Commercial and SME segments of the market,” said Mr Johnson.
The downward pressure on lending spreads, first identified in the February 2005
survey, has intensified.
“Market share driven strategies by incumbent banks, the entry of new players,
and an apparent acceptance that the current benign asset quality conditions will
persist in perpetuity are structurally driving lending spreads down.
“As a result, the long-term pricing power of the banks in the business banking
market is starting to fade,” said Mr Johnson.
The evidence of downward re-pricing for risk is in line with many other
indicators which suggest a sharp increase in competition in the Corporate,
Commercial and SME segments as all banks are adopting either predatory or
defensive pricing strategies to attack/defend a perceived weakened NAB
franchise.
“This latest survey reinforces the principal theme of the banking markets in
2006, which is ‘hyper competition’,” said Paul Dowling, Principal Analyst at
East & Partners.
“Although SME and Commercial companies are displaying plenty of appetite to grow
their businesses, the markets as a whole aren’t getting any larger, there aren’t
suddenly thousands of sizeable new businesses appearing, which is why it is so
important for banks to do more business with their existing customers.
“The Big 4 banks have come under tremendous assault from other lenders over the
past 18 months or so but there are clear signs that the fight back is underway
with a vengeance, with forward borrowing intentions showing NAB in particular
has got through its tough period and can expect good growth in its lending book
across the three market segments covered in this forward research,” said Mr
Dowling.
“Interestingly, BankWest which has been a real catalyst for change in the
business banking markets, appears to be pausing for the moment, with less SMEs
and middle market companies saying they will borrow from the bank in this
survey. This may be a case of the Bank reaching capacity until the next raft of
business banking centres and RM teams are rolled out but it’s also a reflection
of the large incumbent lenders stiffening their customer retention and growth
execution.
“A major dynamic in tomorrow’s business lending markets is the surge in
origination taking place through the broker channel with more than 26 percent of
SMEs and 22 percent of Commercial companies accessing debt this way. This has
put real pressure on those banks without an effective broker strategy to come up
with one because broker originated lending has a very long run in front of it,”
said Mr Dowling.
For further information, please contact:
Paul Bartholomew
Senior Consultant
East & Partners
Tel: 02-9004 7848
Mob: 0410 400 156
paul.b@eastandpartners.com