Appetite for borrowing among SMEs and Commercials strong compared to Top 500 companies
(30 March 2004 – Australia) The borrowing intentions of Australia’s Top 500 corporations is diminishing but companies in the Small to Medium Sized Enterprise (SME) and Commercial sectors are aggressively growing their businesses through increasing levels of borrowing, according to the latest banking markets survey by JPMorgan and East & Partners.
The joint JPMorgan and East & Partners report, titled Australian Corporate, Commercial and SME Banking Survey (Volume V: March, 2004), surveyed Australia’s Top 500 corporations, the commercial sector (A$20m-$340m 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 forward borrowing intentions of Australia’s SMEs is high, with 69.8 percent of respondents intending to borrow more in the next 12 months – of which 75.8 percent is for capital expenditure, capital projects and project finance," JPMorgan banking analyst Brian Johnson said.
The survey also found that the forward borrowing intentions of the Commercial sector continues to be extremely high.
"The commercial 12 month intention to borrow surged from an already high of 61 percent in August 2003 to 63.9 percent in February 2004, given a strong domestic economy, the perceived increased spending power afforded by a stronger Australian dollar and the cumulative impact of many years of lagging capital," Johnson said.
In contrast, the intention of Top 500 Corporates to borrow continues to fade under the pressure of a strengthening Australian dollar and concerns about the prospects of the global economic recovery.
"Corporates borrowing intentions have slipped from 34.2 percent in November 2002 to 18.1 percent in February 2004 with the Top 500 Corporates now deferring debt-funded projects rather than outright canceling borrowing intentions."
"Significantly, 14.5 percent of Corporate respondents who intend to borrow cited acquisitions as the purpose of the incremental borrowings," Johnson said.
The survey showed that Corporates are becoming more inclined to repay debt, but that Commercials and SMEs are more bullish about borrowing.
"What we are witnessing is a clear divergence between the intentions of small and large companies. While smaller companies are taking hold of Australia’s booming domestic economy, large Corporates face much greater global exposure," he said.
East & Partners principal analyst Paul Dowling said the aggressive growth sought by Commercial companies was reflected in the rapidly growing demands these companies were putting on their banks.
"Commercial companies that do not receive high levels of service and product from their banks look elsewhere, it’s as simple as that," he said.
"The Commercial market is experiencing rapid rates of account churn with almost 50 percent of customers who express a desire to change banks doing so within six months. This puts enormous pressure on banks to deliver," Dowling said.
He said the length of primary banking relationships continued to shorten with service performance the main driver of account churn.
"It is an extremely competitive landscape. The major domestic banks are still the dominant players but are facing mounting pressure from international banks such as Citigroup, JPMorgan Chase and HSBC, as well as St George and the regionals, which are making significant inroads into the Commercial, and in particular, the SME sectors," he said.
"We are seeing major opportunities for banks who get it right at the lower end of the Commercial Banking and SME Banking markets where Commercial customers are only running an average of 2.6 bank relationships and 59 separate products, while SMEs are using an average of 1.2 relationships and 12 products. These compare to 14.7 bank relationships and 59 products being engaged by Top 500 Corporates," Dowling said.
"The survey found that the forward borrowing intentions of Australia’s SMEs is high, with 69.8 percent of respondents intending to borrow more in the next 12 months – of which 75.8 percent is for capital expenditure, capital projects and project finance," JPMorgan banking analyst Brian Johnson said.
The survey also found that the forward borrowing intentions of the Commercial sector continues to be extremely high.
"The commercial 12 month intention to borrow surged from an already high of 61 percent in August 2003 to 63.9 percent in February 2004, given a strong domestic economy, the perceived increased spending power afforded by a stronger Australian dollar and the cumulative impact of many years of lagging capital," Johnson said.
In contrast, the intention of Top 500 Corporates to borrow continues to fade under the pressure of a strengthening Australian dollar and concerns about the prospects of the global economic recovery.
"Corporates borrowing intentions have slipped from 34.2 percent in November 2002 to 18.1 percent in February 2004 with the Top 500 Corporates now deferring debt-funded projects rather than outright canceling borrowing intentions."
"Significantly, 14.5 percent of Corporate respondents who intend to borrow cited acquisitions as the purpose of the incremental borrowings," Johnson said.
The survey showed that Corporates are becoming more inclined to repay debt, but that Commercials and SMEs are more bullish about borrowing.
"What we are witnessing is a clear divergence between the intentions of small and large companies. While smaller companies are taking hold of Australia’s booming domestic economy, large Corporates face much greater global exposure," he said.
East & Partners principal analyst Paul Dowling said the aggressive growth sought by Commercial companies was reflected in the rapidly growing demands these companies were putting on their banks.
"Commercial companies that do not receive high levels of service and product from their banks look elsewhere, it’s as simple as that," he said.
"The Commercial market is experiencing rapid rates of account churn with almost 50 percent of customers who express a desire to change banks doing so within six months. This puts enormous pressure on banks to deliver," Dowling said.
He said the length of primary banking relationships continued to shorten with service performance the main driver of account churn.
"It is an extremely competitive landscape. The major domestic banks are still the dominant players but are facing mounting pressure from international banks such as Citigroup, JPMorgan Chase and HSBC, as well as St George and the regionals, which are making significant inroads into the Commercial, and in particular, the SME sectors," he said.
"We are seeing major opportunities for banks who get it right at the lower end of the Commercial Banking and SME Banking markets where Commercial customers are only running an average of 2.6 bank relationships and 59 separate products, while SMEs are using an average of 1.2 relationships and 12 products. These compare to 14.7 bank relationships and 59 products being engaged by Top 500 Corporates," Dowling said.
Subscribe