August 2013

A tale of two markets
East’s research into the Australian markets continues to show a major dichotomy between the smaller and larger business segments.

Smaller businesses have more adversarial relationships with their banks, find it harder to get credit, and feel under-serviced in comparison with larger enterprises. And almost half of Small and Medium Sized Enterprises have had their lines of credit repriced upwards in the last 12 months, and this in an environment where interest rates have been moving lower.

With this in mind, East recently asked a series of questions of all business segments, based around their interest in engaging with lenders from outside the mainstream banking system for funding, other than through debt capital markets.

Anecdotally, there is much talk in the market about smaller businesses turning to non-bank lenders out of a perceived lack of choice and real competition amongst the major banks, and East wanted to test the appetite for this. Already, East’s research has found half of SME businesses who apply for, but don’t close on new credit lines with their banks walk away from the process, mainly based on the terms and conditions imposed, and the difficulty of the application process.

In this context, were they then more inclined to turn to non-bank lenders? The results showed that 26.8 percent of Micro businesses - or those turning over between A$1 and $5 million a year – have considered making use of non-bank financing for their business in the last six months.

The interest in non-bank financing declined as the size of the business increased. 23.3 percent of SME businesses turning over $5 to $20 million have considered non-bank financing, but only 8.3 percent from the corporate segment ($20-725 million annual turnover) and 1.3 percent of Institutions (more than $725 million in turnover) have actively considered it.
The results are reinforced with businesses asked how likely they are to consider borrowing from lenders outside the mainstream system on a scale of 1 to 5, where one was “very likely” and five is “most likely.”

Micro businesses are the most likely to engage non-bank lenders, with the segment rating it at 1.98. At the other end of the spectrum, Institutional businesses rate their likelihood of doing so at 4.47, a strong repudiation of non-banks from this segment.

The results reflect the difficulty in accessing appropriate credit by smaller businesses from mainstream banks, underlining just how focussed banks are on larger business customers.

Asked to reveal if approaches from competitor banks had increased or decreased in the last six months, a significant 55 percent of Institutional sized businesses reported an increase. At the same time, only 11.5 percent of Micro businesses said competing bank approaches have increased.

Putting the two sets of insights together adds some more meat to the emerging picture. Banks appear focussed on larger business customers and are putting greater efforts into winning their business. In this scenario, it is little wonder that Micro and SME businesses are showing greater interest in non-bank funding.

East’s research also shows Micro and SME businesses are in re-leveraging mode: they still deposit more into the banking system than they borrow but that ratio is coming down rapidly.

It all suggests a “moment” in the market for a lender serious about taking on SME credits. The major banks’ attention would appear to be on larger businesses, so the SME opportunity is still there for a lender – bank or non-bank – which wants to embrace the smaller market segment.

Propensity to Borrow Away from Mainstream Banks

Note: no significant variance by main bank nor state of business customer

Source: East & Partners Business Banking Index - July 2013

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