December 2013

2014 – Banks can saddle up for the ‘Year of the Horse’
Business banking markets have arrived at something of a watershed as we move into 2014, the Year of the Horse in the Lunar Calendar. Banks have struggled with regulatory issues and low credit growth in their business banking franchises, but cost cutting, fewer impairments and strong retail operations have seen them post record share prices, dividends and profits in 2013.

For 2014, the challenge is to find new growth in business banking, in a landscape where the demand is forecast to not come from the largest Institutional segment, but from Small and Medium Sized Enterprises (SMEs) who have been largely dormant since the Global Financial Crisis.

Australian businesses are rapidly adjusting their lending and saving behaviour in response to low interest rates and competitive bank offerings. Unprecedented increases in SME borrowing contrasts starkly with higher deposit volumes for the Institutional segment.

East’s SME business DFDI ratio – which measures the ratio of deposits to lending - continues to decline from a June 2012 high over 2.40 to a fresh low of 1.29. This infers that businesses turning over A$5-20 million per annum were depositing more than $2.40 for every dollar borrowed in 2012, yet now deposit $1.29 per dollar borrowed.

Smaller businesses are vigorously re-engaging their loan book to take advantage of competitive lending conditions and record low interest rates, driving business credit growth from the ‘bottom up’. The gulf between small and large businesses appetite for credit is widening, posing a unique challenge for the majors and regional banks alike.
After years of comparative neglect, the Big Four are now focussing their efforts on the SME sector, but there could be some competition. BOQ, for example, is well positioned to emerge as a “SME champion” as it leverages its high satisfaction ratings, topping East’s Business Banking Index again – a key measurement of customer satisfaction - in 2013 for the fifth successive year. The Big Four have recorded lower BBI scores in 2013.

Trade Finance is also presenting as a key area for potential growth in 2014, but the question is whether the banks can meet smaller businesses’ demands for greater liquidity support and structured solutions.

According to the latest East research for the Macquarie Spotlight series, businesses also appear to be significantly more positive on the outlook for the economy compared to the start of the year, with 52 percent forecasting an improvement in conditions in 2014 compared to only 17 percent at the beginning of 2013.

In the Chinese Zodiac, the traits of the Horse are contradictory. Powerful and sweet-tempered, the Horse is also proud and tactless. The outlook for 2014 is also mixed: new demand for business growth from SMEs, but in an environment of a Government enquiry into banking industry competition.

Add to that an uncertain global environment, with questions over US monetary policy and China’s growth. Credit demand may grow, but will the banks be able to turn on the credit tap?

Saddle up for the Year of the Horse because 2014 is shaping up to be another interesting ride for the Australian banking sector.

Source: East & Partners Deposit Funding and Debt Index

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