Banks are starting to open pockets again but the lending hurdles are much higher

Lending to business almost dried up during the GFC, but the banks, big and small, are starting to talk to their clients again.

Is finance getting easier for the business sector? Are banks coming to the party after tightening credit during the global finance crisis?

There are tentative signs that the answer is yes, but don’t hold your breath for a major easing.

Accounting firm PwC’s latest private business barometer summed up the current situation neatly.

It concluded that banks were lending but they were becoming more stringent and wanted more timely financial information from their business customers.

Commenting on the survey, PwC partner Billy Meston said: “There is no doubt that the banks have the ability to lend.

“But in order to get the funding, there is a different and more robust process that businesses need to go through.”  

Grant Thornton’s recent International Business Report found a similar trend in Australia.

“The banks are now talking to their clients again,” Grant Thornton Australia partner Bill Shew said.

“They want to lend but the hurdle is a lot higher than it was before the GFC. It’s still dependent on the businesses having some fundamental strengths.”

The Reserve Bank’s latest lending data support the view that banks are becoming more accommodating.

Business lending by all Australian banks rose 0.4 per cent in the month of September, lifting the annual rate of growth to 0.2 per cent.

That was the first time in more than two years that the annualised growth rate was positive.

The preceding decline in business lending had been almost unprecedented in the post-World War II period.

National business lending had been shrinking consistently since July 2009, with total business credit falling 6 per cent from the level that prevailed before the GFC hit.

The slowdown in lending has been driven by two main factors: tighter credit controls applied by the banks and more prudent financial management by businesses that survived the GFC.

The tighter lending standards were manifest in several ways: lower loan-to-valuation ratios, stricter collateral requirements and higher interest coverage ratios. 

Did this constitute a credit squeeze?

The Reserve Bank has argued that most industries had “tighter but still reasonable access to funds”. 

It acknowledged that the property sector was an exception, with lending to that industry drying up.

PwC described Australia as having an “anaemic credit environment” in its recent review of the major banks’ profit results.

Business loans system growth was a paltry 0.2 per cent in the 2011 financial year, PwC said.

Looking at individual banks’ annual results, Westpac reported that Australian business lending “remained subdued”, declining by $2 billion, with a small decline in institutional lending and modest growth in the small-to-medium enterprise segment.

ANZ said commercial lending in Australia grew 5 per cent while deposits increased 18 per cent.

Commonwealth Bank, which reported its results in August, used similar language, saying growth in lending was subdued while deposits grew strongly.

National Australia Bank was more upbeat, saying its lending growth was above the market average, enabling its business banking division to “extend its market-leading position”.

NAB claims a 22.8 per cent national market share in business lending, up from 21.5 per cent in March last year.

Looking ahead, PwC said growth in business lending was expected to remain thin at around 3 to 5 per cent in the current financial year.

Playing the margins

Arguably the sharpest measure of banking competition is interest margins. It shows how keenly the banks are prepared to price loans, in order to win more customers.

Research group Canstar CANNEX measures this by comparing the interest rate charged on housing loans and on residentially secured business loans.

Before the GFC, when the banks had softer credit policies, the interest rate on both loan types was the same (see graph above).

Following the GFC, the banks as a group did not fully pass on reductions in market rates.

“The GFC caused a fissure, with business left stranded on the high side and ordinary home loan borrowers on the low side of interest rates,” Canstar said.

As a result, the margin between the two loan types increased to about 1.3 percentage points (130 basis points) in 2009.

During 2010 and 2011, the difference has been fluctuating around 80 to 90 basis points. 

This month, it has increased again to 110 basis points, because the banks have reduced their standard housing loan rate – in line with last week’s cut in official interest rates – but they have not yet moved on their residentially secured business loans. 

Contact falls off

Another indicator of how keen banks are to write new business is the frequency of their contact with customers.

Banking industry consultants East & Partners found a steady and pronounced decline in the amount of contact between business banking clients and their primary bank over the past two years.

East & Partners head of client service Amy Nixon said a key driver behind this appeared to be banks slowing down their proactive communication with customers.

“The direction of this one-way relationship is driving deterioration in customer satisfaction coupled with falling loyalty,” she said.

“This contact pattern is in stark contrast to customer experiences reported mid-GFC, where very high levels of bank-initiated interaction, mostly credit-driven, with their business customers was being reported across the board.”

In other words, when the banks were worried about losing their own money, they cranked up contact with their customers. Now that credit risk has eased, they have reverted to their old habits.

The one-way relationship is most evident among small business customers, with 76 per cent saying they had been proactive in connecting with their bank rather than the other way around.

The East & Partners survey found big differences between the banks.

NAB maintained the highest contact frequency with its customers, with 61 per cent of NAB business clients reporting direct interaction with the bank over the prior month.

It was followed by Bank of Queensland and Bankwest, with 54 per cent and 50 per cent of business customers reporting direct personal contact over the past month.

These banks also rated highly in East & Partners’ bank reputation index, which was drawn from interviews with 1,325 bank customers across Australia.

Nationally, NAB has by far the best reputation for business banking, being selected by more than one in five respondents to the survey.

That put it streets ahead of any other bank.

East & Partners said having business banking as the main focus was the single most important driver of bank reputation.

Other factors were service performance, product offerings and quality of senior management.

In the SME segment, the top three banks were NAB, Bank of Queensland and Bankwest.

NAB was also top bank in the corporate segment, while Westpac had the best reputation in the institutional segment.

The state-by-state results told a different story.

In Western Australia, Bankwest was equal first with NAB for the best business bank reputation.

The survey also revealed a very different set of results when business people were asked to rate their own bank.

The smaller banks tended to fare better on this measure, with Bank of Queensland coming out best (see attached graphic: Business Bank Reputation).

Bank of Queensland, which made a big push into WA when it bought Home Building Society some years ago, had the highest rating overall by its own business customers, and the highest rating by its own SME customers.

NAB was rated highest by its corporate customers and Commonwealth was rated top by its institutional clients.

The East & Partners survey had a reality check for the banking industry as a whole, including those that rated well.

When the business customers were asked to name the bank with the best reputation, the most popular response, from nearly 300 people, was “none”.

In an effort to lift their standing and differentiate themselves, most banks compete keenly for business awards, however, the large number can make it confusing.

Money Magazine, for instance, has named Westpac as business bank of the year for the past four years.

Yet Canstar named Commonwealth Bank as its business bank of the year for 2011. It named ANZ as its top business bank in 2010.

Product innovation

The competition for business customers is evident in some of the product and service innovations.

Last month, for instance, the Commonwealth Bank announced the introduction of an ‘everyday settlement’ service that applies seven days a week, without exception.

The service is targeted at businesses that trade on weekends or late in the evening and have faced delays in accessing funds from their merchant terminals.

Once it is rolled out, the service will enable businesses to access funds the same day.

The Commonwealth said it would be the only one of the four major banks to provide this service and the only bank in Australia to offer fast turnaround for late-trading businesses, with transactions processed up to 10pm and settled into the customer’s account by midday.

This initiative was welcomed by the Australian Retailers Association, which said it would help with cash-flow management.

“In the past, retailers would have to wait until a Tuesday to use funds from transactions taken in store over the weekend, delaying access to money needed to pay staff and suppliers,” ARA executive director Russell Zimmerman said.

“Having access to funds daily lessens the frustration associated with cash flow for smaller retailers and leads to greater business efficiencies.”

Another recent initiative, this time by ANZ Bank, was the introduction of a new service to make it easier for business customers to switch their transaction banking.

Targeting businesses with a turnover of more than $5 million, the service allows customers to switch their transaction banking in one week, signing one application form and dealing with one banker.

This comes ahead of a federal government push for a ‘tick and flick’ system that is meant to simplify the process of switching banks.