Banks cherry pick business

A RECENT Macquarie Equities report on SME banking was titled Small Business: River of Gold. It’s a title that should send a chill down the spines of small business operators.

Macquarie estimated that SME banking would generate at least $2.8 billion in aftertax profits for the major banks this financial year. That is equivalent to a 25-35 per cent return on equity.

The good news for small business is that the level of competition is expected to increase.

“With the housing cycle at or near its peak, business lending is shaping up as a key battleground for next year,” PricewaterhouseCoopers banking leader Michael Codling said.

This creates good opportunities for well-run businesses seeking extra support from their bank. But it provides no consolation for businesses that fail to meet the strict credit guidelines imposed by the banks. Indeed, some banks have become more stringent in response to the uncertain global environment and patchy economic growth.

Macquarie Equities singled out National Australia Bank, which it said was “actively shedding its lower credit quality customers”.

“Under this program NAB is selecting which customers it wishes to keep and which it would rather not renew current arrangements with. This cleans out its lending portfolio in preparation for strong lending growth as the economy recovers,” the report says.

NAB highlighted its “credit discipline” when it announced its annual profit last week.

“As a result of credit discipline and a range of credit initiatives undertaken over the last two years we have strengthened our asset quality,” it said.

In fact, NAB’s non-accrual loans have fallen to the lowest level since 1986.

The other major banks told a similar story, emphasising their sound asset quality as a highlight of their latest results.

Many business advisers and finance brokers across Perth have seen the impact of the banks’ strict credit policies.

Brian Preston, principal of Preston Consulting Group, said the banks were now following credit policies a lot more carefully.

“The credit policies haven’t changed but they are looking a lot closer to make sure their people follow the rules,” he said.

Hall Chadwick managing partner Chris Williamson agrees that the banks have a stricter focus on the performance of their business clients.

“They are refocusing to make sure there are no nasty surprises,” he said.

Managing director of finance broker Barry Barr & Associates, Barry Barr, has observed a tighter approach in property lending.

“There has been a strengthening of credit control by the banks. When they get the financial statements from their existing clients, they run them through the computer. If they don’t come through on every criteria, they get sent to the credit bureau,” he said.

Justin Leeks, director of Kaizen Corporate, which runs a banking review service, has observed several notable trends amidst the general tightening.

“The banks were happy to rely on soft business assets, debenture-type assets, such as plant and equipment, stock and debtors. They are now looking more for traditional bricks and mortar security,” Mr Leeks said.

He said the banks were making a “more aggressive allowance” for preferential creditors, such as staff entitlements that would have to be paid if a business were to fail.

Some banks have also reduced their exposure to entire industries.

“When they take a view, it’s across the board. It doesn’t matter whether a business is trading well or trading marginally, they all get lumped in together,” Mr Leeks said.

Current market conditions presented an opportunity for companies to negotiate a better deal, he said.

“The banks want to keep their good quality clients. They lift margins when things are tough, but they never offer to lower rates when conditions improve,” Mr Leeks said.

For businesses that do not meet the banks’ credit standards, or are looking for a new lender, there is a growing number of finance brokers willing to help.

“Most of our business is now coming from disgruntled bank customers,” Mr Barr said.

“We don’t see anything wrong with these customers. We look at their credit worthiness and make sure they are able to repay the loan. The banks want principal and interest payments but we only need the interest payments”

Mr Barr has also disputed warnings by the industry regulator about the increased use of third-party brokers to originate commercial loans.

This was one of several “areas of concern” raised recently by the Australian Prudential Regulation Authority (APRA), he said.

It called on credit unions and building societies to review their lending practices, in response to “a small but growing tendency towards overly aggressive property lending”.

Specifically, APRA said it was concerned that building societies and credit unions may incorrectly assume that experience in residential lending translates into expertise in commercial property lending.

It was also concerned about a lack of detailed commercial lending policies and procedures and of ongoing review of loans once advanced.

APRA head of policy, research and consulting, Charles Littrell, told WA Business News his main concern was where lenders relied on property security without assessing a borrower’s credit history.

Small business owners were relying on their inherently volatile business income to service commercial property loans.

“The lender needs to confirm the suitability of loan applications,” Mr Littrell said. “A lender that just takes the broker’s word for it is setting themselves up for a problem.

“The broker is driven by the deal. They don’t act for the lender or the borrower. Their economic interest is to close the deal.”

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