The banks are back

The banks are coming back. After spending the last three years restricting and repricing credit for SMEs – and, in the eyes of some entrepreneurs, leaving businesses high and dry – slowing mortgage markets and a recovering economy has the banks looking at the small business market once more.

Australia and New Zealand Banking Group is hiring hundreds of business banking staff as it talks up plans to become the second-biggest business banker.

National Australia Bank’s ‘Breaking up’ marketing campaign to grab a greater share of the retail market has been widely praised, but figures show its business banking share is also rising.

Up in Sydney, Westpac Banking Group has hired hundreds of local bankers, while Commonwealth Bank of Australia is seen as a lender that maintained support for many customers, relative to the actions of other banks.

While many SMEs will be sceptical about this new-found enthusiasm for SMEs, it is not all marketing spin. Figures from the Australian Prudential Regulation Authority show that for loans under $2 million, the six months to September 2010 was the second-strongest half-year period on record for new lending activity.

In addition, Reserve Bank figures released on March 31 showed a 0.6% lift in business lending for February.

Sue Prestney, Institute of Chartered Accountants SME spokeswoman, says banks are starting to regain their appetite for SMEs, after cutting back on relationship managers during the GFC.

“It still depends a lot on the security the SME can offer, but once you’re able to do that you can certainly get some pretty competitive offers,” Prestney says.

And Marc Peskett, partner at accounting and advisory firm MPR Group, says banks will need to increase their lending over time, presenting opportunities for quality businesses.

“Businesses with good cashflow and a good track record of borrowing money and repaying it will be the winners,” Peskett says.

Nick Hossack, acting CEO of the Australian Bankers’ Association, says while the GFC undoubtedly meant less choice for SMEs, the last 12 months have seen banks reducing and abolishing fees across its retail and business services. He says this is evidence they are “competing fiercely for business.”

DataMonitor senior analyst Harry Senlitonga agrees NAB’s “very aggressive” push for greater retail market share over the past year has set a trend, with other banks following suit by waiving exception fees and abolishing mortgage exit fees, and extending some benefits to business customers.

The banks’ mea culpa

The backdrop for the new battle is a tumultuous one.

During the GFC, lending by non-bank firms almost halved and lending by smaller banks fell well below its 2008 peak. At the same time, the major banks gobbled up about three-quarters of lending to unincorporated businesses, and about 70% of total business credit.

The move away from SMEs towards mortgages was on some levels justifiable – homes are simply less risky than businesses. Nick Hossack says banks “rightly re-priced for risk” during the downturn, and highlights Reserve Bank figures showing 90-day arrears for bank lending to unincorporated businesses were 2.6% at June 2010, compared with 0.7% for home loans.

“Capital required by the Australian Prudential Regulatory Authority to be held by banks for small business loans is generally three times higher than for home loans, and can even be seven times higher for some products,” Hossack adds.

Still, the technical arguments did little for the banks’ public image. The contrast between the free-flowing credit available before the downturn, and cold shoulder during and after was stark, and exacerbated by the departure of international lenders from our shores.

The banks’ reputation was not helped by the announcement of record profits, multimillion-dollar packages for their top brass and mortgage rate rises that well exceeded lifts in the official cash rate from the Reserve Bank.

As inquiries, roundtables and column inches on ‘bastard bankers’ piled up, banks continued to fiercely defend themselves.

That was until NAB executive Joseph Healy admitted last year that access to credit for the “engine room of the economy” was falling short as banks redirected poured money into the booming housing market.

Healy went further in February, telling SmartCompany that “part of the problem is that lending to small business has become more capital intensive compared to lending to households for mortgages.”

“So you have to allocate between households and business, and it’s more profitable for a bank to lend for a mortgage than a business,” Healy said.

“Banks need to acknowledge that, rather than being defensive, and they need to have an appreciation about the needs of small business and how they might be met,” Healy told an Australian Securities and Investments Commission summer school two months ago.

The battle begins again

But it’s not just a sudden change of heart that’s led the banks to embrace SMEs again. As the housing market slows, mortgage lending is slowing and the banks need to find a new way to grow.

Putting the SME sector back on the agenda aggressively is ANZ, which wants to become the second-largest business lender by 2014.

ANZ general manager for small business, Nick Reade, told SmartCompany the bank is looking to exploit its super-regional links to “acquire a lot more customers”, and has worked out what it needs to do to reach second place, behind market leader National Australia Bank.

The new emphasis is reflective of confidence in the sector, Reade says, rather than a feeling the bank is underweight.

He draws attention to market share gains over the past few years, but says ANZ can capture more.

While he declines to elaborate on specific targets, Reade says ANZ is targeting new and existing customers, and looking at “all types of industry”.

Reade says ANZ has put on 130 new people over the past 12-18 months, and is “looking at all options” in terms of improving its SME offering.

“People are part of that, but there are other ways to boost productivity,” Reade says.

And while National Australia Bank has gained plenty of attention for its customer-friendly fee-cutting push, Reade says price can play second fiddle to an understanding of customer needs.

“Some banks” are relying on price because “they’re trying to be different,” Reade comments.

“That’s not what we’re on about. We’re about understanding the needs of customers. We want to be competitive but we don’t want to lead on price.”

The importance of understanding customer needs is shared by veteran NAB executive, Geoff Greer, who takes pride in the bank’s record of lending during both the GFC and recession in the 1990s.

Greer, the outgoing head of NAB’s lending division, welcomed ANZ’s focus on the sector, saying competition is “always good for the market”.

“Aspiring to be number two means somebody’s going be number one,” he cheekily adds.

He claims that in the two years to November 2010, NAB increased business lending by $8 billion when the overall business lending market went backwards.

Exact market share in the SME market is hard to gauge, depending on how banks break down their lending.

Bank analyst Paul Dowling, of specialist market research firm East & Partners, says NAB retains top billing, with Westpac, CommBank and ANZ following, although not terribly much separates the final three.

CBA’s first half result, released in February, showed business lending market share at 18.6%, from 19.5% the previous quarter, based on APRA figures.

Citing APRA data for loans under $2 million, CommBank told SmartCompany it grew total lending by 4.5% in the year to September 2010, versus a market-wide fall of 0.2%.

“We remain open for business with the small business sector and are looking to increase our presence in this space,” a bank spokesman says.

“We have increased the number of business centres and individual bankers throughout the GFC period,” adding it has more than 950 business banking specialists in 23 new business banking centres across Australia.

A Westpac spokesman said, based on BBM business Financial Services Monitor for the December quarter, Westpac came in second. For lending of up to $2 million, it had 14.9% market share including agri, and 16.9% excluding.

ANZ’s December quarter update, released two months ago, showed flat commercial lending.

But Andrew Inwood, principal at financial services market research firm Core Data, says while NAB likes to talk up its business banking business, CommBank is actually seen in the market as one of two big banks – the other being Westpac – which continued to lend during the financial crisis.

ANZ “took its foot off the growth pedal” during the GFC, says Inwood, after establishing a solid business development team.

Not like before the GFC

But while it’s great to see the big banks on the front-foot at last, it is clear that lessons from the GFC remain at the front of bankers’ minds.

Experts say the free-flowing credit that epitomised the pre-GFC boom has been replaced by a more cautious approach, with a greater emphasis on financial figures, management and record.

“There’s no doubt that cashflow lending that we saw pre-GFC is not happening. We’re going back more to how it was traditionally, before the heady times. Before the GFC, it was getting too competitive,” Sue Prestney says.

Banks can still afford to be a “little bit choosy” she says, which means some SMEs will find it tough to get attractive pricing.

Peskett concurs that banks have learnt their lesson after being burnt during the downturn, so A-grade companies will naturally get the best treatment.

“I think the banks are looking for more security and are scrutinising the capacity to pay more than they did pre-GFC,” he says.

“They’re also looking for more verification of financial reports and what customers present to banks in terms of profit and loss and incomes.”

The SME experts are mixed on whether certain sectors should expect a cold shoulder from banks.

While Prestney says no sector (except perhaps property developers) should expect difficulty, Peskett reckons sectoral differences will come through and some franchisees and some small retailers could still struggle to get funding.

The Bankers’ Association points out that the requirements for businesses to provide plenty of documentation to support their lending applications will still be high.

“Banks are effectively making an investment in small businesses via the lending facilities they provide,” Hossack says.

“In order for a bank to make a sound and prudent investment in their business, owners need to demonstrate that they understand their business, have suitable controls and strategies in place and are prepared to work to ensure the viability of their business.”

But make no mistake – for good businesses, the funding outlook it better than it has been in three years.

As the economy continues to improve, entrepreneurs can look forward to the sight of bankers scrambling for their business.