Is a relationship with Judo Bank right for your business?
Judo Bank is a classic gamekeeper turned poacher story involving former big bank executives Joseph Healy and David Hornery taking on their old employers who they say have lost the craft of relationship banking.
Having earned its?banking licence in 2019, Judo has grown from scratch to a loan book of $3.5 billion. It expects to reach $6 billion by June 2022 with a forecast after tax profit of $5.2 million. Judo is due to list on the ASX next Monday with a valuation at $2.317 billion.
Gaining the licence?helped Judo immeasurably. It provided access to $2.86 billion of funding at 0.10 per cent under the Government's Term Funding Facility. Judo is one of the few lenders approved under each phase of the $40 billion Coronavirus SME Guarantee Scheme and it was approved for $250 billion under the Structured Finance Support Fund. Having a banking licence also means depositors enjoy the safety of a government guarantee. All of this has enabled a reduction?in the average cost of funds from 3.3 per cent in 2019 to a very competitive current rate 1.3 per cent. In addition, Judo has received substantial backing from big name shareholders and warehouse funders.
Based on this support as well performance measures like Net Promoter Scores, customer satisfaction and retention?rates, Judo deserves to be regarded as a genuine player in the SME lending market.
But let’s put Judo into context. It remains a minnow with around only 1 per cent of the total SME lending market. Even if it doubles or triples in size in the next couple of years, it will remain a minnow so it cannot be nor, it should be pointed out, does it aim to be all things to all SMEs.
It has less than 2,000 customers Australia wide and the average loan size is $2.1 million. The website says it is looking to service businesses with aggregate loan exposures between $250,000 and $25 million.
It is interesting that the Productivity Commission in its recent report on?Small Business Access to Finance?concluded that “there appears to be a gap for unsecured SME finance between $250,000 and $5 million.
The key word here is “unsecured”.?Judo's?Prospectus?reveals that 72 per cent of the loan book is secured by property with the remaining 28 per cent being “Not secured by property”. What this means is that other security is taken for example GSAs and/or specific charges over assets like plant and equipment, stock and debtors as well as directors personal guarantees. Judo does not lend unsecured.
To achieve its longer terms goals, Judo says it will need to grow its loan book by between four and five times current levels. Given its low base and SMEs general dissatisfaction with the big banks, the scope for such growth is clearly present but will Judo be able to maintain its ethos as it grows?
Starting from scratch has its advantages like the absence of legacy systems and being able to be selective in which businesses it takes on. It has also been selective in recruiting experienced relationship bankers.
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The 87 bankers now on board look after an average of only 21 customers which enables regular personal contact. But Judo’s plans call for an increase in the number of relationships per banker by two to three times which begs the question “will the bankers still have the time required to service the needs of all their customers in line with their value proposition?
Keys to this include factors like harnessing new technology, strong risk management and retaining and recruiting quality staff.
The big banks are alert to the value of relationship banking. CBA’s new Group Executive Business Banking Mike Vacy-Lyle recently said “business banking has?become fixated on lending against property and banking is when you actually have a conversation with a customer about their cash flow needs”.
SMEs do not have much faith in big banks when it comes to delivering on commitments to relationship banking but Judo seems to be performing extremely well on this score.
A risk for Judo as it gets bigger is that it could become more like the banks it is looking to disrupt. But for now at least, if you can tick?these boxes, Judo could be the right bank for your business:
If you are in the enviable position of having surplus funds and no need for debt, Judo offers?better deposit rates than the big banks with the same protection provided by the government deposit guarantee up to a limit of $250,000.
Bear in mind?though that currently Judo does not offer the full range of transactional services you get from the big banks.
Feedback always welcome.??
Neil Slonim theBankDoctor
Disclaimer: This article is not to be taken as advice or a recommendation. The writer has no personal or professional association with Judo Bank.
Banking and Finance Expert Witness specialising in personal and business lending, credit policy and process and risk management
3 年I agree with Joe Siragusa, #Judo have assisted a number of my clients where the respective Big 4 (despite being the main banker to my client) have been unable to help. This has helped my clients enormously. I believe that Judo WILL ultimately fill the gap that exists to assist SMEs however, it does mean they need to be resolute to their promise which is to focus on the 3, 4 or 5 (or more) C's. However, whichever way you choose to look at it, the first and second of the C's are the most important being the Character or the person/business you are lending to and their Capacity or their ability to service and ultimately repay their facilities. At the end of the day, banking is not hard - "we" have (over the last 20 or so years) made it hard and it is now up to us as an industry body to make good and simplify the process whilst, at the same time, doing the right thing by our clients (which sometimes means saying "no" or "hold off and wait"). Very early in my banking career I was advised that it's easy to manage the "yes's" and the "no's" but what our real job is, is to manage the "grey" ie where there is no simple answer and you have to use your brain! It's all about getting back to the basics.
Director, Australian Finance Partners. Debt Advisory Services.
3 年It was a pleasure dealing with the Team at Judo for a client in high growth mode who required financing against the value of the business and cashflow. Many banks say that they are "Cashflow Lenders - but only if it is backed by property"
Leadership and Skills Coaching | Facilitation | Strategy Review | Organisational and Risk Culture | Writer
3 年Hats off on what they've achieved in getting to this point, no mean feat. We will only learn about their underwriting standards when it gets truly tested with all Government assistance exhausted. Next year will be interesting. I'd also be interested in their succession planning once the main players hang up their spurs - we know that continued supply of capital from key investors is the only game in town, no matter how compelling your app or service proposition.
Private Investor / Adviser / Family Historian
3 年A good article Neil on Judo's current position. It's early days for Judo. Let's see how they survive a material economic downturn. It would be interesting to know how they propose to develop and maintain positive Income/Expense growth jaws to drive sustainable profitability. They have been paying above market rates to get experienced business bankers to manage small portfolios. That's not sustainable. Growing from scratch is the easy bit, as previously demonstrated by the foreign banks in the 1980s, and then the regional banks (ex building societies) in the 1990s, but then they each struggled to successfully risk manage their 'new' back books and when an economic downturn came along, fell over and their books taken over by one of the big 4! Will this happen again to the likes of Judo, particularly given the limited size of the Australian banking market?