SME lending: Judo Capital takes on big banks with soft launch

July 13, 2017
Richard Gluyas, The Australian

Joseph Healy’s non-bank business lender, Judo Capital, has completed a soft launch and successfully written its first half-dozen loans ahead of a full public launch scheduled for August. Healy’s target market is small and medium-sized businesses with annual turnover of up to $20 million. The average size of the loans is $500,000. Along with co-chief executive and fellow NAB refugee David Hornery, Healy has been working on Judo since he left NAB as head of its business bank in 2014. The new venture is now in the final throes of tapping global investors for $100m to on-lend to SMEs. This is expected to underwrite Judo’s operations for about a year, after which Healy hopes to secure a banking licence from APRA. He is heartened by the government’s determination to lower the industry’s barriers to entry, as flagged in the May budget. Judo already employs 32 people but is poised to scale up rapidly, doubling its workforce in the next three-four months. Healy has stacked his leadership team with NAB veterans. Apart from Hornery, it includes long-time NAB business banker Tim Alexander, the bank’s ex-head of Asian banking Kate Keenan, and former Woolworths group services manager and head of NAB’s online bank UBank, Alex Twigg. Healy has been adamant from the outset that Judo won’t be a fintech. He believes human capital, not financial capital, will be the main driver of success in the new era of banking. That means human interaction with customers and experience in making the right credit decisions, as opposed to handing control to an algorithmic formula. The model borrows extensively from the British challenger banks and specialist SME lenders Aldermore and Shawbrook. Aldermore has no branch network, serving customers online, by phone and face-to-face through a network of 12 regional offices, while Shawbrook has used a similar model to build a loan book of more than £3.3 billion ($5.3bn).

Fintech festival

The first comprehensive map of the nation’s fintech ecosystem, compiled by the industry body Fintech Australia, shows the strength and diversity of the sector, particularly in wealth generation and lending. That should come as no surprise — our major banks are in the world’s top-20 by market capitalisation, and the $2.2 trillion superannuation market is the fourth largest in the world. The map features 119 members of Fintech Australia, along with the nation’s key financial regulators. It understates the true position because the lobby group represents only a quarter of all fintechs. This was the basis for yesterday’s claim that Australia has more fintechs than Hong Kong and is level-pegging with Singapore. The nation’s bid for regional leadership will be enhanced by developments over the last week.

One of the aims of the week-long Intersekt fintech festival in October, which will incorporate the second Collab/Collide conference, will be to build funding bridges into the region for local fintechs. While Australia has a solid angel and start-up investment community, it lacks growth capital. The other development has been the long-awaited announcement of tenders for a Victorian fintech hub in the Docklands precinct. Proposals will be evaluated by early August, with an announcement by early September. The intention is to have the hub up and running by the time Intersekt comes around. A hub is also planned for Queensland, which would establish an eastern seaboard network of genuine scale.

Trashed banks a buy

As of yesterday, Scott Morrison’s instruction to the four major banks and Macquarie Group to “pony up” $6.2 billion because no one likes them had stripped $40bn in value from the five affected institutions. It’s not bad work on behalf of the nation’s superannuants! Anyway, the question for investors now is whether the sell-off has reached a point where the banks have been oversold. Bank of America Merrill Lynch seems to think so, inviting investors to pick from its three buy-rated major banks — ANZ, National Australia Bank and Westpac. As for the black sheep, Commonwealth Bank, it’s not that there’s anything fundamentally wrong with the nation’s most profitable financial services franchise; it’s just that its prospective total shareholder return is lower. BAML hasn’t ingested too much of the major-bank kool-aid.

It recognises there are risks associated with its prognosis, including a capital or credit crisis, but believes the chance of either scenario coming into play is remote. While the banking regulator has flagged higher capital standards, the perceived regulatory overhang flies in the face of BAML’s assessment that the majors comfortably exceed all current requirements for capital, liquidity and funding. This assumes a 10.5 per cent target for common equity tier one capital and mortgage risk-weights approaching 30 per cent. The report also runs the bear narrative on housing risk. However, it notes that the nation’s 34 per cent household debt serviceability ratio (debt payments as a percentage of income) is in line with the 15-year average and below the 44 per cent and 41 per cent levels leading into the last two mild housing downturns in 2008-09 and 2011-12. The investment bank’s three buy calls are based on 12-month, forecast TSRs (total shareholder return) in a range of 18 per cent to 26 per cent. CBA’s forecast TSR is 7 per cent.
Twitter: @Gluyasr

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