Judo Bank does not aim to be all things to all SMEs but if you want a relationship bank and you tick all their boxes, Judo could be the right bank for you.

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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.

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:

  1. Want a true relationship with an experienced banker you can talk to and who understands your business and its needs.
  2. Prepared to pay a small premium for this service.
  3. Looking to borrow between $250,000 and $25 million (preferably towards the higher end).
  4. Have property which you are prepared to offer as security.

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.  


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