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The grass is expected to be greener on the business side of lending, as residential lending continues to dry up due to external pressures.
Despite copious reports predicting declines in business lending following fallout from the Hayne royal commission, with small businesses especially set to feel the pinch, KPMG said in its Major Australian Banks: Full Year 2018 Results Analysis report that the outlook for business lending “appears rosier” than that for mortgage lending.
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It noted, however, that business lending cannot be counted on to “pick up all of the slack from the mortgage market”.
Rival accountancy giant PwC appears to be more optimistic about the future of business lending, claiming in its report, titled Banking Matters: Major Banks Analysis Full Year 2018, that “accelerating business lending growth [is] surpassing decelerating mortgage lending growth”.
“Business credit growth was up sharply in the second half to 5.3 per cent p.a. on a six-month rolling average, up by 1.9 per cent from prior half (3.4 per cent) and also up from a year ago (4.5 per cent),” the PwC report stated.
The accountancy giant further noted that business lending growth, as at June 2018, has “finally caught up with nominal GDP growth”.
“Nominal GDP growth exceeding business credit growth is a phenomenon usually observed following major downturns, but one which has unusually persisted in Australia since early 2014,” it stated in its report.
The big four banks have pursued this opportunity differently, according to PwC, two of which have grown their business lending portfolio “substantially” faster than system.
This is despite data provided to the Productivity Commission earlier this year showing that the average return on equity over the last five years for residential lending was 7 per cent higher than for business lending for one major bank and 4 per cent higher for another.
For example, in its 2018 third quarter trading update, NAB revealed that its statutory net profit increased by $50 million from $1.6 billion in Q3 FY17 to $1.65 billion in Q3 FY18. The major bank’s revenue also increased by 1 per cent, with the bank attributing the rise in part to “good growth in SME lending within business and private banking”, with its on-balance sheet exposure to SME lending totalling $13.49 billion as of 30 June 2018.
Commonwealth Bank’s results for the 2018 financial year, on the other hand, showed an opposing trend. The major bank reported negative business lending growth of 0.6 of a percentage point in FY18, compared with 3.3 per cent positive growth in FY17, with its business lending activity 3.8 per cent below system (which is currently at +3.2 per cent).
PwC said that two major banks approached the opportunity to reshape their portfolios by aligning them “more closely to risk, sector, geographic and/or strategic appetite”, with one such bank shrinking its non-housing portfolio in absolute terms.
In contrast to PwC, Deloitte claimed that both housing and business lending “remained subdued” in the 2018 financial year, though it acknowledged that the major banks’ divestment of life insurance, funds management and wealth management businesses is resulting in them reallocating capital internally to residential and business banking.
While it remains unclear how the major banks will approach business lending, smaller banks, non-bank lenders and fintechs have their minds firmly set on servicing the business market, particularly small businesses that are increasing turning to smaller lenders.
[Related: SMEs to increasingly lean on smaller lenders]
