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% 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% in 2019 to a very competitive current rate 1.3%. 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% 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 fewer than 2000 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
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 at Judo 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.
Neil Slonim is an independent SME finance advocate from theBankDoctor.org.
