Sydney, July 03, 2008
Plunging business confidence and borrowing intentions paint a grim picture for lenders battling for market share and profitability, a new report into Australia’s small and medium-sized enterprise (SME) market has found.
The joint JPMorgan / Fujitsu Consulting Australian SME Market Report (Volume 2, July 2008) also noted that the combination of interest rate rises, the global credit crunch and lower levels of consumer confidence could result in a lagged increase in unemployment.
“Significantly, SME lending currently accounts for 24 percent of the total business lending portfolio,” said JPMorgan Banking Analyst, Brian Johnson.
“With the latest data for the 12 months to May 2008 indicating that total business lending is slowing significantly, we anticipate a corresponding slowdown in SME credit growth,” he said.
Fujitsu Consulting’s Managing Consulting Director and Executive General Manager, Martin North, said the gloomy outlook projected by the report was matched by this week’s 2008 Bank for International Settlements’ (BIS) report.
“Importantly, the BIS report warns that the global economy is at a tipping point, where easy credit conditions, low interest rates and complex financial instruments have created the potential for a major and sustained downturn,” Mr North said.
“This means the current depressed state of the financial services sector is tipped to spill out into the real economy. The SME sector is the bellwether for this, as the latest Fujitsu Consulting / JPMorgan report highlights. First, business confidence has dropped significantly, secondly propensity to borrow has dropped, and thirdly, losses are rising.
“As the BIS is a key third-party observer of the global economy, which sits above the fray and fosters cooperation between central banks, I take its findings extremely seriously.”
According to Fujitsu Consulting estimates, business confidence has fallen the greatest degree in NSW at 18 percent, followed by Victoria and Tasmania, falling 16 percent and eight percent respectively. Conversely, in both Western Australia and Queensland, the main beneficiaries of the current mining boom, business confidence has risen by three and two percent respectively.
JPMorgan’s Brian Johnson said the potential burden faced by SMEs is exacerbated by the relatively benign interest rate period between 2002 and 2007, during which time approximately 70 percent of borrowers were paying interest rates of less than eight percent.
“As monetary policy tightened in 2006 and 2007, that proportion dropped to 40 percent, and today, it stands at 20 percent,” he said.
“They are already outweighed by the proportion of borrowers paying more than 10 percent, and we expect that proportion to increase over the next two years as existing loan facilities mature and lenders look to re-price risk.
“We only have to look back to the last sudden upswing in rates, which was around 2000/01. The lagged increase in unemployment showed up 12 months later.
“Looking at the current situation, as businesses face declining sales and rising costs, they may be forced to cut variable costs – such as the 45 percent of the workforce that are employed on a part-time basis in currently ‘pressured’ sectors such as retail and hospitality,” Mr Johnson said.
Other key findings of the detailed review of the SME market include:
- Lending volume growth has slowed over calendar year 2008, with business lending growth declining from a peak of 24 percent at the end of 2007 to now sit at six percent;
- The Australian economy is predicated on currently strong capital expenditure intentions for the 2008/09 year, which may not be fulfilled; and
- The profit signature of SME lending compares unfavourably overall with mortgage loan portfolios, because SMEs are more idiosyncratic than the increasingly homogenous mortgage sector, require higher servicing and incur structurally higher credit costs through different levels of loan security.
At the macroeconomic level, the report notes the following impacts of rising costs and falling confidence levels across all industry sectors with the exception of mining, health and education:
- Australian SMEs are more highly levered while facing sharp upward repricing of credit, as a result of consecutive increases in the Official Cash Rate and higher funding costs in global wholesale markets being passed on to customers;
- A consistent escalation in SME write-offs, which is expected to continue to rise over the medium-term given the challenges outlined above.
A separate update on SME banking relationships, which found that while overall satisfaction levels have improved, price is an increasingly significant cause of dissatisfaction and rate considerations are foremost indicators of switching potential, is also included in the report.
The Australian SME Market Report (Vol. 2: July 2008) is a joint effort between Fujitsu Consulting and JPMorgan, focusing on developments in the Australian SME market as the cost of funds rises and confidence falls.
Phone: +61 2 9113 9592 
E-mail: kimberley.ramplin@au.fujitsu.com
