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New Zealand

Banks to battle it out over SME lending

60 per cent of SMEs are dissatisfied with their financial services provider

Fujitsu Australia Limited

Sydney, June 19, 2007

The Small and Medium Enterprise (SME) market will be the next banking battleground for market share, margins and new entrants according to the inaugural SME market industry report from JPMorgan and Fujitsu Consulting.

Despite this potential for growth, more than 60 per cent of small businesses surveyed expressed dissatisfaction with their financial services provider, with 61 per cent saying they would consider switching providers. As at January 2007, micro and SME lending accounted for $139 billion or 24.5 per cent of the $567 billion of total business lending.

The Australian SME Market Industry Report (Vol. 1: June 2007) is a joint effort between JPMorgan and Fujitsu, focusing on recent developments in the SME market based on Fujitsu SME Market and Yield Improvement Modeling.

“Our research found that nearly 60 per cent of respondents are dissatisfied with their financial services provider and a considerable 61 per cent of micro and SMEs would openly consider switching lenders. That said, around half of all business owners surveyed have never switched banks, with many believing it is too hard to switch, or that there would be no advantage in switching because ‘they are all the same,’” said Martin North, managing consulting director, Fujitsu Australia and New Zealand.

According to JPMorgan banking analyst Brian Johnson, “Lending volume growth has remained robust over the course of CY2007, with both housing and business lending growth stabilising over the last 12 months to remain broadly unchanged at 13.5 per cent and 16.8 per cent annualised growth respectively.

“As the housing lending super credit cycle inevitably slows, business lending becomes the next ‘growth’ business, following the delayed capex cycle. With excess liquidity in capital markets, and margins at the top-end of corporate lending very fine, many of the major players have decided to prioritise efforts in the micro and SME market,” he said.

“Confidence in the micro and SME sector is high, with more than 50 per cent of respondents having the propensity to increase borrowings. We believe that this will be the next battleground for market share, margins, and new entrants,” Martin North said. “However, lenders must consider the sheer diversity of the SME sector for which mass marketing techniques simply do not apply. Smarter, segmented offerings are required if banks are to establish a differentiated position in the SME market.”

Other key findings of the Australian SME Market Industry Report are:

  • Overall, the profit signatures of micro / SME lending compares unfavourably with mortgage loan portfolios – Mortgages have a more profitable top decile and less unprofitable bottom decile when compared to micro / SME customers. Around 70 per cent of SME and Micro Lending is profitable over the life of the loan, allowing for defaults and refinancing broker commissions.
  • Only 21 per cent of micro / SME loans are broker originated, significantly lower than the estimated 45 per cent of new housing volumes are written through third party brokers – A relatively small proportion (less than 20 per cent) of mortgage brokers are willing to originate commercial loans, citing complexity, which offsets additional commission, as the primary drawback.
  • Market share is aligned to the majors – The big four have the lion’s share of secured commercial lending for this sector. NAB has the largest share, at about 21 per cent, followed by Commonwealth Bank, then ANZ. Some specialist lenders, like Elders Rural Bank, have significant representation in specific industry sectors.
  • A range of frustrations are leading to high levels of dissatisfaction amongst SMEs –When respondents were asked about the greatest frustration they experience, the compliance to bank rules, and lack of business understanding were the strongest factors. Nearly 60 per cent of respondents are dissatisfied with their Financial Services provider.
  • There is significant switching potential – Less than 22 per cent of respondents surveyed indicated that they would not switch banks, 17 per cent noted they would switch if offered a compelling reason, while a considerable 61 per cent of micro / SMEs would openly consider switching financial service providers.
  • Apathy or inertia means that the opportunity for banks to entice customers to switch is limited – Around half of all business owners surveyed have never switched banks, with many believing it is too hard to switch, or that there would be no advantage in switching because “they are all the same”.

The report also notes providers in the SME sector have failed to differentiate themselves from competitors. And while service was sighted as a root cause of dissatisfaction, ANZ was a clear service leader. The Elders Rural Bank niche offering also scored highly. Among the major banks, St George’s service levels were also admirable, while Commonwealth Bank, NAB, and Westpac all scored similarly below par.

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Elizabeth Greene

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Company:Fujitsu Australia and New Zealand Limited

Date: 19 June, 2007
City: Sydney
Company: Fujitsu Australia Limited