Loan Rivalry Forces Banks To 'slash' Margins
Sydney Morning Herald
Monday June 26, 1995
INTENSE competition for small to medium-business loans has pushed rates down significantly, shaving bank margins by as much as 0.5 per cent. The entry of new players and flagging demand has forced banks to offer discounted rates and other sweeteners to win business.
Many regional and second tier banks have recently entered the fray offering business loans to small and medium-size businesses as the demand for home loans dries up. But the down-surge of business confidence has led to a low volume of demand with some bankers grumbling margins have been "slashed" by up to 0.5 per cent in the past six months.
"There is considerable pressure on margins," says Mr Andrew Willink, managing director of interest rate research group Cannex. "Banks are falling over themselves to do business. We have save seen some very significant cuts in rates as others have entered the market. It's not unrealistic to say banks have shaved margins by 0.5 per cent."
On top of this, many companies have shifted away from borrowing, preferring to generate capital internally to fund growth.
"When that happens it gets mighty competitive. Large corporations can borrow anywhere, they have access to global markets. If you can't lend at the top end of the market you have to go down the ladder because it is bread-and-butter growth to your shareholders." Mr Willink says many regionals that weren't in the market last year have entered it, to get a slice of the action.
"You notice the competition in the products they offer. They have focused on putting packages together which include add-ons from low cost transaction accounts to extra services, like a night-safe facility." Banks that are making their mark include Advance, St George, Bank of Melbourne and Challenge.
According to bankers, the competition is benefiting most classes of business customers. Some claim good credit risks are getting discounts of between 0.5 to 1 per cent less than the reference rate. As one put it, "every risk category has moved up a notch in terms of what they can demand".
Mr Peter Leon, the marketing manager of business banking, St George, maintains the battle lines were drawn earlier this year when the NAB initiated its $1 billion small business program. "They were targeting ANZ and Westpac's better account customers, offering very attractive pricing and others were forced to retaliate," he says. "Everyone had to follow suit to retain customers and get new business - and the benefits have filtered down.
"There is no doubt that business customers are doing better than they did 12 to 18 months ago. Pricing is much keener and some institutions are waiving valuation and establishment fees where good accounts are up for grabs."
He points to "honeymoon", or discount rates, of 8.9 per cent for the first year or two of the loan to illustrate how aggressively competitive the market is - as well as innovative.
"At the bottom end of the market there is a move to package a low interest rate loan secured against the business owner's residential property. It operates like an equity mortgage loan using the house as security. It's restrictive but it does provide finance at a relatively low interest rate and helps to fund business operations."
Mr Leon says "super quality borrowers" can negotiate up to 1 per cent below the reference rate.
"Indications are banks are going below the reference rate quite frequently but not for anything other than a good customer, someone with good security and a good track record." At the other end of the spectrum, 3.5 per cent may be added for risk, he says.
Mr Dennis Roams, chief manager business banking at Commonwealth Bank, says up to 5 per cent can be added to the reference or base rate to reflect risk. "The index is merely a yardstick. It's not used as a basis for lending as such, it will have a margin for risk added to it. It gives you an idea of how rates are moving." But despite the good deals being offered he says borrowers are still reluctant to go into debt. "They are using their own resources, they are cashed up. So much business is so well positioned, they have so much equity relative to the size of the balance sheet, but they are reluctant to borrow or gear up to more volume or increased turnover." Meanwhile banks are under pressure to lend. "If you don't lend money, you don't make money," says Mr Roams.
Mr David Brown, head of public affairs at Advance, puts some of the blame on the legacy of the 80s. "There is a perception out there that the banks are still lending shy. But they have got the money to lend and they are keen to lend against sound and viable proposals. From the customer's perspective that's good news - they are in the box seats."
Bankers acknowledge there is a fair amount of refinancing going on as existing borrowers review their position and take advantage of the current climate. "This market has been ill served by the major banks in the past," claims Mr Leon. "It has prompted better quality customers to look around and see others who are prepared to win their business."
NAB's Mr Haydn Park says the new players are not a threat. "It's a risky market. I've seen them try to enter in the past and they have not been too successful. A couple of regional banks have put their toe in the water. If you speak to analysts they would say they're on a learning curve, they don't want to get too big too soon." But he agrees it's a tough market. "Business confidence is not that flash. We are all trying to pinch each other's customers. We are offering discount loans and others are offering other price initiatives and add-on benefits. It's extremely competitive."
The senior general manager, business banking, at ANZ, Dr Robert Edgar, complains that borrowers have not latched on to the changed market conditions. "You hear people say prices are similar, there's a lack of competition, but the reverse is true. It's intensely competitive; the banks have been slashing margins. They are under pressure. Unfortunately I don't see too much relief. If you look at the results of any bank you would see some contraction of margin - it's a difficult market for us."
But Mr Willink warns it's hard to compare the advertised reference rate. "They don't all use the same benchmark. The best benchmark is directly related to the wholesale 90-day bank bill rate. You need to ask how much from the wholesale rate you are paying." He says the margin added above the reference rate will depend on risk, and negotiations between you and the bank.
The chief executive of the Council of Small Business Organisations of Australia, Mr Rob Bastion, would like to see the total cost of borrowing expressed as a single effective rate that includes the cost of entry, maintenance and exit fees.
"It's confusing as it stands at the moment. It's made it very difficult for clients to determine the true price of the product."
While he is delighted more finance is available for small business, he worries history may repeat itself. "Right now there is a surplus of money, but if it brings problems further down the track, that's a worry. Before the last recession money was easy to get but when the big end of town went belly up, the small end of town wore it. When the banks lose money they tend to turn around to the small business sector and crank up rates."
And how do the banks assess risk? Clearly a good track record, the ability to service the debt and a good credit rating is your best argument. But if you are shopping around for a loan, or refinancing, it's worth giving some thought to how they arrive at the risk margin.
"It's not a precise science, it's a judgment based on the information you have and what you know of the client - it's what you make of the information," says Mr Roams. Which means you need to negotiate on a bank by bank basis to find what is best for you.
SMALL BUSINESS COMMERCIAL RATES
Institution Overdraft Fixed Lending Rates
%* Rates 1 Year 3 Years 5
Years
Advance Bank Business Ref Rate 10.95 11.65* 7.80* 8.20*
8.6*
ANZ Bank Ref Rate 10.75 11.00 11.00 11.60
11.8
Bank/Melbourne Base Lending Rate 10.75 10.75* 7.90-10.40 8.35-10.85
8.75-11.25
BankWest Business Loan 8.95 11.00* 8.00-11.00 9.40-11.40
8.85-11.85
ChallengeBank Business Ref Rate 10.95 11.95* 11.25-11.75 11.75-12.25
-
Citibank 10.95 12.95 9.95 10.25
10.85
Commonwealth Better
Business Loan 9.45 11.25* 8.35-13.35 8.75-13.75
9.05-14.05
Metway Bank Base Variable Rate 10.5 10.50* 9.90 10.25
10.20
NAB Business Inv Loan5 8.9 10.90* 9.50* 9.80*
10.00*
State Bank NSW Special Business
Plus/Ref 9.25/11.25 11.25* 8.10 8.70*
9.10*
Westpac Business Fin/Ref
Lending 9.50/10.65 11.50* 9.05-11.55 9.45-11.95
9.80-12.30
Source: CANNEX
* Margin for risk may be added.
© 1995 Sydney Morning Herald
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