SME bank pulls back from commercial property exposure

In the update, Judo Bank said that it had reduced its sector concentration for property investment by 1.4 per cent in the half and would continue to be “cautious of” property investment, retail, and hospital sectors in the near term.

It flagged that property investment – which accounts for 21 per cent of its exposure – was “challenging while interest rates remain elevated”, even though demographics and flat/declining cash rates are supportive in the longer term.

The bank also said that it was doing less commercial real estate lending deals, which are “generally larger deals at lower margins”.

Over the half, the bank grew its loan book by $800 million (up 9 per cent on the prior six months), to $9.7 billion. This represents around three times system credit growth (based on RBA business lending statistics).

Judo Bank noted that it had been “dynamically” balancing margins, growth, and risk in its lending book, with front book lending margins reflecting the composition of new lending.

It revealed that around half of all applications for new credit were being declined, with a large proportion of declines in 1H24 being to property and retail borrowers.

For example, it said it had a continued focus on lending to SMEs that highly value Judo’s “high-touch, premium service proposition” and had decreased its commercial real estate (CRE) lending, opting for generally larger deals at lower margins.

It said that the 1,320 brokers it worked with were “are an effective filter for loans outside of Judo’s well-defined appetite”.

Judo has also been executing its Term Funding Facility repayment strategy – with $390 million repaid in 1H24 – and prioritising deposit funding. The bank has taken a cautious stance towards discretionary spending and sectors with weakening asset values, while experiencing strong growth in the healthcare and agribusiness sectors.

Loan amortisation had remained stable, at approximately 8 per cent, while external refinances increased in the December 2023 quarter due to “proactive risk management of the existing book”.

Paydowns have also increased as SMEs deleveraged via asset sales in response to a rapid increase in rates. However, Judo remains comfortable with its long-run assumption of a 20 per cent run-off.

It now has 61 customers in 90-plus days in arrears/impaired loans, representing around 1.5 per cent of total customers.

The bank also noted that it was seeing more loans enter arrears and impairment than were being resolved – due to portfolio seasoning, the economic cycle, and “some indigestion”.

Judo Bank’s outgoing co-founder and chief executive Joseph Healy commented: “We have grown prudently while delivering an improvement in our front book lending margins, within our risk appetite, all in what continues to be an uneven and uncertain operating environment.

“The impact of higher interest rates is still working through the economy. Our approach to lending remains dynamic, with lending appetite for different sectors regularly reviewed.

“Our focus is on lending to SMEs that value Judo’s high-touch, premium service proposition. We have been cautious about lending to businesses that are susceptible to reduced discretionary consumer spending and weakening asset values. We are very pleased with our expansion into the regions and will build on the great inroads we have made in agribusiness and healthcare lending.”

While releasing its financial results for the half, Judo also revealed that Mr Healy would be stepping down from his role next month.

Chris Bayliss, an original co-founder and Judo’s deputy CEO and chief relationship officer, will succeed Mr Healy as CEO and managing director on 19 March 2024.

However, Mr Healy will remain as an adviser to Mr Bayliss until 28 June 2024 to help manage the transition.

[Related: Judo Bank announces new CEO]