The COVID crisis has triggered a sharp fall in business and commercial lending volumes and has shifted the competitive landscape in favour of the big four banks, according to new research.
Aggregator FAST has released its latest Business Lending Index (BLI) – which involves an online survey of its broker network – reporting that over the three months to 30 June 2020, total business and commercial lending volumes fell 16 per cent on the previous corresponding period.
The slide in volumes was most pronounced among smaller lenders (non-majors and non-banks), down 32.3 per cent, from $485 million to $328.4 million, while settlements across the big four banks (excluding subsidiaries) fell 7.5 per cent, from $953.2 million to $880.9 million.
According to FAST CEO Brendan Wright, the results are a reflection of the economic impact of the COVID-19 crisis.
“The three months to 30 June have been some of the most difficult in the history of the Australian economy,” he said.
“We are dealing with a global health pandemic that has challenged financial markets and had a significant impact on Australian businesses.
“Mortgage and finance brokers are working harder than ever to help their business as well as residential customers through this difficult time.”
The drop-off in demand for business credit is also reflected in the Reserve Bank of Australia’s (RBA) latest Financial Aggregates data, which reported a 0.8 per cent decline in business credit growth in June, following a 0.6 per cent slide in May.
This marked the third consecutive month of weak business lending activity following a surge in demand at the onset of the COVID-19 crisis, which spurred record-high growth of 3.1 per cent in March.
Majors win back market share
The COVID-19 crisis has also shifted the competitive landscape, with the big four banks regaining lost ground in the business and commercial lending space.
The FAST research revealed that the big four’s share grew to 73 per cent in the June quarter of 2020, up 7 percentage points from 66 per cent in the previous corresponding period.
Non-banks took the biggest hit over the June quarter, with their market share slipping from 12 per cent to 7 per cent over the same period.
This coincided with a 48.7 per cent plunge in the non-bank sector’s business and commercial lending volumes.
When including settlements originated by non-major banks, the ADI sector’s collective market share grew from 88 per cent to 93 per cent.
Mr Wright attributed the non-banks’ performance to a rise in wholesale funding costs, which have hindered the sector’s ability to compete with banks on pricing.
“Wholesale funding markets have been impacted globally, and the cost of funds has risen,” he said.
“Non-banks and fintech lenders that rely on wholesale funding and investment equity have had to manage their front books over the quarter as the rising cost of funds has placed upward pressure on margin.
“What we have seen over the June quarter is a shift back to the mainstream lenders as more loans are placed with the banks, particularly the big four.”
SME demand still strong
Brokers surveyed by FAST indicated that SME lending flows have withstood the broader decline in volumes across the business and commercial space.
“Accessing finance remains critical for SMEs over the coming months, and brokers continue to help their business clients secure working capital so that they can continue operating through this challenging period,” Mr Wright added.
“The pandemic continues to impact the way we work and live. Businesses are continually adjusting to new measures imposed by state and federal government to control the contagion of the coronavirus.”
FAST brokers stated that they expected demand for working capital to increase over the next six months.
According to the aggregator’s research, half of surveyed brokers have provided COVID-specific credit assistance over the pas few months, which Mr Wright said was a testament to the broker proposition.
“Finance brokers continue to play an essential role to commercial and business clients,” he said.
“Small and medium businesses across the country are working with brokers to secure critical funding lines to keep their doors open during these uncertain times.”