Introduction
The business loans market in Australia is undergoing a significant change as the country’s four largest lenders – ANZ, Commonwealth Bank, NAB and Westpac – are looking to increase their presence and profitability in this sector. This comes after a decade of strong growth and high margins in the mortgage market, which has been eroded by intense competition and regulatory pressures.
In this article, we will explore the reasons behind this strategic shift, the current state and outlook of the business loans market in Australia, and the challenges and opportunities that the big banks face in this space.
Why are the big banks pivoting to business lending?
The mortgage market has been a key driver of revenue and profit for the big banks in Australia for the past 10 years. According to the Australian Bureau of Statistics (ABS), the value of outstanding home loans rose from $1.1 trillion in June 2011 to $1.9 trillion in June 2021, an increase of 73%. The big four banks accounted for about 80% of this market share.
However, this growth has come at a cost of lower margins and higher risks. The big banks have faced increasing competition from smaller lenders, fintechs and non-bank lenders, who have offered lower interest rates and more flexible products to attract customers. The big banks have also faced regulatory pressures from the Australian Prudential Regulation Authority (APRA), which has imposed stricter capital requirements and lending standards to ensure financial stability and consumer protection.
As a result, the net interest margin (NIM) – the difference between the interest income and interest expense as a percentage of average interest-earning assets – of the big four banks has declined from 2.25% in June 2011 to 1.88% in June 2021, according to their financial reports. The NIM is a key indicator of profitability for banks.
In contrast, the business loans market has been relatively under-served and under-penetrated by the big banks. According to the ABS, the value of outstanding business loans was $974 billion in June 2021, slightly lower than the value of outstanding home loans. However, the big four banks only accounted for about 60% of this market share, leaving room for growth and expansion.
Moreover, the business loans market offers higher margins and lower risks than the mortgage market. According to RBA data, the average interest rate on business loans was 3.67% in June 2021, compared to 2.66% on home loans. The average interest rate on small business loans was even higher at 4.64%. Additionally, business loans are typically secured by assets or cash flows, which reduces the credit risk for lenders.
Therefore, by pivoting to business lending, the big banks are hoping to improve their profitability and diversify their revenue streams.
What is the state and outlook of the business loans market in Australia?
The business loans market in Australia has been recovering from the impact of the COVID-19 pandemic, which caused a sharp contraction in economic activity and demand for credit in 2020. According to RBA data, the annual growth rate of business credit was -3.6% in June 2020, compared to 3.4% in June 2019.
However, as the economy has rebounded from the recession and lockdowns, so has the demand for business credit. The annual growth rate of business credit turned positive to 0.8% in June 2021, driven by increased borrowing by large businesses for working capital and investment purposes.
The outlook for the business loans market is positive, as the economy is expected to grow by 4.25% in 2021 and 3.5% in 2022, according to RBA forecasts. The government has also provided various stimulus measures and support schemes to help businesses survive and thrive during and after the pandemic, such as JobKeeper, JobMaker, instant asset write-off and loss carry-back provisions.
According to a survey by Deloitte Access Economics commissioned by ANZ, small and medium-sized enterprises (SMEs) are optimistic about their future prospects and plan to increase their borrowing over the next year. The survey found that 41% of SMEs intend to borrow more over the next year, compared to 29% who intend to borrow less.
