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PrintJul 03, 2008
Plunging business confidence and borrowing intentions paint a grim picture for lenders battling for market share and profitability, a new report into Australia’s small and medium-sized enterprise (SME) market has found.
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Steep decline in business confidence crunches SMEs
NSW, Victoria and Tasmania hardest hit, Western Australia and Queensland upbeat
Sydney, 3 July 2008 – Plunging business confidence and borrowing intentions paint a grim picture for lenders battling for market share and profitability, a new report into Australia’s small and medium-sized enterprise (SME) market has found.
The joint JPMorgan / Fujitsu Consulting Australian SME Market Report (Volume 2, July 2008) also noted that the combination of interest rate rises, the global credit crunch and lower levels of consumer confidence could result in a lagged increase in unemployment.
“Significantly, SME lending currently accounts for 24 percent of the total business lending portfolio,” said JPMorgan Banking Analyst, Brian Johnson.
“With the latest data for the 12 months to May 2008 indicating that total business lending is slowing significantly, we anticipate a corresponding slowdown in SME credit growth,” he said.
Fujitsu Consulting’s Managing Consulting Director and Executive General Manager, Martin North, said the gloomy outlook projected by the report was matched by this week’s 2008 Bank for International Settlements’ (BIS) report.
“Importantly, the BIS report warns that the global economy is at a tipping point, where easy credit conditions, low interest rates and complex financial instruments have created the potential for a major and sustained downturn,” Mr North said.
“This means the current depressed state of the financial services sector is tipped to spill out into the real economy. The SME sector is the bellwether for this, as the latest Fujitsu Consulting / JPMorgan report highlights. First, business confidence has dropped significantly, secondly propensity to borrow has dropped, and thirdly, losses are rising.
“As the BIS is a key third-party observer of the global economy, which sits above the fray and fosters cooperation between central banks, I take its findings extremely seriously.”
According to Fujitsu Consulting estimates, business confidence has fallen the greatest degree in NSW at 18 percent, followed by Victoria and Tasmania, falling 16 percent and eight percent respectively. Conversely, in both Western Australia and Queensland, the main beneficiaries of the current mining boom, business confidence has risen by three and two percent respectively.
JPMorgan’s Brian Johnson said the potential burden faced by SMEs is exacerbated by the relatively benign interest rate period between 2002 and 2007, during which time approximately 70 percent of borrowers were paying interest rates of less than eight percent.
“As monetary policy tightened in 2006 and 2007, that proportion dropped to 40 percent, and today, it stands at 20 percent,” he said. “They are already outweighed by the proportion of borrowers paying more than 10 percent, and we expect that proportion to increase over the next two years as existing loan facilities mature and lenders look to re-price risk.
“We only have to look back to the last sudden upswing in rates, which was around 2000/01. The lagged increase in unemployment showed up 12 months later.
“Looking at the current situation, as businesses face declining sales and rising costs, they may be forced to cut variable costs – such as the 45 percent of the workforce that are employed on a part-time basis in currently ‘pressured’ sectors such as retail and hospitality,” Mr Johnson said.
Other key findings of the detailed review of the SME market include:
- Lending volume growth has slowed over calendar year 2008, with business lending growth declining from a peak of 24 percent at the end of 2007 to now sit at six percent;
- The Australian economy is predicated on currently strong capital expenditure intentions for the 2008/09 year, which may not be fulfilled; and
- The profit signature of SME lending compares unfavourably overall with mortgage loan portfolios, because SMEs are more idiosyncratic than the increasingly homogenous mortgage sector, require higher servicing and incur structurally higher credit costs through different levels of loan security.
At the macroeconomic level, the report notes the following impacts of rising costs and falling confidence levels across all industry sectors with the exception of mining, health and education:
- Australian SMEs are more highly levered while facing sharp upward repricing of credit, as a result of consecutive increases in the Official Cash Rate and higher funding costs in global wholesale markets being passed on to customers;
- A consistent escalation in SME write-offs, which is expected to continue to rise over the medium-term given the challenges outlined above.
A separate update on SME banking relationships, which found that while overall satisfaction levels have improved, price is an increasingly significant cause of dissatisfaction and rate considerations are foremost indicators of switching potential, is also included in the report.
The Australian SME Market Report (Vol. 2: July 2008) is a joint effort between Fujitsu Consulting and JPMorgan, focusing on developments in the Australian SME market as the cost of funds rises and confidence falls.
Further information:
Andrew Donohoe
JPMorgan
61 2 9220 3138 or 0410 579 695
andrew.m.donohoe@jpmorgan.com
Kimberley Ramplin
Fujitsu Australia and New Zealand
61 2 9113 9592 or 0437 506 107
kimberley.ramplin@au.fujitsu.com
About JPMorgan
JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $1.6 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset and wealth management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its JPMorgan and Chase brands. Information about the firm is available at www.jpmorgan.com.au
About Fujitsu Australia and New Zealand
Fujitsu Australia and New Zealand is a leading service provider of business, information technology and communications solutions. Throughout Australia and New Zealand we partner with our customers to consult, design, build, operate and support business solutions. From strategic consulting to application and infrastructure solutions and services, Fujitsu Australia and New Zealand have earned a reputation as the single supplier of choice for leading corporate and government organisations. Fujitsu Australia Limited and Fujitsu New Zealand Limited are wholly owned subsidiaries of Fujitsu Limited (TSE: 6702).
For further information, please visit: au.fujitsu.com or nz.fujitsu.com
About Fujitsu Fujitsu is a leading provider of IT-based business solutions for the global marketplace. With approximately 160,000 employees supporting customers in 70 countries, Fujitsu combines a worldwide corps of systems and services experts with highly reliable computing and communications products and advanced microelectronics to deliver added value to customers. Headquartered in Tokyo, Fujitsu Limited (TSE:6702) reported consolidated revenues of 5.3 trillion yen (US$53 billion) for the fiscal year ended March 31, 2008. For more information, please see: www.fujitsu.com