Judo Bank avoids mortgages, competes with the Big Four as a commercial lender

Also, Healy has to bear the burden of a lower credit rating. Judo, like most regionals, has a minus BBB credit rating compared to the AA ratings of the big four banks.

Mortgages are even worse when it comes to competing with the Big Four. There is a higher return on capital when taking out a mortgage, but the commodification of this product means that the margins are extremely low.

‘Market distortion’

APRA’s uneven surveillance of mortgage risk weights means that a residential mortgage with a 40 percent loan-to-value ratio requires about 10 percent in equity from one of the Big Four and about 35 percent in equity. of a regional bank.

David Murray highlighted this disadvantage in his research on the financial system in 2014 and recommended leveling the playing field. But APRA and the Treasury have not done anything about it.

If anything, APRA has made the risk-weighted capital problem for regionals even worse, according to a regional banker familiar with APRA’s obsession with advanced methodology for credit evaluation.

Healy says the difference in capital weighting for regionals “creates a distortion in the market.”

“It weakens the competitive pressure in the market, there is no doubt about that,” he says. “But the whole risk-weight determination is a black art that creates a competitive advantage in favor of the major banks.”

Judo’s 2022 financial results released Thursday showed a pro forma pretax profit of $15.6 million, more than double the original prospect’s earnings forecast of $7.4 million.

Closely watched credit metrics were in line with forecasts. Impairments of $25.4 million were below the prospectus target of $28.5 million.

Total provisions increased to $55 million due to growth in collective provisioning and provision coverage of 91 basis points was just above the forecast of 90 basis points.

The bank boosted loans and advances by 73 percent to $6.1 billion and more than doubled net interest income to $169.8 million. The bank’s underlying net interest margin of 2.79 percent is up 20 basis points, and Healy says it will reach 3 percent by the end of this year and be more than 3 percent by June next year.

Healy has aggressive goals to improve the bank’s efficiency as measured by cost-to-revenue ratio. He wants to bring this ratio down to around 60 percent from 73 percent through a combination of higher revenues and lower costs.

“As a bank that was built on PowerPoint five years ago, we’re not burdened by legacy systems,” Healy says.

“We don’t have the legacy in terms of compliance and technology and infrastructure assets, which plague the industry. The burden of legacy is something that judo has avoided.”

Judo has managed to compete effectively with major banks in lending to small and medium-sized businesses, while promising a net interest margin of 100 to 125 basis points higher than that of major banks.

Much of that can be attributed to the founders’ decision to target a segment of the market that is not highly commoditized.

Chanticleer assumes the Australian Competition and Consumer Commission will explore this bizarre competitive distortion as part of its review of ANZ Banking Group’s acquisition of Suncorp Bank.

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