Banks Think Small – But do they understand SMEs?

A banker, they say, lends an umbrella only to whip it back when it rains. Jaundiced or not, that’s the view many local businesses have of major banks.

As well as struggling to successfully manage small to medium-sized businesses (SMEs), banks are generally seen as being thirsty for profit – at the expense of service. It’s perhaps no coincidence that in recent Consumer magazine survey, New Zealand’s most profitable bank, the ANZ, earned the lowest customer satisfaction rating.

Seems the happiest customers can be found in smaller-scale outfits such as the PSIS (not registered bank) and the TSB Bank. Disenchantment with some of the major banks is expressed in growing support for newcomer Kiwibank – finding mirrored by another survey of both residential and business customers carried out recently by the University of Auckland Business School.

Of the five major banks, ASB tops the satisfaction poll with both its residential and business customers, followed fairly closely by National Bank.

Customer dissatisfaction doesn’t necessarily translate to account shifting, however. Most business customers view bank-hopping as expensive and “too much hassle” for too little difference. On average, only 11 percent of business customers contemplate switching every year, and less than four percent actually bother.

But incentives to shift may be growing.
Andrew Dinsdale, chairman of KPMG’s Banking and Finance Group says changing dynamics within the banking sector plus incremental, but significant refinements to the banking model, calls for corporate vigilance.

He reckons the recent wave of second and third-tier finance houses suggests banks are being served with wake-up call.

Small is beautiful

While the major banks remain dominant lenders to SMEs Dinsdale believes the bolder approach to financing taken by newer market entrants is forcing the majors to be less indifferent to SME needs.

Recent inroads by niche specialists such as Elders Finance, Pyne Gould Corp and GE Finance only partly explain banks’ renewed interest in the small business market, however.

Another factor is the major thinning out at the corporate top-end, (as big business relocates offshore) which has reduced the opportunity for wholesale banking. If banks are to meet their own shareholder demand for year-on-year profit growth, they need to look elsewhere – and SMEs are more clearly in their sights.

Although mortgages still continue to dominate banks’ lending profile (44 percent), commercial and financial lending is gaining ground. Last year, it represented the most significant area of lending growth – up three percent to 35 percent.

A growing interest in SMEs is forcing banks to reassess their traditionally conservative risk model, says Dinsdale.

“It’s true, banks remain bricks and mortar lenders, and SMEs have struggled to get look-in. Banks simply don’t understand this market, but the ice is melting – albeit slowly.”

Efforts to reduce operating costs have seen local major banks close almost half their total branch numbers since 1994. But in reversal of the downsizing trend, 2001 saw bank staffing levels increase by 1.5 percent.

Dinsdale says banks have recently discovered that branches have become inefficient delivery channels; and they’re significantly more important to small business than was realised.

“Running through cashflow projection or business plan is something businesses want to do face to face.”

Removal of the friendly branch manager has meant that value judgements about potential borrowers are being made via an impersonal call centre, says Dinsdale. Now, taking cue from their Australian counterparts, banks are reviewing the role of rural branches.

“Banks no longer see their branch network in isolation but as part of broader distribution strategy.”

It reflects an admission from banks they “indeed do have social responsibility”, he says.

They are also tightening their focus on small business.

Recent survey results suggest 75 to 94 percent of business customers have business bankers. While still in their infancy, most banks now have separate business units.

Introduction by the ANZ of “franchise” system that gives local banking executives more control and accountability exemplifies less constrained banking structure. In addition to its Franchising Unit, ANZ has established dedicated stand-alone division, dealing solely with SMEs.

With subsidiary UDC now franchising out its sales districts, and ANZ rolling out its shadow franchising into the branch network, Wayne Passant – ANZ’s head of SME banking, says the spin-offs for small business will be positive.

“The private equity product has been hugely successful for the ANZ and there’s certainly an opportunity to refashion this for the business market. The ANZ small to medium business division has full autonomy over the SME market and has even gone so far as to develop an internal positioning of promise to our customers – 100 percent professional care. ANZ recognises that decisions people make about their businesses also affect their lives,” says Passant.

Similarly, the BNZ’s general manager business banking Mike Skilling says broadening of bank criteria has seen more creativity around cashflow, asset and debtor financing.

Banks doing better?

In light of increased competition for SME business, Dinsdale believes the real mantra for banks is getting customer service levels back on track and staunching losses to new market entrants.

If results of Auckland University’s business customer survey are anything to go by, bank efforts to clean up their act haven’t gone unnoticed. The proportion of satisfied or very satisfied customers jumped from 58 percent (2000) to 73 percent this year.

Given they started from such low base, David Tripe, senior lecturer in banking at Massey University, questions whether these figures denote any meaningful change.

Tripe suspects that what’s behind banks’ (especially ANZ Bank’s) new differentiation strategies is realisation that banking services are becoming commodities only distinguishable by fee levels, and that good profitability has come at the expense of balance sheet growth.

“With only 1.4 percent total asset growth between 31 December 1999 and 31 March 2002, it looked as if ANZ Bank had given up on asset growth and concentrated on maximising profit from existing customers. Repositioning tactics in recent weeks, suggests they’re back being interested in customer service,” says Tripe.

He reckons the impact of second and third-tier entrants and their appetite for small-business lending is hard to substantiate. Unless lenders have the financial transparency that comes from controlling company’s entire bank account, there’s danger even new entrants will relegate SMEs to the too-hard basket, he says.

“What these new players have done is pick up property development lending. I suspect that banks are more than happy to watch new entrants capitalise on this opportunity.”

Reserve Bank results suggest the rural sector has been the real winner in last year’s lending stakes. The favourable collision of “agricultural stars” has seen farming ride the top of its cycle over the past two years. But Tripe says there’s little evidence to indicate that SMEs have received better look-in.

To the contrary, Brent King, CEO with finance company Dorchester Pacific, believes there’s sufficient evidence to suggest banks are getting tougher with businesses – big and small.

For example, it’s understood that due to higher default rates, some banks are reducing their lending from 50 to 60 percent against tourism-related assets.

“Banks would like to give the impression they’re more interested in SMEs. In reality, little has changed,” says King.

Banking’s brake

How much SME business do banks really want, asks Alasdair McLachlan, former CEO of Invercargill-based Southern Fresh Milk.

While agreeing that banks h

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