The good times roll on in middle market

By Nick Stride

Friday 28th May 2004

"We keep saying it's not going to last," Westpac business banking general manager Bruce McLachlan enthuses, "but our team says the pipelines keep filling up."

Not all bankers in the business banking segment defined for convenience as businesses with revenues between $5 million and $100 million are as jubilant as McLachlan.

But there is general agreement that, for New Zealand's middle-market companies, the party is still far from over.

A slew of recent statistics indicates growth is still strong economy-wide. March data for exports, manufacturing output and retail sales all came out stronger than economists had been expecting.

McLachlan, speaking halfway through a nationwide tour of the bank's customers, suggests April has been just as strong.

"We've had unbelievable growth. In the past 12 months [to April] loans outstanding year-on-year have grown 23%."

His only reservation is in the commercial property development market, especially in Auckland where, he says, Westpac dominates with a 70% share.

"Current projects, which were dreamed up one, two or three years ago, are getting finished off, but the number of new projects being brought to us has reduced quite considerably."

The commercial property investment market, he says, is still strong, "but yields are coming in."

Housing turnover resumed a downward trend in April.

BNZ general manager financial services Mike Skilling says the bank's middle-market growth has been well above the Reserve Bank's "systems growth" figure of 4% a year but he is not as bullish as Westpac's McLachlan.

Where BNZ like Westpac has picked up big business this year has been in the SME (small-to-medium-sized enterprise) market.

"There isn't a lot of confidence in the middle market but there are signs it's starting to grow."

Why the disparity?

"My own theory is that companies in the middle market are experiencing a lot of growing pains as they try to become truly national or international," Skilling says.

"But that's not easy. You have to set up systems, work on marketing, and so on."

Bankers agree middle- market companies are better managed, better organised and better structured than they were a few years ago, but there are some reservations.

Anthony Grayson, BNZ's general manager of corporate and institutional banking, says not enough companies have formal, flexible treasury management policies.

Another perennial favourite is lack of succession planning. Addressing this is becoming more urgent as a wave of baby boomers who started companies in the 1960s and 1970s approaches retirement.

The New Zealand Exchange gets praise for its efforts to make capital markets more accessible to smaller companies.

Another solution is private equity-backed management buyouts, or management buy-ins, an area in which only ANZ operates.

ANZ in January backed a private equity deal, estimated to be worth $60 million, to buy Auckland plastics packaging company Chequer Group from founders Paul Halford and Rod Sullivan. Over the past four years ANZ has invested $57 million in private companies, including $23 million in 2003.

Banks are working hard at getting their pitch to the middle- market segment right.

Companies of that size, says BNZ's Skilling, need more than just traditional lending and working capital packages.

With larger customer bases, electronic handling of payments is essential, as are risk management products. Many also need effective cross-border banking arrangements.

For both the middle and SME markets banks have also developed education and advice services.

BNZ backs The Icehouse "mini-MBA" for chief executives while National provides research via its Small Business Monitor publication. Westpac runs the successful Beyond Survival travelling seminar series.

BNZ and Westpac also offer user-friendly guides to legislation changes, a service that must have seen hot demand of late.

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