All eyes on interest rates' effect on loans

By Nick Stride

Friday 28th May 2004

If growth has been strong in the corporate and middle -market segments, in the SME (small to medium enterprise) market it has been explosive.

Westpac reports growth in the SME loan book of 30% over the past 12 months.

BNZ, which claims a one-third share of the market, says its growth has been 23-25%. ANZ says its relationship managers have been run off their feet and is putting more business bankers on the road.

ANZ head of business banking Ross Verry says a potential threat from the high dollar has receded to some extent but he notes the sector now faces other challenges.

"We thought 70USc could put pressure on exporters generally. But in this sector the major export market is Australia, so there hasn't been quite the same impact as on US dollar exporters."

Nonetheless, there would still be some flow-through effect on SMEs from the impact of the high US dollar exchange rate on the agricultural economy.

"I'm reasonably relieved to see it's come back to more reasonable levels," Mr Verry says. "The next test will be interest rates."

One factor fuelling high rates of loan growth has been the boom in house prices. In the SME sector loans are commonly secured against the business operators' personal assets and the rising value of the equity in owners' homes has put more collateral at their disposal.

Using your home to secure a business loan is also, notes BNZ general manager of business financial services Mike Skilling, by far the cheapest way to raise debt. "You can borrow unsecured but rates are 3-5% higher."

As the housing market cools, that may cool business owners' appetite for debt.

And the economy, bankers say, is plainly off its peak.

"The question now," says Westpac general manager of business banking Bruce McLachlan, "is should I still be investing in capacity?"

Still, after three years of solid growth, Mr Skilling notes, smaller businesses have comfortable debt levels and cash on hand; business call deposits have grown rapidly since 2001.

By comparison with a few years ago, small-business bankers are thick on the ground.

Westpac, for example, has a team of 29 Asian language-speaking bankers in its migrant division alone and trawls "immigration expos" in places such as London and Singapore for new business.

The average customer, says head of migrant banking Yen Yap, sets up at the very small end of the market such as lunchbars and takeaways, franchises, commercial and resid-
ential cleaning but Westpac sees an opportunity to secure at the ground floor a relationship with growing businesses.

Another trend is for people joining or setting up smaller businesses to be better-educated, often coming from larger companies.

"Many of these businesses are quite sophisticated, with value-added products," says National Bank's business banking head of sales management Bruce Lambert. "But they're not necessarily experienced in compliance, employ-
ment law."

Banks have put considerable emphasis on simplified guides to legislation and compliance.

As much as business complains of the high compliance burden, the issue is no longer the one that most worries smaller firms.

National Bank's latest Small Business Monitor survey shows that, for the first time since the survey began in July 2002, the difficulty of finding skilled employees has overtaken regulation as the primary concern. Exchange rates, interest rates, and access to finance come way down the list, with 5% or fewer of smaller businesses citing them as an issue.

Even unskilled labour is becoming hard to find, bankers report.

In traditional banking areas technology is increasingly delivering the simplicity smaller operators demand.

The five key things smaller businesses need, says BNZ's Mr Skilling, are a simple, cheap transaction account, telephone and internet banking services that allow owners to consult an expert without making an appointment, access to finance, especially business credit cards, and a simple savings account.

In other cases, owners need to be persuaded to relinquish everyday control and concentrate on more strategic matters.

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