Judo Bank reports seven-fold profit increase, growing SME loan book as it challenges Big Four lending

Small business lender Judo Bank has reported a seven-fold profit increase and nearly $3 billion in new loans and advances, marking a significant headway in the specialist bank’s battle against the Big Four.

The ASX-listed bank on Thursday posted its financial results for the year to June, boasting profits before tax of $107.5 million, up from the $15.6 million reported a year prior.

Significant growth to its loan book underpinned those results, with Judo Bank increasing its lending portfolio from $6.1 billion to $8.9 billion.

It now counts nearly 3,800 small and medium business lending customers, with an average loan size of $2.3 million.

Judo Bank’s net interest margin, the difference between interest paid on bank deposits and interest received through loan commitments, lifted by 74 basis points to 3.53%.

Joseph Healy, the bank’s CEO and co-founder, said the results were significant given Judo Bank only earned its full banking license in 2019.

“In achieving this growth, Judo has reached profitability faster than any other challenger bank globally, just four years after being granted our banking licence,” Healy said.

Market remains strong, Judo says, but some traders starting to slip

Judo Bank’s surging profits and loan book come as small businesses manage surging operating costs — and the burden of higher interest rates on their business loans.

Those struggles are represented in the proportion of Judo Bank loans listed as 90 days past due or otherwise impaired.

That figure lifted to 1.09% of the bank’s total portfolio over the year, up from the low base of 0.37%.

Retail traders stand out among those businesses with overdue loan obligations.

Some 2.25% of its retail business customer base was behind on repayments last financial year, up from 0.95% the year prior.

Of these businesses, the proportion of non-discretionary retailers with repayments more than 90 days past due was slightly higher, at 2.61%.

“We continue to stay close to our customers, and Judo’s asset quality remains robust,” Healy said.

“While we have seen an increase in our 90+ days past due and impaired customers, it is off a very low base, and our current levels remain well below the sector average.”

The bank has “very little appetite for pure construction risk,” Healy added, indicating Judo Bank’s careful footing around the hard-hit sector.

Warren Hogan, the bank’s chief economic advisor, told investors that small and medium businesses are managing economic turbulence well overall.

“Looking forward, higher costs and a weaker economy are expected to be the main challenges for businesses,” he said.

“While it is easy to forecast doom and gloom, Australian SMEs are generally well positioned to manage through choppy economic waters.

“Strong balance sheets and a fundamentally sound economy should continue to underpin growth in business activity over the medium to long term.”

Even so, lingering concerns of a consumer spending slowdown, and the possibility that interest rates may be at their peak, appear to have spooked some investors.

Judo Bank shares fell approximately 12% on Thursday morning, following the release of its financial report.

Taking the fight to the Big Four

The bank sees its 2022-2023 growth as an important development in its attempt to seriously challenge the incumbent banks in the small business lending market.

With a loan book of nearly $9 billion, it is halfway to its goal of a portfolio worth between $15 billion and $20 billion.

Its cost-to-income ratio sat at 54% for the year, but the bank expects it to moderate to 30% once it hits full scale.

“We continue to run our own race and execute the strategy we set out in 2016 and confirmed in late 2021 at the time of our IPO,” Healy said.

Of the Big Four banks, only Commonwealth Bank has reported its results for the year to June.

CBA said its business lending portfolio expanded by $11.4 billion over the year, delivering 11.4% growth.

Like Judo Bank, CBA CEO Matthew Comyn said the bank will monitor how broader economic fluctuations rattle its small business clients.

“We are seeing consumer demand moderate and economic growth slow and we are closely monitoring the impact of reduced discretionary spend, particularly on our small and medium-sized business customers,” he said.

NAB — the nation’s biggest small business lender — along with Westpac and ANZ are slated to report their full-year results in the months ahead, giving a clearer picture of the SME lending environment.

Separately, non-bank lenders are reporting spiking interest, speaking to small business curiosity about alternative financing options through a tough economic period.