Banking Royal Commission: Potential implications for Directors / Business Owners
November 1, 2018
Following the Banking Royal Commission's interim findings published on 28 September 2018, we believe there will be significant impacts on directors and business owners.
The following are examples of what we think these implications may be:
- The Royal Commission is not proposing any additional regulation for SME lending but significant questions and issues have been raised.
- The lending process will take longer, for example more paperwork (Know Your Customer, compliance checks) and deeper financial analysis. This could result in longer lead times for funding which could negatively impact on your business plan timelines.
- Marginal credit applications are unlikely to be approved as banks will have a more conservative risk appetite. This may cause the following:
- Fall in house prices (already seeing this in Sydney and Melbourne).
- Tighter lending criteria e.g. debt servicing capabilities, more disclosure on living expenses for mortgage applications.
- Direct negative impact on the property sector e.g. apartment purchases slow down and lower loan to value ratios for property development lending.
- Interest only focus (“mortgage prisoners”) – some customers will need to move to a principal and interest repayment structure which typically means a 40% increase in current monthly repayments. They may struggle to do this if they are already highly geared.
- Negative sentiment of consumers resulting in reduced appetite or capacity to borrow for other purposes such as home renovations which would impact on builders and associated industries.
- Pricing of banking facilities may increase to reflect reduced or no covenants for “small business”. This will take time to flow through the banks’ credit risk models but you can be sure that they have modelled the implications already.
- Regulators will be more “fired up” to take more decisive action for financial firms’ poor behaviour in future (see an article from the Australian Financial Review HERE).
- Civil and criminal litigation such as the AMP class actions launched earlier this year (see an article from the Australian Financial Review HERE).
- Short, medium and long term impacts on the attractiveness of the finance industry from an employee perspective.
- Longer term implications for banks being viewed as a “utility” as opposed to a profit maker. This is likely to see a depressive impact on their share price with the resultant effect on shareholders' wealth
Most of the above factors have the potential to have a depressive affect on banks lending appetites, but they are still open for business and do have the desire to lend (this is how they make money).
If you have any further queries about the Banking Royal Commission or would like to discuss how it has or will affect you or if you require further assistance on how to communicate your current position to your bank and/or successfully position your organisation for increased debt funding, please contact Quadrant Advisory’s managing director, Paul O’Farrell.
We have significant insight, knowledge and experience in dealing with banks and can leverage this expertise for your organisation’s benefit. Our key operating principle for banking relationships is one of “no surprises” and using this as a standard, this should guide you on when and what business information you should be sharing with your bank in the coming weeks and months.