Aggregator defends non-banks after columnist says risky loans could hurt them
Platform Finance is challenging the idea that non-banks would be at the epicentre of a potential fallout if rising interest rates caused firms to renege on paying interest on loans.
The asset finance broking aggregator’s comments are in response to an opinion piece by Coolabah Capital Investments chief investment officer and columnist Christopher Joye in the Australian Financial Review on September 15, 2022.
In the article, Joye said the non-bank market is likely to become the epicentre of a “zombie apocalypse” as large interest rate rises “wipe out weaker borrowers”.
Joye refers to a “zombie” as a company that doesn’t have sufficient profit to pay interest on its debts.
Read next: Are non-banks disadvantaged by escalating funding costs?
Platform Finance CEO Ryan Young (pictured above) said as not all non-banks were the same, and comments that they were at the epicentre of an apocalypse should be treated with caution.
According to research conducted by Coolabah Capital Investments (as at June 30, 2021, in Australia, and December 31, 2021, in the US), when the official cash rate was 0.10%, up to one in three listed companies could be classified as zombies, further defined as having an interest coverage ratio (EBIT) of less than one for three years’ running.
Since the GFC, there has been an explosion of unregulated non-bank lenders offering finance to borrowers unable to get loans from more prudent banks, Joye told AFR.
Questioned by MPA about lenders’ exposure to riskier loans, Joye referred to the 2014 financial system inquiry recommendation implemented by APRA, requiring banks to “radically deleverage their balance sheets” and increase capital. Post-2014, the imposition of macro-prudential controls reduced bank exposures to riskier loans, he said.
Having spent years’ conducting due diligence on non-banks in the residential, credit card and business loan space, Joye said Coolabah Capital Investments had seen a huge difference between the credit risk capabilities and risk appetite of the major banks relative to non-banks.
“While non-banks always try to claim they don’t write riskier loans than banks, or write similar risk loans, they have a much higher cost of capital than banks and almost always focus on riskier loans that are not dominated by the conventional banking system. This is true of non-banks writing both residential and business credit,” Joye said.
Joye’s comments about a zombie firm apocalypse are in the context of a rising official cash rate, which has increased by 225-basis points since May.
But rate hikes could slow from here, with Reserve Bank governor Philip Lowe telling the federal parliament economics committee on Friday that the case for outsized rate hikes was becoming weaker. The October board meeting would focus on whether a 25 or 50-basis point hike was necessary, he said.
However, CreditorWatch August data showed trade payment defaults, a leading indicator of business insolvencies, were up 53% year-on-year. The five interest rate hikes delivered to date had not yet hit borrowers’ back pockets, CreditorWatch chief economist Anneke Thompson said, commenting that pressure was expected to mount over October and November.
Platform Finance, which also has an in-house lending arm, works with non-banks in the asset finance sector.
Responding to Joye’s comments, Young said not all non-banks played at the top of the risk curve, and there were material differences across sectors.
“Within the asset finance sector, for example, non-banks now represent 50% of our lending (compared to only 15% five years ago), which clearly indicates they are writing substantial volumes of prime and near prime business,” Young said.
While larger portfolios and greater diversification of funding bases provide a comfort to banks, Young said there were many non-banks with meaningful market share and solid books that would continue to thrive in the current environment.
Read more: Business insolvencies to rise, credit agency warns
While rising interest rates and inflationary pressures was likely to place some businesses under added pressure, Young noted that non-bank lenders in the asset finance sector tended to manage their portfolios at a more granular level than banks.
This wasn’t a criticism of banks, but rather a necessity for non-banks dealing with a smaller portfolio, and reliant on wholesale funding lines, he said.
“Non-banks tend to have much lower individual exposure caps in order to limit customer concentrations, and they’re much less likely to go outside of their main lending parameters, including on aspects such as customer gearing, and interest coverage,” Young said.
Within the asset finance sector, non-banks had often gained market share via a combination of speed, service and innovation, in conjunction with banks pulling back in some areas, he said.
“This means that many of our main non-banks will have near bank-quality books, and often with comparable or stronger margins,” Young said.
“So, whilst some non-banks have made riskier buying their point of difference, and those are the ones that will be challenged, overall, the main non-banks in the asset finance space will be very confident in their credit quality.”
