Judo bank boss ‘paranoid’ about ‘unprecedented’ risks

“We have a situation here where if interest rates move, as the theory says they should, to tackle inflation, you have a huge problem in the household sector that will spill over into the SME economy,” Healy warns.

The comments come after an annoying 10 days for bank investors. During that period, the Commonwealth Bank fell 16 percent to $87.66 on Friday, its lowest level since April last year. CBA is down 7 percent this week, including more than 3 percent on Friday. Westpac underperformed even more, falling 21 percent in the past 10 days, since the Reserve Bank raised its spot rate by 50 basis points more than expected.

Healy says many of the problems were caused by the RBA itself. “If you pump up the system with excess liquidity, you create inflation problems,” he told financial reporters on Friday. “The foundations of economics transcend geographic areas, and the idea that we can behave like the rest of the world and be exempt from the consequences doesn’t make sense.”

It’s not the average borrower bringing the market down, it’s the marginal borrower.

Healy, on Friday

The judo house’s view on the price trajectory is similar to that of large banks: it sees the cash interest rate this year going to 2.5 percent and maybe 3 percent. But Healy says there’s a real risk it will have to go higher than this.

“I’m nervous about the psyche saying ‘she’s right, don’t worry’. Better to be prepared for the worst and hope it doesn’t happen than to say ‘we don’t expect problems to arise and everything will be fine’.’

There is some reason for relative optimism. While the global prospects for a recession are very high, he says Australia is better placed for its natural resources and agriculture, commodities the world needs.

Unemployment also remains very low, which Dr. Lowe this week will help to support consumption. The RBA governor also pointed to the additional $250 billion in savings during the pandemic as a buffer against rising rates.

Still, Healy says wage inflation will eventually bite small businesses and force layoffs, driving unemployment up.

Joseph Healy of Judo Bank says the level of household debt is mind-boggling, driving inflation of the RBA that much harder. David Rowe

With the Fair Work Commission minimum wage increase of 5.2 percent this week the biggest increase in 16 years,” the inflation psychology is locked in the minds of workers and people expect wage increases of 5 to 8 percent, and business will have to deal with that – and you have to deal with it in a world of very low unemployment where it is difficult to retain talent,” he says.

“At what stage, [given] rising prices due to wages and other influences, are employers saying ‘I’m going to cut back because I can’t afford this because my margins are under pressure’? That’s what the theory says will happen, so much solace in the low unemployment I don’t consider sustainable.”

He also says that Dr. Lowe’s focus on aggregate savings is “a misconception” by looking at averages, rather than risks in the tail of borrowers. “It’s kind of like saying to a non-swimmer, ‘It’s safe to cross the river because it’s three feet deep on average,’ only to find that it’s three feet deep in the middle.”

“It’s not the average borrower bringing the market down, it’s the marginal borrower. It is the highly indebted household that borrows at 6 to 7 times its net income and has bought two or three properties as investment…that is the Achilles heel.”

After the The US Federal Reserve’s maximum rate hike of 75 basis points this weekHealy says the United States tends to take their medicines quickly, but he is concerned that Australia will react too slowly to the inflation outbreak.

“The risk of not accepting short-term pain when you have long-term pain,” he says. “But in Australia, the issue is complex because household debt is astounding. And while the central bank is independent, there will come a time when politicians will find that the amount of pain that has to be inflicted is unbearable from a political perspective.”

While the outlook for the banking sector is bearish, Healy says Judo Bank will meet all of its prospectus forecasts from a year ago. His loan portfolio should reach $20 billion by 2026, which will make him the largest SME bank after the big four.

“We are confident that we will at least meet, if not exceed, the key metrics we set out in the prospectus,” he said Friday. These include a net interest margin of more than 3 percent, a cost-to-income ratio of nearly 30 percent, and return on equity in the low to mid-teens. Judo has 450 employees and plans to hire another 100 over the next 12 months.

With the stock under pressure, Healy says the market may not understand that rising interest rates are a tailwind for profitability – if it can control credit risk. Her business loans can be adjusted every 30 days; 91 percent of its loans are at a floating rate pegged to BBSW. But most deposits are locked for nine months. This means that “rising interest rates are a blow to us,” he says.

An increase in the cash interest rate of 50 basis points will increase Judo’s net interest margin by 25 to 30 basis points. “Rising rates isn’t good for our customers or the economy, but because of the way our assets and liabilities are aligned, they’re good for us,” he says.

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