By Alice Uribe
SYDNEY–Judo Capital Holdings Ltd. is set to increase the serviceability buffer it uses when assessing new small-to-medium business loans, as it looks to get ahead of risks to the economy from higher cash rates and inflation.
Joseph Healy, the chief executive of the Australian SME-only lender, said that its current credit policy is to add 200 basis points when conducting a risk analysis of a potential loan.
“So, if we’re lending to a business at 4.5%, our risk analysis is done at 6.5%. We’re going to increase that to 300 basis points,” he said at a media event on Friday.
The increase was approved Thursday, Mr. Healy said, with Judo introducing the higher buffer imminently. He said that the move is part of cautious preparation for how a cocktail of unprecedented circumstances may play out, he said.
“The level of household debt is eye-watering. I think globally the prospects of a recession are pretty high,” he said.
“I’m not saying there is going to be a correction here. We’re blessed by the fact that we’ve natural resources and agriculture.”
Judo’s move to increase its serviceability buffer could mean that some borrowers are no longer eligible to take out a loan with the lender, Mr. Healy said. In spite of this, he said that the company remains comfortable with its ability to meet its growth aspiration of having an A$15 billion-A$20 billion (US$10.57 billion-US$14.09 billion) lending portfolio at scale, and A$6 billion by June 30.
“We believe that what will happen in a rising interest-rate market, with business conditions softening, the credit capacity will be reduced. The drawbridge will be pulled up, and the banks will be focused on managing and preserving the exposure that they’ve got,” Mr. Healy said.
“That creates an opportunity for Judo, given our size…we can grow by identifying good-quality businesses.”
Construction and discretionary retail are two sectors Mr. Healy sees as being under pressure.
“We’ve got to be cautious of discretionary retail generally speaking. Not just because of the likely impact of consumer expenditure if there is a major uplift in interest rates, but as the result of Covid, there was an acceleration of changed behavior in how people were shopping,” he said.
Judo’s house view is that the Australian cash rate will rise to 2.5% by the end of the year and could move to 3% next year. Mr. Healy said the great unknown is how aggressive the Reserve Bank of Australia will be in its efforts to rein in inflation.
RBA Gov. Philip Lowe on the ABC’s 7.30 television program this week said he expects inflation to reach 7% by the end of the year, but he noted that Australian households had amassed an A$250 billion buffer savings.
“The open question is what is the willingness of the central bank to go aggressively on interest rates to deal with inflation and that’s the big unknown,” Mr. Healy said.
“If we were to do what I see happening elsewhere, then we’re in for a really difficult time.”
Write to Alice Uribe at firstname.lastname@example.org