‘Two-speed economy’: Bank bosses flag consumer weakness

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The bosses of National Australia Bank and Judo Bank have flagged signs of weakness in consumer-facing businesses as more borrowers on fixed-rate loans face sharply higher repayments and look to rein in spending.

Judo Bank, a lender to small and medium-sized enterprises is beginning to see some businesses come under stress, but chief executive Joseph Healy said weakness was concentrated in smaller businesses, and sectors reliant on discretionary expenditure were at greater risk.

NAB and Judo Bank’s chief executives believe Australia will avoid a recession but said consumer businesses were feeling the squeeze of tightened spending.Credit: Dion Georgopoulos

“You only have to walk down the high street in any major centre to see the shops that are closed: small businesses are generally doing it tough,” he said.

“We are also more cautious on sectors that are very dependent on discretionary consumer expenditure as households adjust to higher mortgage rates and cut back on how much they spend at restaurants, bars and on clothing,” he said.

Healy made the comments as Judo’s results disappointed investors, prompting the challenger bank’s shares to plunge almost 20 per cent to $1.02.

The bank reported net profit increased to $73.4 million over the 2023 financial year, up from $9.1 million last year, but the bank revealed its net interest margin – which compares funding costs with what the bank charges for loans – would fall in the next year. Judo’s 90-day arrears increased to 1.09 per cent from 0.16 per cent at the same time a year ago, but remained below the average of other banks.

Judo Bank CEO Joseph Healy said weakness was concentrated in smaller businesses.

“We’re not as exposed to those very small businesses like the butcher, the baker, the candlestick maker, and much more to mid-size businesses,” Healy said, but noted the SME economy was broadly “very resilient” with businesses broadly reducing their debt levels for quite some time.

Ross McEwan, chief executive of NAB, the country’s biggest business bank, also warned this week that some segments of the small business economy were showing weakness, but said others in the agribusiness sector had benefited from higher soft commodity prices.

“The agriculture community has had a very good three years, and they are still feeling buoyed by it even though you’re getting a bit drier conditions now,” McEwan told a Melbourne business luncheon. “They’ve seen prices up, but are starting to see the likes of beef and sheep prices come down, and some other commodities come down, but then again, other commodities have gone up, so they’re getting a balance there.”

McEwan said that while agribusinesses were investing heavily in their own businesses, there were some signs of weakness in consumer-facing businesses, particularly discretionary retail where consumers were pulling back their spending.

“There is a slowdown in some parts of that market,” he said. “I think there will be some businesses that will find that a bit more difficult. But I do believe that by the end of next year, this economy will start to lift again.”

Healy said he was quietly optimistic and expected the Australian economy to avoid a technical recession, but said the soft landing over the next year would play out unevenly. “It’s not too long ago that we used to talk about a two-speed economy, and I think that kind of concept certainly comes to mind,” he said.

With a sizeable volume of mortgages set to be repriced from ultra-low fixed rates, including about $400 billion worth of home loans in 2024, Healy said the full effect of higher mortgage rates would materialise in the next 12 to 18 months.

The upshot of that, Healy said, would be reduced consumer spending and a challenging period for discretionary retail and accommodation and food services businesses. “2024 is going to be a challenging year,” he said. “There’s no question about that.”

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