Consolidation of banking sector could raise SME funding costs

Consolidation in the banking sector is raising fears in the SME market that less choice will mean higher prices.

Consolidation in the banking sector is raising fears in the SME market that less choice will mean higher prices. However some financial analysts claim the consolidation could be good news for SMEs.

Zoran Knezevic, analyst at East & Partners, says that NAB has clearly been the dominant lender to companies with between $1 million to $20 million revenue. “They have 30% of that marketplace,” he says.

He says they have traditionally been regarded as a lending bank and have pushed hard into that space in the last few years. “They are head and shoulders above everyone else,” he says.

Even with the consolidation of CBA and BankWest, NAB will still be the dominant lender, he says.

“What we have seen over three years is all of the banks have pushed down into that sector,” Knezevic says.

The reason is they have found a lot of profitable businesses with a strong appetite for credit, he says, and the banks have started to recognise that SMEs are an important sector for them to chase.

So we are going to see more competition in the SME market, particularly between the CBA, NAB and Westpac? “It is going to be interesting as there will be many areas where this battle will be fought,” he says. “NAB is good but they are going to need to defend their footprint.”

It won’t just be over the cost of loans either, Knezevic says. “SMEs are asking for relationship managers. They want communications tailored to them. They are very interested in value for money but will pay for better service.”

Peter Arnold, financial analyst at Cannex, says that in the overall business loan market, consolidation will bring the CBA/BankWest almost level with NAB at 20%. “If CBA maintains the competitive BankWest products and uses the Commonwealth distribution networks, then the NAB will have very serious competition – and any competition is good competition.” He says it also depends on how the mergers unfold and what products are maintained.

However one finance provider disagrees. Matthew Nolan, who runs Provident Cashflow, says the banks are swallowing up the innovative players who offer flexibility. “They nipped at the heels of the large banks but with consolidation this will be lost.”

He says that even if the large banks keep the innovative products of the second tier banks it will not make a difference. “The risk areas will be run by the major banks, so there will be less innovation and the cost of loans will go up, and there will be more conditions attached.”

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