• Wallace Fan

Establish a position of strength

When you understand what banks want from you in exchange for extending a debt facility, you are armed with a powerful tool that you can use in your negotiation with banks.

Two upfront tips are:

  1. know your total banking wallet beyond just debt facility

  2. proactively manage the “price” you pay.

Among many key drivers of banks’ return on equity (ROE), there are interesting insights to be gained by examining banks’ operating efficiency, mainly their Revenue-to-Assets or Return-on-Assets.

Bank's risk adjusted return-on-assets remained relatively stable at between 0.8% to 1% but, their total income-to-assets ratio shows a consistent downward trend. Why is that? It is the changes in their their income mix.

By looking at their historical data on the proportion of Interest income vs. Non-interest income, it shows that, until 2007, the four major banks had a fairly healthy proportion of non-interest income, which helped contribute to the total income. However, this mix skewed wildly towards interest income since 2008. Two events led to this change:

  1. the market-wide repricing of loans in 2008-09 increased banks’ interest income

  2. the respective acquisitions of St George Bank and BankWest (both have low non-interest income) by Westpac and Commonwealth Bank heavily added to interest income proportion.

Banks must lift return on equity (ROE), a key performance measure, to sustain their banking business. To do so, one of the levers to pull is the total income-to-assets ratio – banks must increase income at a rate that far outpaces the growth of assets, which are the loan facilities extended to their clients.

We all know that business credit growth for the past few years has been poor. The near term outlook is rather soft amidst the combined drag of the weakened global economy, lower commodity prices, rising costs and elevated AUD on corporate borrowing plans. Both lenders and borrowers are equally cautious. With less prospect of increasing their interest earning assets, banks have little incentive to proactively reprice down existing loans as their funding costs slowly revert back to lower levels.

So, banks behave complacently to their less demanding or less sophisticated clients. This is an increasingly common phenomenon where banks fail to fully attend to or properly service long-term clients.

This poor behaviour can only be countered by you demonstrating your knowledge of the banking market and exerting an appropriate level of competitive tension in your banking relationship.

Remember the old saying, “You don’t get, if you don’t ask”.

Another remaining lever banks would pull is to increase non-interest income. So when dealing with existing and future client, banks now ask for a total banking relationship, which will bundle cross-sells, such as transaction banking, cards, risk management and superannuation. These are all sources of non-interest income, which are valuable to banks (enhancing their ROE) and equally, an important bargaining chip that corporates need to leverage in their negotiations with banks

To strengthen your negotiating position, I encourage you to proactively update yourself on banking market developments and periodically analyse your “total banking wallet” value to your bank. This way you enter your negotiations with your banks from a position of strength.

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