‘Things can go wrong’: Judo Bank tightens lending as rates ramp up

Judo Bank boss Joseph Healy says he’s paranoid about what could go wrong in the economy when highly indebted households face higher interest rates and a weaker housing market, as the bank moves to test new borrowers more cautiously.

Judo, a lender to small and medium businesses, will soon start testing how new customers would handle interest rates 3 percentage points higher than current levels, up from its current buffer of 2 percentage points, Healy told journalists on Friday.

Judo Bank chief executive Joseph Healy: “I’m nervous about the psyche that says ‘she’ll be right’.”Credit: Justin McManus

The change was a sign the lender was preparing for an environment of rising interest rates, Healy said, as he painted a cautious economic outlook in which rising inflation would be the key challenge.

“I think the key is to prepare for the worst, and hope for the best,” Healy said at a media event in Sydney.

Healy, a banking veteran who previously ran National Australia Bank’s business bank, said the key question facing Australia’s economy was how aggressive the Reserve Bank would be in trying to tame inflation.

Judo, founded in 2015, predicts the cash rate will hit 2.5 per cent by the end of the year, compared with 0.85 per cent today. Healy said its borrowers were fairly well-placed to weather the challenge of rising inflation.

However, he said the bank was not ignoring the possibility of a more grim scenario in which rates rose further, hitting the housing market harder.

Healy said he was “paranoid about what could happen in the economy,” and said he took little comfort from the fact that households had built up huge savings buffers in recent years.

“I don’t want to stick my head in the sand and say that we’ve never had a big correction, the property market’s a safe bet, nothing could ever go wrong. Because that’s not reality, things can go wrong. I’m nervous about the psyche that says ‘she’ll be right’.”

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

Judo Bank chief executive Joseph Healy

Judo released a survey of 1,750 small and medium enterprises on Friday, which found most expected labour costs would continue rising, but that two thirds of firms were able to pass these higher costs on to customers.

Reserve Bank governor Philip Lowe this week emphasised households were sitting on $250 billion in savings to shield them from rising rates, but Healy said he thought there was a “fallacy” in that argument.

“There’s so much danger in ‘on average’ assumptions. It’s a bit like saying to a non-swimmer, ‘it’s safe across the river because it’s a metre deep, on average,’ only to find it’s three metres deep in the middle.”

“It’s not the average borrower that brings the market down, it’s the marginal borrower. It’s the highly levered households that have been borrowing six, seven times net income, that have bought two or three properties as investments.”

Healy’s cautious comments come after bank shares have plunged dramatically this month amid fears of rising bad debts.

Judo’s share price is no exception — it has fallen about 20per cent in the last month, though it rose 1.4 per cent to $1.42 on Friday.

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