Judo Capital tips buoyant business credit, cautions on ‘chronic’ labour shortages, as IPO costs hit profit

The challenger bank expects business lending to grow at its fastest clip in 14 years, but has warned of rising inflation and ‘chronic’ labour shortages in some industries.

Judo Capital CEO Joseph Healy is optimistic on business lending growth, but sounded a warning on inflationary pressures. Picture: Britta Campion

Judo Capital chief executive ­Joseph Healy expects business lending to grow at its fastest clip in 14 years this year, but is warning of rising inflationary pressure and “chronic” labour shortages.

Mr Healy’s comments came as the challenger business bank posted a pro-forma profit before tax of $3m for the six months to December 31, helped by stronger loan growth, which compared to a $700,000 loss in the preceding six months.

The statutory result was a net loss of $16.1m, as initial public ­offering and related costs of $23m hit the bottom line. That compared to a $1.9m profit for the prior six months.

Judo’s shares closed 2 per cent lower at $1.94 on Tuesday, outpacing a 1 per cent decline in the S&P/ASX 200.

Despite strong initial trading when the bank listed in November, the stock is hovering below its $2.10 offer price.

Still, Mr Healy expects buoyant business lending and investment in 2022 and said Judo had a pipeline of $1bn in new lending over coming months.

Judo estimates business credit will expand 8.75 per cent across the economy in 2022, before slowing to growth of 6.2 per cent next year.

“We’ve got businesses looking to borrow more and start investing,” Mr Healy said, also cautioning of wage pressures.

“I can’t think of an industry to which there is an exception to this. Businesses are really struggling for labour and it’s chronic in some segments of the economy especially specialist technical skills.”

Mr Healy said “the reality” was wage growth was running at 6-10 per cent in some segments compared to six and 12 months ago, while in banking Judo was seeing labour costs jump 15-20 per cent.

Judo expects the Reserve Bank to increase the cash rate to 1.25 per cent by December 31, up markedly from the historic low of 0.1 per cent currently. The bank’s margins will benefit from rising rates, although that affects borrower repayments.

 

On geopolitical risks, Mr Healy said any further aggravation by Russia in Ukraine may affect business sentiment.

“There’s a real risk that business sentiment and financial market sentiment will be dented by a deterioration of the situation in Ukraine … it’s gone up several notches in the risk to the global economy,” he said.

Judo’s underlying net interest margin rose by eight basis points over the first half to 2.73 per cent, with the bank saying it was running ahead of full-year prospectus guidance.

Net interest margins measure what banks earn on loans less funding and other costs.

The increase in Judo’s margin – helped by lower funding costs and drawing on the RBA’s term funding facility – comes in contrast to declines in margins at the major banks, which are more exposed to competitive pressures in mortgage pricing.

Judo’s net interest income climbed 48 per cent to $73.5m in the half, as its loan book swelled to $4.85bn.

Judo on Tuesday said it was “on track” to meet a range of prospectus forecasts including for its lending book to rise to $6bn by June 30 and for a decline in its cost-to-income ratio. It said it expected to exceed prospectus forecasts in a number of areas including net interest income and annual before tax profit.

Barrenjoey analysts said: “It is encouraging to see broadbased loan growth across sectors and geographies, with front-book lending margins above prospectus guidance.”

Judo’s common equity tier one ratio was 23.3 per cent in the first half, although the bank will not pay dividends in the short term.

S&P Global Ratings said Judo’s “very strong capital position” would probably support rapid growth over the next two years. “We expect the underlying asset quality of Judo Bank’s loan portfolio to remain sound over the next two years. However, the ongoing effects of Covid-19, some potential for interest rates rises, and the relatively low seasoning of the bank’s loan portfolio provide additional risks,” S&P said.

Mr Healy said that, of 2200 lending customers, none had asked for additional support during the Omicron wave of Covid-19, although about five business customers had signalled they may require assistance.

Judo is targeting a loan book of $15bn-$20bn over the medium term, which would reflect 3 per cent of the business lending market. Pro forma operating expenses for the first half were $61.3m, versus prospectus forecast expenses for the full year of $126.3m.

The impairment expense was $9.6m.