Listing looms as Judo vows to fill the SME banking gap

Judo Bank will list on the ASX on Monday, the first bank listing in 30 years as it takes on the big four banks in the business banking market.

Judo chief executive Joseph Healy: ‘This is a business where you have to be an absolutely first-class risk manager.’ Picture: John Feder / The Australian

On Monday Judo Bank will be the first bank listed on the Australian Stock Exchange in 30 years. The last one was the Commonwealth Bank. And only six years ago Judo was just an idea on a power-point presentation.

Ask Judo’s chief executive Joseph Healy whether he would rather hold the top CEO position at one of the big four banks or be a co-founder and builder of new bank, and the response is categorically the latter.

“There is a huge sense of pride that we have built the bank that we always wanted to work in, a bank that can now be listed on the public market, and this highlights how little new competition there has been in the banking sector for a very long time,” Healy says. 

Judo has ambitious plans in the hotly contested business banking market, using its strategy to outmanoeuvre the bigger banks with legacy systems and ride a recovery in small business activity.

Once in the public market, exposed to the same scrutiny of compliance and analysis as the competition, the veteran banker’s skills in managing risk as Judo grows will be important.

The IPO of $653m was almost three times oversubscribed on the institutional side. The bank will be valued around $2.3bn or about a third of the size of BoQ.

The blue-chip original backers of Judo, including Ironbridge Capital, Myer Family Investments and Credit Suisse Asset Management, will all remain on the register, and Healy says significant names will be added after the float. “It is a ‘to die for’ register,” he says.

Judo, co-founded by Healy and David Hornery, is exclusively and unapologetically a banker to small and medium-sized businesses, a market worth $605bn. It operates in all the major cities, has regional offices in Geelong and Newcastle and is soon to open doors in Parramatta.

Healy himself has had 35 years in banking at Lloyds, Citibank and CIBC in London and then ANZ and NAB in Australia. He says at some time about 20 years ago core values that were important to banks and banking were lost, and he has been hammering the message on relationship banking to anyone who will listen.

In Judo’s prospectus is a graph that shows its lending business on the higher risk/higher reward side of the market. “I wouldn’t characterise it as high risk. Where Judo positions itself in the market is exactly where the major banks used to operate about a decade or so ago.”

As of September 30, Judo’s loan book was $4.15bn for just over 1900 customers and loan book pipeline of $2.1bn. Its deposit book is $2.9bn from around 12,500 customers. The bank has already hit some impressive milestones in its short life.

“We raised $1.2bn of equity as a private company in two years – that’s unheard of. We did the largest pre-revenue capital raise in Australia in 2018.”

That year, the government decided to open up the banking system to allow new bank licences for the first time in many years. In 2019 unrestricted banking licences were issued to Xinja, Volt, 86 400 and Judo. “When you compare our success relative to the three other newly licensed banks that in itself tells a story,” says Healy.

Xinja Bank closed in January this year after failing to match its deposit and loans business. Also that month, 86 400 was swallowed up by NAB. Neobank Volt shows promise but has been slower to progress its banking as a service model.

In a surprise last month Judo was issued with a BBB- investment grade rating by S&P Global, something Healy says he had not expected to achieve until 2023. That investment grading, albeit at entry level, widens the group of potential depositors for the bank.

By 2022 the Judo prospectus forecasts a move into the black with a $5m profit.

There are risks, however: some outlined in the prospectus and some highlighted by S&P, including Judo’s aggressive deposit pricing to attract funds, targeting higher risk SMEs and its lack of a track record that proves it can grow business and retain clients through the cycle.

“Obviously our ability to grow by acquiring new customers is something we have to monitor closely,” Healy says.

“Our ability to manage risk carefully is something that is a core competency of the company, and then the ability to fund the business by raising deposits and raising wholesale debt facilities. Cyber risk, tech risk, operational risk, funding risk – this is a business where you have to be an absolutely first-class risk manager.”

Healy says he has been very clear with investors about Judo being a growth company. Judo will recycle capital back into the business. “If you are looking for a dividend from Judo over the next five years then Judo is not the stock for you.”

Healy’s pitch is that Judo is filling a critical gap in the market vacated by the big banks after the broad-scale shift to residential mortgage lending, a shift that centralised processes and where banks insisted that small business offer up residential or commercial real estate as security.

Back in 2006 for every dollar of lending to the mortgage market, there was a dollar of lending to the business sector, split 60/40 between large business and SMEs. Today according to Healy, for every dollar lent on household mortgages, just 40c is allocated to business and less than half of that goes to SMEs. He calls that market failure. 

“Before asking a business about the business, the emphasis in banking is ‘tell me how much property you’ve got and I’ll talk to you about how we make be able to help you’.

“The Judo philosophy is let’s understand the business, the people running the business, the profitability of the business and the strength of the balance sheet and then let’s understand what security is available if we need it.”

This, says Healy, requires experienced, skilful bankers to exercise judgment in speaking to small businesses. “But I don’t see it as high risk at all. I see it as the craft of SME banking.”

 Talk to bank chiefs like CBA’s Matt Comyn, NAB’s Ross Mc­Ewan or BoQ’s George Frazis and they too are looking harder at SME business cashflows.

Healy welcomes the competition and argues that Judo’s clean slate gives it an edge. “No legacy technology, legacy policies or procedures, no legacy infrastructure assets and no legacy thinking.”

As recovery picks up, Judo has the chance to build resilience. Healy sees a strong start to 2022 and that’s good for business. Ninety per cent of customer loans are on variable rates.

“I do see an interest rate cycle that is going to start earlier than the RBA has signalled, largely because of inflationary pressure we see around the world. There are significant inflationary pressures in the Australian economy. We forecast interest rates to move near the end of 2022, early 2023.”

Warren Hogan, for many years ANZ’s chief economist, is now the chief economic adviser at Judo.

On Monday, three junior staff from the Sydney office will ring the bell. “We wanted to make sure that some of our first employees in Sydney we part of the celebrations,” Healy says.

Once listed, Judo becomes fair game to be picked up by bigger players. “That’s a reality of being listed on the public market. I hope it doesn’t happen.

“Competition is so important but it is a question for the regulators. We’ve got a lot of work to do to make sure we continue growing to make Judo a very expensive business that would be difficult for anybody to buy.”

Given the choice of running one of the big four pillars or doing what he is doing now, Joseph Healy chooses “new co”.

 “If you are a CEO in a big bank you are passing through 100 or 200 years of history … there is nothing more fulfilling and satisfying than building something yourself, or in my case with a team. That is a real legacy.”