Neil Slonim — 2020 Looms as a Watershed Year for the Big Banks

This article is an updated version of theBankDoctor’s final newsletter of 2019. Read the original full version here: 2020 looms.

Neil Slonim has spent 30 years holding senior leadership positions in Business Banking, Corporate Banking and Credit within the National Australia Bank group.

After leaving the banking sector in 2008, Neil formed Slonim Consulting Pty Ltd — a banking advisory and advocacy practice which performs the role of “the banker in your corner” for medium-sized corporates.

It certainly has been a challenging year for the banks, probably even more so than most of us anticipated. Following Westpac’s recently revealed breaches of anti-money laundering law, its shareholders voted for a second time against the remuneration report but then overwhelmingly voted against a spill of the entire board.

Notwithstanding the anger with their directors, they seem to have thought agaead and asked themselves some pretty incisive questions like

• Do suitable cleanskin alternatives actually exist?

• Even if they did, who in their right mind would take on such roles?

• Would the bank actually be better off with an entirely new board?

It would be interesting to see how shareholders of ANZ and NAB vote at their AGMs in the coming week. Both of these banks are also staring down a second strike but their shareholders too are unlikely to go to the next step and vote for a spill.

The banks are struggling under a relentless double barrelled onslaught from a baying media constantly seeking to identify and expose the next episode of bank misconduct and politicians who, perhaps to their own surprise, have finally hit upon a profession which is even less trusted than themselves.

WHAT WILL 2020 BRING?

It would be unwise to suggest that it can’t get any worse for the banks. One thing we’ve come to learn is that if one bank has a problem, there’s a fair chance the others will have similar problems. Warren Buffett's cockroach analogy rings true:

Banks will continue to proclaim with some justification that “compliance is killing us” but there will be no let up until such time as they demonstrate they have learned the lessons of the past.

They will continue the process of simplification which implies more divestments. Impetus for this will come from within the banks as well as external influence from markets, government and regulators. Shedding of staff will continue although the reliance on consultants will be unabated.

Investment in technology will increase and we are likely to see more partnering with innovators who leverage technology to improve customer outcomes and compliance. Offshoots like NAB Labs and Westpac’s Reinventure will play an increasingly significant role in strategy and development.

The banks will remain the whipping boy for the politicians on all sides because there are votes in it. Scott Morrison wants to be seen as hard on both rogue banks and rogue unions and recently warned bankers that “crooked bankers will face tougher sanctions than union thugs”.

At a more meaningful policy level there needs to be further discussion about the dismantling of the four pillars policy, not to allow mergers amongst the banks but rather to encourage a change in direction of one or more of them.

The removal of the government guarantee on deposits held with ADI’s is something which should be considered along with a clear commitment to the principle that the banks are not “too big to fail”.

It has taken some years, but finally it seems that politicians and bureaucrats have come to the realisation that the best way to increase competition is not by trying to get the banks to change but by making it easier for new competitors to take them on. There is now more happening on this front but even more can be done.

The banks shouldn’t be written off just yet, they still have much going for them including a massive customer base and big and reasonably strong balance sheets. But time is no longer on their side as incumbency and inertia are finite advantages. One way or another, 2020 could herald the beginning of the dismantling of this long standing homogeneous oligopoly.

Neil Slonim

theBankDoctor

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Danny Burger — Navigating the Development Finance Maze

Danny is a co-founder and director of Debuilt Property and has a professional career spanning architecture, construction, project management, development and property finance. Debuilt provides a wide range of property, development and monitoring services to investors, financiers, property owners and developers.

This week a small group of property professionals caught up for our monthly breakfast discussion. The core group includes senior executives from Charter Keck Cramer, Merricks Capital, SJB Architects, SJB Planning, Debuilt Property and half a dozen guests. Most of us have a working relationship, so the discussion is always open and informative.

Matt O’Halloran is head of Merricks Capital property lending business. Along with Neil Slonim (ex NAB) and several developers sitting around the table, it did not take long for the discussion to veer towards bank versus non-bank lending in the property and construction sector.

As most in the property industry are acutely aware, traditional bank finance has reduced to a trickle to all but the most significant corporate customers. The banks want to lend, but with APRA’s tightening regulatory requirements, the banking royal commission and the property market slowdown, it has become difficult for bank managers to obtain approval for even their most valued clients.

This has left developers frequently unable to meet the banks’ covenant requirements and pre-sale or commercial pre-commitment hurdles.  

These constraints have assisted rapid growth in the non-bank lending sector.  Interestingly, Matt O’Halloran noted whilst it is estimated that non-bank lending is now approaching 15-20% of the commercial property sector, in North America and Europe it is estimated at around 35-40%.

The pricing might be higher, but the availability of nonbank lending means that developers are able to move forward with certainty to achieve sales hurdles and complete building contracts. It’s a lot easier to close an apartment sale or lock down a competitive build contract if the other party knows that the project is proceeding. And let’s not forget protecting town planning permits with looming expiry dates. In addition, non-bank lenders are typically more nimble and able to transact with speed and responsiveness, which is critical to the execution of the project.

The other factor for developers, who work on maximizing leverage of equity, is that a higher finance cost but with a lower equity requirement can still result in a pretty healthy equity IRR.

An example, reported in this week’s AFR, is a loan by Merricks Capital to Goldfields for its $300million commercial office building in South Yarra. The project has no pre-lease commitments – which is not unusual for suburban office projects. In these circumstances project finance would be impossible to obtain through the traditional banking sector. Matt O’Halloran explained that the combination of security structuring, the calibre of the parties and the high quality of the project supported the finance package.

The group also discussed mezzanine finance and the suggestion that some banks are once again open to a capital structure that includes a subordinated second mortgage sitting between equity and the bank as senior lender. Apparently, banks who are eager to participate are being pro-active at forging a marriage of capital. 

But a developer has to take into account dealing with two financiers, two sets of loan documents, negotiating a challenging inter-creditor deed, a more complex builder’s side deed and a blended interest rate. This means dealing with a non-bank lender may be a lot easier and no more expensive. Managing multiple parties adds complexity, consumes valuable time and heightens the uncertainty of the end result.

Overall, it was apparent that a combination of bank and non-bank lending is a great thing and has in fact been critical to maintaining forward momentum in property construction.

It is worth noting that there was a view around the table that a shake up in the banking sector was needed, but there is also over enthusiasm in criticising all things banking. The consensus was that we have enjoyed, and need to continue to enjoy, a strong and stable banking sector.

Whilst navigating the development funding labyrinth is challenging, there are now multiple options available. This is a good thing for the industry.

A final take-away was that, whilst finance may be viewed as a commodity, the relationship between borrower and lender is as important as it ever was.

Cartoons by Buddy Ross