Judo Bank, a prominent lender for SMEs in Australia, has expressed its expectation of challenges ahead for its client base as interest rates continue to rise. However, the bank does not foresee widespread business failures or a deep recession on the horizon.
Judo Bank Chief Risk Officer Frank Versace addressed reporters, acknowledging the challenging forward outlook but highlighting that many businesses are starting from a position of strength.
He noted that the COVID-19 pandemic had provided an opportunity for retail businesses to enhance their resilience, recapitalize their balance sheets, fortify their business models, and benefit from government stimulus measures.
While acknowledging the increased difficulties ahead, Mr Versace stated that Judo Bank does not anticipate “systemic deterioration” in the business landscape.
He did, however, anticipate certain pockets of distress, particularly in the discretionary retail sector, as higher interest rates impact consumer spending in the fight against inflation.
Another area that could come under pressure is commercial property, as rising interest rates affect property yields and valuation, according to Mr Versace.
He emphasized that while there may be isolated cases of distress, there is no expectation of a widespread deep recession.
Judo Bank CEO Joseph Healy highlighted the impact of higher interest rates on Australian households, which currently hold the highest level of debt among developed nations.
“When you’ve gone from an interest rate environment such as the one we had a year ago to the one that we are now looking into – and it’s gone so quickly – and you’ve got energy bills, household bills all headed in the wrong direction, that has to have an impact on those sectors of the business community that rely on discretionary expenditure,” Mr Healy said, explaining that while Judo Bank wasn’t forecasting a “hard landing,” a mild recession was possible.
“But there will be sectors of the economy that will find it tough,” he said.
The remarks from Judo Bank’s leadership came during the launch of the bank’s SME Purchase Managers Index Business Activity Report, which serves as the first report of its kind to measure Australian business activity in the small and medium-sized business sector.