Judo Bank is set to make a large drawdown on the Reserve Bank’s Term Funding Facility after more than doubling the size of its business lending book in the 12 months to the end of January 2021.
While the access criteria for the TFF have disadvantaged start-up retail banks such 86 400 and Volt Bank in the last year, the special funding allowances afforded to business lenders by the facility are set to deliver oodles of cheap funding to Judo.
ADIs engaged in business lending are eligible for additional TFF funding at around five times the value of net new SME lending written in the 12 months to the end of January.
Judo increased lending to business borrowers by more than A$1.4 billion in the last year, which means it is eligible for at least $6 billion worth of three year funding priced at only 10 basis points.
Judo co-founder and chief executive Joseph Healy confirmed to Banking Day that the bank would tap the TFF for up to $2 billion this month – a move that will lower the company’s average cost of funds and boost margins.
“We are looking at making a drawdown on the TFF,” Healy said.
“The amount will depend on the momentum of our lending business – it is likely to be somewhere in the range of one to two billion dollars.”
The opportunity to dip into the TFF comes at a timely moment for the bank as it prepares to ramp up marketing for an IPO in the next 12 months.
Judo made a pre-tax loss of $50 million in 2020, but the cheap TFF funding could have a material impact on Judo’s profitability over the next three years because most of the company’s lending is currently funded through retail term deposits that yield annual interest to customers of between 0.96 per cent and 1.2 per cent.
While Judo is almost exclusively focused on business lending, it has been competing aggressively for personal deposits.
It is now the fastest growing deposit taker in Australia among ADIs holding aggregate household deposits of more than $100 million.
APRA data shows that Judo increased its household deposit base by 50 per cent to $1.23 billion in the six months to the end of December.
“We’ve been thrilled with the reaction to our products in the retail deposit market,” Healy said.
“Our focus on marketing term deposits of more than 12 months duration will continue but accessing the TFF will reduce our appetite for deposits of shorter duration.”
Judo is likely to be eligible for the third largest TFF funding allocation among SME lenders behind Commonwealth Bank and ANZ.
According to APRA, Judo boosted lending to non-financial companies by $1.37 billion in the eleven months to the end of December while the country’s largest SME lender – NAB - expanded its book by only $996 million.
Westpac’s lending to non-financial companies contracted by more than $2.5 billion, which means it is likely to be ineligible for special TFF support to fund new SME lending.
The Reserve Bank has earmarked around $35 billion of SME lending support to Australian ADIs under the TFF, but only around $4 billion has been drawn so far.
Peter Sheahan, a director of institutional markets at Curve Securities said the major banks had not tapped the TFF for SME funding after they were flooded with retail deposits priced at less than 30 basis points after the pandemic hit early last year.
“Retail customers are giving the major banks far more than they ever expected in the form of low cost deposits,” Sheahan said.
“The banks are now saturated with retail funding.”
Sheahan attributes the anaemic growth in business lending across Australia to demand factors, rather than an unwillingness of major banks to supply credit.
He said Judo was one of the few ADIs that stood to gain material benefits from tapping the TFF in the current environment.