The banking and finance industry has suffered through some tough years, but the latest SmartCompany-Dun & Bradstreet Industry Growth List for the finance sector reveals major lending institutions are finding solace in wealth, superannuation and funds management.
While credit still remains tight, smaller, non-lending institutions are also succeeding by identifying key niches in smaller sectors, and are enjoying the benefits of customer churn from some of their bigger competitors.
However, experts also identify key risks – the entire market is sentiment driven, and fears over European sovereign debt are keeping investors on their toes.
East & Partners principal analyst Paul Dowling says the fragility of debt markets in Europe and subsequent uncertainty could threaten a recovery.
“It’s still a fairly fragile market, and it doesn’t take too much to turn sentiment – these markets are very sentiment driven anyway. Most lenders will say that credit is slowly coming back, demand for credit is returning, but there are risks.”
Some experts also believe dry credit markets will prevent the second-tier financial institutions from enjoying any positive benefits of customer churn.
The total revenue of the D&B list for finance comes in at just over $18 billion, while the average is $367 million. Average growth is just over 193%.
The list is dominated by major players – IOOF, RBS Morgan, Nomura and the Bank of Western Australia all appear in the top 25.
IBISWorld senior analyst Sam Ellis says this isn’t surprising. Major finance institutions have been hesitant to lend, and so turn to wealth management services to help existing customers plan with the money they already have – this will also keep them well-placed for a recovery.
“There was that period in 2008-09 when across the board, just about every sector in the finance industry saw a contraction in revenue and profit. And over the last year or so we’ve seen a reasonable recovery,” he says.
That recovery is based on a grapple for control in the wealth management space. The most prominent example of this has been NAB’s bid for AXA Asia Pacific. While the move was ultimately blocked by the ACCC, Ellis says this type of activity represents where the real growth is occurring.
“That’s definitely indicative for limited capacity for huge amounts of further lending growth, and it obviously then ties into the fact that banks are looking to other areas other than lending to drive growth,” Ellis says.
Certainly, NAB has been focusing on its wealth management service in a big way. It has been focused this year on integrating the Aviva wealth management business, which it acquired in 2009 for $825 million, along with the wealth management business of Goldman Sachs JBWere.
NAB’s wealth management subsidiary MLC recorded revenue of $81 million, up from $34 million in 2009, and ranked 17th on the list. But several other major banking institutions – BankWest, RMB, RBS Morgans, ANZ, JP Morgan and Rio Tinto are all within the top 30.
Ellis says this simply highlights the current market environment. IBISWorld believes the non-lending sector of finance will grow by 4.5% per annum over the next few years, along with the funds management sector, which will grow by 6% per annum.
There are several financial management services of the major banks included on the list. NAB’s MLC business ranks 19th, while the Bank of Western Australia ranks 20th. ANZ Securities comes in at 27th, while Macquarie Group ranks 38th.
A range of other financial investment managers including IOOF, Veritas and Axicorp all appear in the top 15 as well as they focus on long-term wealth strategies for customers.
“This change is being reflected among these companies because the banks are competing aggressively. And have been doing so for the past two years, especially in areas other than traditional banking,” Ellis says.
“Certainly recognising that lending probably can’t go forever at the rate it has. So they’re looking to expand their services more so on the wealth management side.”
That increased activity for wealth management is also being seen among superannuation funds.
While lending may be running dry for now in the mortgage and business sectors, experts believe the aging population is giving superannuation fund managers and brokers a positive outlook for the next few years.
Ellis says IBISWorld is expecting stronger growth for superannuation managers, especially as the Government continues on its quest to increase the mandatory super guarantee to 12% from 9%.
“This reflects our demographics in Australia – the rise of superannuation. We’re at a period where a greater percentage of our workforce is entering the final 10 to 15 years of their life, when they tend to already own their own home, and are putting more money into super.”
“So all of that flows through, into that investment management side of the industry to boost funds under management, and then in turn for fund managers.”
“And then flowing on from that, you’ve got benefits for investment banking and the broking industry, making markets in the collapse of assets that super like to invest in.”
In turn, this provides more opportunities for the investment banking and broking firms – plenty of which appear on latest D&B list. Some notable entries include RBS Morgans at 7th, Axicorp at 14th, ANZ Securities at 23rd and Australian Wealth Management at 26th.
The increased focus on superannuation and general wealth building even caused list member IOOF to create an entirely new bond product specifically tailored for an aging population.
That increased demand is good news for the non-bank financial institutions.
Plenty of smaller companies are leveraging the growth for demand in financial services.
The top company on the list, Farmworks, provides financial services among others to the agricultural sector – it turned over $10 million in 2010.
Several other smaller firms, including Charter Pacific, India Equities, RIM Securities and Katana Capital are listed within the top 25 and are enjoying swarms of new customers concerned with saving for retirement and paying off debt.
The growth of these small firms also comes as the four major banks themselves are nowhere to be found on the Dun & Bradstreet list, despite having ranked fairly highly in the past. Dowling says the growth of these small firms is out pacing the banks, bringing in more business from SMEs and individuals.
“Well, you’ve got a number of boutique credit markets. Asset financing, project financing, cashflow funding and so on. These are pretty small providers, and lenders doing very good business.”
In particular, asset management firms are performing well – Clime Asset Management and K2 Asset Management are listed among the fastest growing companies.
“There are a number of pretty small providers and lenders doing very good business,” Dowling says. “But brokers, in many respects, are having quite a tough time”.
There are plenty of stockbrokers on the D&B list – Patersons, Cameron, Evans and Partners and Australian Investment Exchange are just a few. However, they are all within the bottom half of the list – Dowling says this is because their lending capabilities have been restricted.
“The pre-GFC had a value proposition to their business clients that was all about best services and rates. They delivered that by having large panels of lenders that would play off against each other.”
“But the average broker lending panel has reduced by close to two-thirds since the GFC, and the level of choice available to the broker on behalf of clients has reduced.”
Merger and acquisition activity has been fairly thin, leaving advisors with very little room to work on, and the IPO market has been “quite dormant” according to Dowling, with a few exceptions for some larger businesses.
But looking ahead, Dowling expects credit markets to continue increasing their lending capabilities.
“Credit markets are slowly opening up again. So as long as there is no major earthquake in the market, things will start quietly improving.”
Part of that is being helped by increased competition. Dowling says the amount of discounting occurring in the banking sector is also helping SMEs, and lower rates and fees will see more activity for second and third-tier institutions.
“Borrowers outside the institutional market don’t sense they have significant choice. The other way to look at that is a perceived lack of competition. The GFC has conditioned quite a serious break in bank-customer relationships, especially in the SME market. “
“The sort of second-tier banks, the regional markets and international markets are largely in the same pot as the big four. It’s this kind of third-tier element that’s performing well.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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