NAB's view on SME risk and reward

Small business owners are feeling successful these days with a recent National Australia Bank survey finding that a solid 73 per cent of SMEs are optimistic about the future and believe their business is in for a good run over the next few years.

By and large, claimed Tim Williams, head of NAB Group Strategic Business Services, business conditions are good and people should feel comfortable.

"That is the glass half full side,” he told delegates at RFi Group’s Australian Business Banking Summit held in Sydney on Thursday. "However, on the flip side we are not seeing the business investment, we’re not seeing capex growth, we’re not seeing that use of free cash flow being invested back in the business.

“SMEs are seeing risk and uncertainty - no clear direction - so they’re not prepared to make the decision to grow their business."

Worse, he argued, SMEs are witnessing new players coming into the market and commentators, both informed and otherwise, talking up the the changing environment as a very unstable and uncertain political situation plays out.

“It’s up to the banks to provide businesses with the confidence and support needed to make those investments - a runway to be able to grow their business. The relevance of banks to customers centres very much on risk management. And that’s real relationship banking at its pointiest.”

Yellow brick road

From where Williams sits, he is able to see exactly what’s playing out in real time across the country, in the big cities, the small towns as well as in a host of different industries and sectors.

“I see everything that goes wrong in business banking from the smallest to the largest customer," he told the audience. Clearly, Williams added, not all businesses that step on the yellow brick road are going to get there.

“They will inevitably struggle and invariably some will falter and face financial risks. And this is where real relationship banking comes into play – in terms of understanding the customer, not just the credit aspects, but the broader issues creating problems for that customer.”

Risk has fundamentally changed in the last 35 years that Williams has been in banking and he expects that it will continue to change.

“Like I said, not everyone is going to get there. They’re not all going to make it but we find through a more holistic approach to risk management we are in in a much better place to stabalise and derisk a situation," he said.

The risk manager claimed 80 per cent of the files his division works return to the mainstream bank, which helps strengthen that customer relationship.

“People do remember that so when there are alternate financiers out there like the Googles and the Amazons - well good luck when you get into problems since they won’t be there," he said. “If you get cheap money and something goes wrong those people generally want their money back and generally don’t have the capital base to carry out a long-term restructure."

Nine circles of hell

What’s noticeable to Williams is that previously people in his area came out of the lender’s insolvency practice. Now the lion’s share of what the division does is business turnaround and restructuring.

Even in the early 1990s, he explained, best practice would be far more about credit and litigation, stemming the corporate bleeding before moving any ailing firms on to receivers within the month. Things are very different now.

“You need to hold someone’s hand as they go through what to firms are Dante’s nine circles of hell and so it is a very different role we play now," he said.

Asked by the audience to name the biggest risk currently facing the Australian business scene, Williams pointed to a rise interest rates.

While there is nothing on the horizon to suggest a rate a hike, there was also nothing on the horizon in 2014 to indicate that either coal prices would fall below $100 dollars or iron ore prices would drop to where they are today.

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