Judo Bank’s credit score reveals model flaws



Judo CFO Chris Bayliss said the rating was a milestone and opened up the bank’s deposit products to universities, churches and others with mandates requiring quality rating.

“We didn’t expect to get an investment grade this early in our journey,” said Bayliss.

S&P’s assessment spends some time congratulating the bank’s management team on their initial success. But he spends a lot more time pointing out the risks he faces, including price sensitive customers, the higher risk segment, and limited track record.

Judo’s term deposits are some of the most competitive in the market, with many of its longer-term deposits offering over 1%. S&P notes aggressive pricing and judo’s reliance on price sensitive deposits.

“In our view, this funding base is sensitive to volatile reinvestment rates and may be less stable than retail transaction deposits,” the rating agency said.

Judo Bayliss is not discouraged by the assessment. As a challenger, judo cannot rely on customer inertia and lazy money, it has to fight for every dollar and the prize is leverage available to them.

“It’s hot money, but hot money is good because you get the flows,” Mr. Bayliss said.

Judo’s target market, high-risk SMEs, is also under scrutiny by S&P who notes that while asset quality has held up and compares well to banks focused on mortgage lending, the book’s performance is unproven.

“There remains lingering uncertainty regarding Judo Bank’s credit losses, both as its portfolio seasons and as the COVID-19 pandemic progresses given the greater sensitivity of SMEs to operating conditions.” , S.&says P.

S&P’s methodology places a strong emphasis on an institution’s track record with many references to its limited time in the market.

“Judo Bank has yet to prove that it will be able to support the growth of its business and retain customers throughout a full business cycle or periods of more aggressive competitive pressures,” said S.&says P.

This particular gap can only be filled in one way and the experienced management team should provide some comfort to depositors and investors.

The lack of longer-term performance data has led S&P to conclude that it is less resistant against its BBB peers, leading the rating agency to lower the rating by a notch.

On S&On the P scale, the BBB- rating represents the first step into investment grade territory. For those more inclined to take a half-empty glass approach, this is a notch off a speculation rating and what some call junk.

S&P does not explain the circumstances of a downgrade, but rather focuses on the likelihood of an improvement as the risks to judo and the industry diminish. He said, however, that he would revise his positive outlook for judo if the improvements in his credit profile were to “diminish significantly”.

While the rating is only interested in creditworthiness, it also finds time to address its “limited profitability” as it pursues growth, an issue that will surely arise when investors are asked to invest in securities. equity.



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