Commercial Finance – Annual Review
Under their APRA requirements the majority of lenders have to complete an Annual Review of a clients’ lending facilities. Part of this is reviewing their historical financial performance since the last “Annual Review”.
When reading the below – I can appreciate that this can be extremely frustrating, and you may raise the thought of what ever happened to Relationship Banking.
The average tenor of a Business Banker is between 12 to 24 months.
If you talk to a Business Banker about what happened to Relationship Banking – they probably going to look at you strangely.
This is where we come in to help a client navigate the ever-changing Relationship Managers, Lenders Changing Policies or a Lenders Market Opinion.
Credit Managers who overview /approve an Annual Review can be elusive and will very rarely meet a client face to face – claiming they need to be independent. The best ones I ever had would though. Some of them will say things like “We are the protector of the bank’s balance sheet” or “The tax structure of this client is un-bankable”. Which is interesting because if you are protecting a balance sheet you typically must put in as much as going out and tax structure is there for a purpose.
Because of the turnover of Bank Managers, they can also take / form a view on a client which has no direct reflection on the client themselves but be targeted at the experience of the bank manager. We find it very important to supply more information, so this does not happen – as once a credit manager takes a view it is very hard to change.
Some key notes:
If a client has under $1mill in Commercial Lending Limits – typically they will not complete an Annual Review. Their computer systems will complete a behaviour review of a clients banking. What this means it will review a client’s account conduct / spending habits and complete a risk rating. If a client overdraws / has payments returned / missed repayment it will significantly impact this score.
From $1mill to $3mill they will in most cases try and complete a quick review based on a client’s account behaviour.
The Annual Review Date is set typically from the original establishment of the commercial facilities. This can be really frustrating for a client as some times the date of the Annual Review seems to be set at a frustrating or inconvenient time. It can be moved and definitely an item to check with a Bank Manager. It may mean that in one 12-month period two Annual Reviews are completed.
Historically Annual Review could be moved / temporarily extended / completed and adjusted for market conditions. APRA have inhibited lender’s ability to do this, saying that lenders were adjusting to many Annual Reviews. This has created lenders to take hard and fast action on Annual Reviews to appease APRA. It can be extremely hard on clients at times as they may have circumstances which limit their ability to complete the Annual Review and the banks comments being “We have to meet APRA requirements”
Bankers are great at just saying “We have to complete your Annual Review” or “Don’t worry we just have to complete it for internal purposes”
It can though really impact a clients’ facilities or banking relationship. As all sudden they get a call saying we need to meet urgently. As per comment above – the bank will run a commercial rating model which historically you could adjust as a banker for changes in a client’s circumstances. Every business at some point in their operating lifestyle will have a period of change.
APRA said to lenders that they are having to many rating overrides and so to get an override on a rating model is extremely challenging now. Remember they are completing this rating on the historical financials lodged with ATO so a client’s position could be completely different when the Annual Review is done. With the financials not being a reflection on where the business is.
On a positive an Annual Review is a great time for a client to do their own Annual Review on their Lender and a market check on their facilities. Because the information that they need to supply to their existing lender is enough for another lender to complete a review and present how they would approach the clients banking facilities.
We do this allot, take the information a client provides their existing lender and complete an Annual Review on the lender, presenting back to the client a summary of their options.
What is the Annual Review Process:
90 Days from the Annual Review Date – Bank / Bank Manager will email / send a letter / call a client saying Annual Review is coming up and information they need to provide.
60 Days from the Annual Review Date – A follow up for the information will be issued
30 Days from the Annual Review Date – If it is not completed or the information requested provided the level of contact will increase significantly. Bankers will be getting pressure from their leaders about what is happening and when will it be done. Remember Bankers don’t really have sales targets anymore. They are measured on compliance. So, pressure will start as they will have to report to Bank Leaders on these as part of their KPI’s.
Annual Review Due – If it is not done, Bankers will really start putting clients under pressure. They can also play the card that a client is in breach of their Letter of Offer and will potentially issue a Letter saying that they are in breach of their requirements under their Letter of Offer. This really creates unnecessary pressure on clients and their support network.
Typically, what they will collect is the following:
Most recent financials for year end.
Year to date management accounts – profit and loss and balance sheet.
Forecast for the next 12 months – they may ask for actuals Vs budgets
ATO Tax portals and activity statements
Aged Creditors and Debtors
In relation to what they will look at is:
Any variance from budget or the previous financial year – typically over a 10% to 15% variance they will ask questions about.
They will look at the historical account behaviours. This being:
Was there any:
Overdrawing’s – Account balances going overdrawn or over the limit on an overdraft and how long was it over.
Is the overdraft fully fluctuating – this means does the account balance over the last 12 months go back into credit. An overdraft should draw up to the limit and then clear and go back into credit a number times a year. If it does not do this, then they will say there is a “Hard Core” balance in the overdraft, and they will investigate what caused this.
Returned Payments – was there not enough funds in the account and they returned payments.
Temporary Limits – A client is doing the right thing by requesting temporary limits. But can impact them if they are requesting a number of these through a year.
With the ATO – They will look at the statements and see how a client has managed this for the last 12 months. If there is there outstanding balances or payment plans.
Complete an APRA based rating model on:
Historical accountant financials
Forecasts
Potentially management figures
This will provide them with a risk scoring which will dictate were on the risk curve the client sits.
The risk grade outcome with the security grade (They have a score on how secured the facility is) will dictate the pricing, ability to lend future funds and if they feel concerned and a more intense management of the client is required.
The APRA financial risk grading is measured differently by each bank; the fundamentals on what they measure though is same.
Industry a Client Operates In: Lenders will flag industries to watch, or they do not want to be part off. This is typically based on economic data, social requirements, or news.
So if your Annual Review is up - reach out to us to complete an Annual Review on your bank!!