In May, Judo Bank started taking wholesale deposits having obtained its banking license the previous month. The bank is well capitalised having raised $140 million of equity in April 2018 and is now looking to expand its lending operations. Judo is targeting the SME business market and has already made loans of $156 million to over 120 small businesses in the last 12 months before being allowed to raise deposits.
The term deposit rates offered by Judo are some of the best in the market and around 20bps to 30bps better than the best rates offered by mainstream banks as it looks to attract funds with numerous brokers such as Laminar Capital and Curve Securities who are actively marketing to their client bases. Judo is one of the first of many start-up or “challenger” fin tech banks that are likely to obtain banking licenses over the next few years and start seeking deposits.
On one assessment, Judo Bank term deposits look like an attractive investment offering rates superior to the market for a bank with claimed liquidity of 45% of assets and a Tier 1 capital ratio of 40%. Judo is also looking to raise an additional $200 million of capital in June 2019 to further strengthen its balance sheet. Clearly with this very strong net asset position and little lending to date, it appears unlikely Judo will fail before the maturity of the shorter-dated term deposits it is now offering out to six months.
However, we would argue it does not meet the necessary standards of “prudence” for many conservative investors governed by the Trustees Act 1925 carrying the fiduciary duties for the responsible management of entrusted funds. Judo is a start-up bank with essentially no operating history and is currently loss making as it tries to expand its loan book to cover its infrastructure costs. The point of breakeven financial sustainability for the bank is unknown, but it will need to expand its lending significantly to reach this point. It is not rated by any of the credit ratings agencies (who would be unlikely to give it an investment grade rating) and it has not publicly disclosed any financial statements in its 2018 Annual Report which is largely a marketing document.
Essentially, any investor in Judo term deposits is relying almost solely on the supervision of the regulator APRA and the competence and honesty of the management team without any other external verification of Judo’s credit-worthiness on an ongoing basis. The nearest comparable investment would be a term deposit with a small unrated credit union, except most of these institutions have long track records of operation, are marginally profitable, financially stable and not highly dependent on growth for survival. They also publicly disclose audited annual accounts each year.
We emphasise any short term failure of Judo is highly unlikely and its deposits will be covered by the government guarantee for the first $250,000 invested, but the upside benefits if it is wildly successful will flow to the equity seed capital investors and the management team as is the case with most start-ups. In contrast, the downsides of failure will be borne by all its investors potentially including those in its term deposits (outside the government guarantee).
Amicus’ opinion is Judo Term Deposits may be a suitable investment for some investors, particularly those investing in amounts up to the government guarantee, but it does not fit the risk profile of many of our more conservative clients for sums greater than $250,000.