Matthew Macreadie
At +625-650 (or close to 11% yield), the new Judo AT1 should play a part in an optimal
portfolio of T2 and AT1 product. In September 2023, APRA announced it is seeking
feedback regarding effectiveness of AT1 hybrids. This may have material impacts to the ASX
hybrid market going forward and could make new AT1 hybrids riskier than old AT1 hybrids.
Importantly, the Judo AT1 is likely to be grandfathered given the current consultation
process which means it could be one of the last issues in old format.
Key Points:
• Unlike other AT1s issued by the major banks which price tightly, the new issue
concession on its inaugural AT1 transaction is very good
• Crucially, the fundamental credit profile of Judo is in good shape, given its strong
capitalisation and improving profitability
• I’m comfortable that Judo has good ability to pay distributions on the notes. The
group is now profitable. Furthermore, it is now generating franking credits that will reduce
the cash costs of the distributions on a forward basis. However, Judo is unlikely to pay a
dividend to equity holders for at least the next three years which makes the equity not a
great option.
Structure:
• Contains loss absorption triggers (common equity and non-viability event triggers).
There is a CET1 trigger of 5.125%
• Non-cumulative and discretionary distributions (although subject to a dividend
stopper)
• Sits just above common equity and below T2. In my opinion, risks are similar in a bailout
between T2 and AT1 given the nature of the business and capital stack.
Why we like Judo:
• Founded in 2015, Judo is an Australian bank dedicated exclusively to lending to
Small and Medium Enterprises (SMEs). Its goal is to be Australia’s most trusted SME
business bank, by operating a relationship-centric model, focused on recruiting quality
business bankers. It has grown very quickly over the past five years.
• Judo is also the only pure play bank exposure to SME lending, a segment for
which the growth outlook is relatively more positive versus Australian mortgages. While
the FY24 net interest margin (NIM) outlook implies some headwinds, the business
fundamentals remain strong, and Judo continues to demonstrate strong volume and net
interest income growth. Management are targeting a lending portfolio of A$15-20bn with
a low to mid-teens return on equity (ROE). This will translate into stronger cash earnings
and improved debt-serviceability.
• Finally, Judo’s balance sheet management has been exceptional, and the
company has ultimately become one of the standouts in the nonbank sector. The longterm
funding stack of 70-75% from term deposits, 15-20% from senior/subordinated, and
equity at 10% puts the business in a position of strength to absorb any unforeseen
funding challenges. Management noted the current dividend policy is to reinvest all cash
flows and excess capital into the business. This is a positive for creditors as it means the
cash stays within the business and not leaked.
