Stock bloodbath as Judo Bank flags loans going bad "very rapidly" - are the majors also at risk?
Judo Bank shares fell more than 40% on Thursday after the ASX 200 SME lender disclosed worse-than-expected credit losses, a $20 million increase in provisions, and a 2026-27 earnings outlook that missed analyst consensus by approximately 15%.
The update came six weeks after the bank's last guidance, which had not flagged the deterioration.
"Judo's cost of risk has been impacted primarily by specific provision increases for three exposures across different sectors that have recently emerged," the bank said in its ASX update.
Chief executive Chris Bayliss (pictured right) told analysts the losses traced to three business loans that had gone bad "very rapidly" in recent weeks, prompting disclosure ahead of the June 30 balance date. The affected borrowers were a blind and curtain manufacturer, a financial planning customer, and a construction services business - unrelated businesses in different sectors and different states.
Bayliss said the problem did not reflect a loosening of Judo's credit standards. "In the past couple of weeks, we've experienced some asset quality issues that we're actively managing," he said. "I do want to reiterate that these are very different issues with these customers, and not a symptom of anything more systemic."
Investors responded negatively through the analyst briefing, with shares continuing to fall as Bayliss spoke.
Analysts pressed him on what the three simultaneous deteriorations implied for the rest of Judo's almost $15 billion loan book. Barrenjoey's Jon Mott asked: "Are there lots of $20 million loans out there?" Jefferies analyst Andrew Lyons questioned whether Judo's loss rate - set to run well above its 50 basis point through-the-cycle target this year and elevated again next year - reflected the inherent risk of specialising in SME lending during a softening economy. "Are you having to take too much risk to maintain a lending clip in that mid-4 per cent range?" Lyons asked.
Bayliss said no. Chief financial officer Andrew Leslie told analysts the conservative 2026-27 guidance reflected "the experience we've had for this financial year."
Judo Bank now expects its cost of risk to reach between $116 million and $122 million for the 2025–26 financial year, up from $40.1 million recorded in the first half. The proportion of its loan book that is 90 days past due or impaired is forecast to reach 3% by 30 June, compared with 2.65% as of 31 March.
The bank also cut its full-year pre-tax profit guidance to between $163 million and $169 million, down from the previously forecast range of $180 million to $190 million. It is scheduled to report its full-year financial results on 18 August.
Judo is a relatively small player in Australian banking but is closely followed by analysts who also cover the major banks. The AFR's Chanticleer column noted on Thursday that if Judo's SME customers are under pressure, there is no obvious reason why the SME books at NAB, CBA and Westpac would be immune - a question that is likely to follow the major banks into their own reporting seasons later in the year.
The SME sector has absorbed three rate rises, higher fuel costs and a drop in consumer and business confidence over the past 18 months. Judo's update adds to a picture of small business borrowers under growing strain heading into the second half of 2026.
Judo's most significant previous market surprise came when its COVID-era cheap funding rolled off three years ago, compressing margins sharply. Thursday's update is a different problem - credit quality rather than funding costs - but the pattern of the market being caught off-guard has added to investor frustration.
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
