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Judo Bank (ASX:JDO) is a highly undervalued growth stock: Interview with founder and CEO Joseph Healy

June 13, 2023

JDO, Judo Bank, Judo Capital Holdings


Judo Capital Holdings (ASX:JDO)

We spoke with Joseph Healy, founder and CEO of Judo Bank (ASX: JDO), about the challenges he faced when starting Judo Bank, the runaway success of the bank since its 2017 commencement and the fact that the current share price is not valuing any growth in the underlying loan book.

Healy also shared with us his view as to why Judo is unique globally.

You may also want to check out the Investor Webinar we did on JDO here!




Stuart: Hello, and welcome to “Stocks Down Under.” My name is Stuart Roberts, and I’m one of the co-founders of our service. And joining me from Melbourne on the morning of Friday, the 9th of June, 2023, is the legendary, Mr. Joseph Healy, founder and continuing CEO of Judo Bank (ASX:JDO). Joseph, good morning.

Joseph: Good morning, Stuart.

Stuart: This is a real privilege for “Stocks Down Under.” We’ve been talking your story now for a while. And I’ve become a big fan of you and your business model. You started Judo Bank about 2015 with a dream that it would be possible for a bank to do genuine old-fashioned relationship banking, you know, where the relationship manager gets to know his or her customers and lends accordingly. That had kind of disappeared from Australia before you came back. What prompted you to start this bank?

Joseph: Well, Stuart, I’d been in the banking industry all of my career, so 35-plus years. And I’ve seen the industry change quite dramatically. And not just in Australia, I’d seen this also, particularly in the UK, where the banks were industrializing the way they were offering services. It was a one-size-fits-all approach. The industry in Australia, as everyone knows, is heavily concentrated in four big banks. And that was particularly the case after the GFC when St. George and Bankwest and others were consumed by the large guys.

And at the same time, the banking industry had aggressively moved towards household lending, away from business lending. And I felt that there was a big gap opening up in the way that the banking system was serving the needs of the SME economy. And so, started thinking in 2015, ’16 about building a bank that was gonna be a pure-play specialist SME bank, that went back to the fundamentals of banking, but built on a modern technology platform, but a bank that had relationships at the front and center of how it thought about its customers.

In an era where everyone was promoting fintechs and algorithms and technology as the answer, we always felt that when it came to dealing with the butcher, the baker, and the candlestick maker, that they need and want to sit across a table from a banker who’s interested in what they’re trying to do, and can help them think through how that might be done. It doesn’t lend itself to algorithms, or the computer says no, or the computer says yes, it lends itself to human engagement. So, it’s very traditional in that sense, and unashamedly so, but built on a modern technology-enabled platform so that our bankers can spend 70%-plus of their time working with our customers rather than spending 70% of the time dealing with the complexity and bureaucracy of large institutions, which is the case inside large institutions.

So, build a bank that was gonna be there to serve the SME economy, not to do anything else. So, you have permission to, you know, shoot me down if you ever see or hear of Judo doing anything other than SME banking. We believe there’s a big underserved market, a market that genuinely appreciates relationships, that genuinely values having an experienced banker to talk to. And the success of Judo really has proven that thesis to be true. And I also said to people back when we were developing Judo, “I will give you a 1998 bottle of Grange if you can find me a customer satisfaction survey over the last 5 years that have ranked banks on a scale of 1 to 10, SME survey this is, on a scale of 1 to 10, higher than 3.” And no one could ever find one.

Stuart: You keep that Grange. I’m one of those dissatisfied customers.

Joseph: It’s a safe bottle of Grange, I could tell you.

Stuart: Right. So, I’m reminded, listening to you speak, of Jim Collins, author of, “Good to Great.” And he talks about the good to great companies. They’re not reliant on technology. Technologies augments what they do, which is something else, the special sauce. That’s clearly part of Judo’s DNA in that regard.

Joseph: One hundred percent. I mean, I believe that we are a service business. We’re not manufacturing widgets. We’re not providing big operating platforms. We fundamentally are in the business of providing a customer experience. And that goes to the human engagement with the butcher, the baker, and the candlestick maker. Technology is there to enable a great customer experience, not to define a great customer experience.

And one of the things that has con… You know, when I look at new business models that have emerged here and elsewhere in the world, particularly in banking, the overemphasis on technology as being the, you know, the secret silver bullet to a great future, I think is totally to misunderstand the needs of customers, particularly small to mid-sized businesses. Technology is really important to a great service, but it doesn’t define a great service, it enables one.

What defines a great service in the SME economy is a human touch. It’s the experience of the individual who can say, “Tell me about your business. Tell me what you’re trying to do, and let me think about how we can help you.”

Stuart: So, getting that vision originally funded must have been a challenge for you at the time?

Joseph: Well, it is a great story there. And it’s all written in a book called “Black Belts,” for anybody who’s interested. You know, at the very beginning of building Judo, we identified…we built a 10-year plan, so from 2016 to ’26, a financial model. And we identified that we needed $1.5 billion of equity. So, this is a PowerPoint looking to raise $1.5 billion. Eight stages, of course. And the reality is that that took 87 meetings all around the world, 4 times around the world before we got our first bite, when an investor in London said, “If you can get 3 others to come in, then I’m in for $15 million.” But that was the 87th meeting.

Stuart: That beats Colonel Sanders back in the ’60s looking for capital for KFC. I’m pretty sure he had less meetings than that to get his buckets.

Joseph: Well, the thing is that in Australia, the potential investors that we talked to said, “We love the idea. We see the problem. We think you’re credible in terms of experience. But there’s no way you’re gonna be successful because the big guys will kill you. The market is too… The big banks are too powerful. And you’re not gonna be able to get off the ground.” And so then, of course, when we went overseas, between Singapore, Hong Kong, Shanghai, Beijing, Abu Dhabi, London, and New York, people said the same thing.

We said, “Look, we think this is a great idea. We see the problem. And you’ve clearly got the credentials to be successful, but the business model’s gonna be really challenging because Australia’s a very conservative banking environment, tough regulation, and four big, big dominant players. And also, by the way, why are no Australian institutions investing in the company? Why are you spending time in London and New York and Abu Dhabi?” So, you know, you went round, and round, and round, and round raising capital, took 18 months, I think. But we never gave up. We never said… Because nobody ever said it’s a bad idea.

And quite often, you know, people say to me, “Well, 87 meetings, don’t you think there’s a message in that?” I say, “Well, actually, the fact that we’ve been able to have 87 meetings with very credible people is a positive thing,” right? And also, whilst some people said, “No,” I heard, “Maybe.” The body language was, “You know, prove you can do this, and I’m interested.” So, you know, there’s never a bad meeting. You might not get what you’re looking for, but you get insight and information.

And we always had the vision of what the company could be. And of course, the success of the company since 2017 has borne evidence to that vision was very much a credible one. So, the importance of resilience, the importance of never having a plan B. And I know some people might say, “Well, that’s not a sensible approach in life.” But if you’re looking to build something like Judo Bank with a vision for the company, you don’t want to think about the alternative. You want to focus exclusively on that vision and not contemplate failure, and not contemplate plan B. Execute on plan A.

Stuart: Right. Good advice. Fast-forwarded time. Judo has shot the lights out in terms of the customer response. You’ve got people knocking over themselves to borrow. But the basic plan is holding up. You’ve grown the loan book to $8 billion, it’ll be $20 billion by the middle of the decade if you play your cards right. Net interest margin, 3%. You know, other bankers would kill for that sort of number. And in the meantime, no one’s doubting you. You only moved your provisions up to just over 1%. The rest of the world is worried that you’ve lent recklessly and the coming recession, if we move into a recession, is gonna kill you. Turns out that you’ve even been disciplined on the lending front. What’s the secret there? Apart from a Scott’s accent, what other…

Joseph: The secret there is that whilst this is a new bank, the people running the bank, the 8 people running the bank have over 200 years of collective experience. Half the people, four of the eight, have held senior risk management roles in their careers, including myself. The other thing is that… So we know this business, and we know the craft of SME banking inside-out. The other thing is that the management team and the directors of the company own 8.5% of the equity in the company. So we’re running this company as owners, or with an owner mindset, not as an employee mindset. So, we’re taking a long-term view. We’re heavily equity-invested. I mean, mortgaged the home, sold off all the other investments, put it all into Judo. And wanna make sure that we build a great bank.

We’re not gonna take risks in building that great bank that could wipe out all of our hard-earned wealth creation over, you know, a 30-odd-year career. So, I would say to people that it’s a young bank, there’s no question about that, but it’s run by deeply experienced bankers where risk management is right at the heart of the way we think, talk, and act. All we do is SME. We hire carefully. All our bankers are ex… The average experience of our bankers is over 15 years. The average experience of our credit executives is over 25 years.

We go back to the fundamentals of banking. You know, we go back to… When we are lending money, we go through a 4C hierarchy framework. The 4C is, what is the character, track record, reputation, and credentials of the business owner? The second C is, what are the cash flows or the capacity of the business to service the debt and repay it on schedule and deal with volatility in performance? The third C is, what capital is there sitting on the balance sheet, equity capital to support debt? And finally, the fourth C is, what sort of collateral or security is there available should there be a weakness in any of the first three of the 4Cs?

Stuart: You’ve flipped at that, Joseph. Most of your competitors are looking at collateral as their first C, you’ve put it at the last.

Joseph: Yeah. Yeah. Because I would never lend a dollar of money to somebody that I didn’t trust or who I felt didn’t have the credentials to do what they said they wanted to do. If somebody rocks up here saying, “Look, I wanna borrow $10 million. I’ve got a great balance sheet, I’ve got lots of security, and I’m gonna go into a business that I’ve got no experience in,” I’m gonna be very careful, you know, about that individuals. I want to see credentials in what they’re doing and serious skin in the game.

But you’re right, the banking industry, because of this industrialization that I mentioned earlier, and because of a lack of competition in lending, said to the SME economy, “Just tell me how much property you’ve got and I’ll lend you 70% of the evaluation of your property.” I don’t think that’s banking. I think banking goes back to that 4C framework. Who are you? What have you done? What are you trying to do? Does my gut instinct tell me I can trust you?

Second thing is, what are your cash flows in the business? What’s your capacity to deal with volatility in operating conditions? Which has been so critical in a post-COVID world. You know, Judo is a bank that was born in the COVID world. We got our banking license in late April 2019, and we started building the business out. We only really started growing it. I mean, we had a billion dollars of lending in March 2020 when COVID hit our shores. And we’ve now grown it to, it’ll be circa $9 billion when June ends off, as we’ve said to market.

And so we’ve grown our business in this kind of COVID world that then kind of become an economically uncertain world, the one that we’re living in today. So, credit risk management has been at the heart of the way that we’ve thought about risk-taking. I mean, I see banking, as an old school banker, as the business of managing risk, be that credit risk, funding risk, you know, on the liability side of the balance sheet, cybersecurity risk, operational risk. It’s a business model that is littered with banana skins. And you need to know half people who understand those issues, not just intellectually, but instinctively. You know, you kind of say, “My gut tells me that there’s a problem emerging here. Let’s deal with it at point easy and not allow it to get to a point difficult.”

I mean, that’s been at the heart of the way we’ve grown the bank. And whilst I don’t wanna see an economic slowdown or a recession over the next 12 months, clearly, clearly, we’re gonna be in a challenging environment. Ironically, or perversely, I’m looking forward to being able to demonstrate that no matter what the environment throws up, that the Judo Bank proposition will hold up and it will be able to prove the naysayers wrong.

Stuart: Well, what I’m impressed by is that, I tuned into your investor day, which you had last month. And the focus there was technology. Basically, here’s a new bank, you know, we’re using 21st-century tools as our… You know, 100% cloud-based kind of materials. And then you could confidently look forward and say, “We’re gonna have a cost-to-income ratio that the big banks are gonna lust after because we don’t have those legacy issues. So, you can confidently point towards the cost-of-income ratio of 30%, not necessarily tomorrow, but it’s coming. I think that’s great.

Joseph: Yeah. Highly confident in that. Highly confident in that. You know, this was a bank that was started with a PowerPoint, and it’s cloud-based, as you rightly mentioned earlier. It’s also a bank that has no legacy. We’re not burdened with legacy infrastructure, legacy policies, legacy assets, legacy culture, legacy technology. I mean, the technology sitting inside large banks is a spaghetti ball of data technology that’s been built on, and built on, and built on over decades that is very difficult to transform. And whereas we’ve got a very simple technology platform where, as I mentioned earlier, we see technology as being critical to enabling a great customer service.

And that roadmap of how we’re gonna get to where we are today, with a cost-of-income ratio in the mid-50s, which was 90% two years ago. But the trajectory towards the 30 is clearly laid out, highly confident of getting there. And highly confident that by ’26, ’27, we will be able to demonstrate metrics, including customer engagement metrics that will be equivalent to a world-class SME bank. A unique business, which we are today. There’s nothing anywhere in the world that looks like Judo Bank. But by ’26, ’27, which is only two and a half, three years away, this will be a world-class bank.

Stuart: Right. Now, you wouldn’t know that from the current share price at the moment. Let’s face it, the last couple of years haven’t been good to you in that respect. I suspect that the market is throwing you in with the wash with the other banking system where they’re so worried. Does the share price bother you at all?

Joseph: Look, as a CEO and as a top 10 shareholder in the company, but mainly as a CEO of the company, it frustrates me enormously, because we have done what we’ve said we will do and more. But the market is saying, “We love the progress and we love the fact that you’re consistent and you do what you said you will do. But right now, we’re not paying for growth.” And this is a growth company.

Stuart: Absolutely. It’s not just any growth path, we’re talking a center share earnings last year going to 10 in the not distant in the future, if the consensus is any got.

Joseph: Yeah. I mean, I think the average consensus of the analyst has us sitting at about $1.80 today. I think we’re trading at $1.20. We’re not getting any credit for growth. Obviously, I understand investors are saying, “We just don’t know what the macro environment’s gonna do, so we prefer to sit in our hands.” But at the current share price, you look at it as the CEO, and it’s frustrating. But you don’t get disheartened by it because you know that the business is focusing on delivering on the things it can control, and that when the environment is more supportive, then the share price will find its natural level.

You know, we listed the company at $2.10 in November ’21. We met every guidance that we have presented to the market. We are on track to meet and remain highly confident on meeting our metrics at scale, the ones that I described earlier. And if we just continue to execute, then you gotta believe that the fundamentals will be reflected in the share price. But it is a frustration. And people keep on saying to me, “Don’t worry about the share price.” I think it’s kinda easy to say that, but when you’re the CEO of the company and you want to have a strong equity ownership culture in the company, it may not…

Most of the employees in the company have equity in the company. And I mentioned 8.5% of the issued equity is owned by the management team and the directors. You know, you are conscious that the share price might be a source of angst for some families that maybe invested money into the company. But I’m not concerned about the future of the company, I’m just frustrated with the data share price.

Stuart: So, let me ask you one last question. We talked about your company growing to the point where it’s a world-class SME lending bank. Who do you admire most amongst your banking competitors globally? Who do you most aspire to be like, if I could put it like that?

Joseph: Well, that’s a great question. Look, the bank for me that’s been the standout bank of the last decades or two decades has been JP Morgan. Now, that’s a colossal organization. But what I admire about them is just the consistency of their execution and the quality of management. I mean, you know, people look at these big banks around the world and you say, “Well, how come a bank like Morgan can perform so well where other banks have not performed well?”

At the end of the day, it’s all about management. It’s all about management. And, you know, I, over my decades of experience in dealing with businesses as a banker, having seen so many businesses fail and so many succeeding and so many drifting, the fundamental difference is management. It’s not the business…

Stuart: Jamie Dimon got his bank through the global financial crisis when others folded. That’s telling you something, right?

Joseph: Correct. Correct. Yeah. So, I admire them. I admire them at the caliber of management. And Judo, one of the things, a priority for me is to make sure that in our own way, that we are building a very, very strong management bench, very strong. Because that will define success in the company, together with the culture of the organization, which has been a big focus for us. We don’t want to grow into becoming a mini-me of the big guys. And the way that we stop becoming a mini-me of the big guys, fundamentally, is around the nature of the culture inside the company.

We want a culture inside Judo that is almost like a migrant mindset. It’s that, to be successful in life, you’ve gotta work hard. You’re not entitled to success. You’re not entitled, you know, to the things that you get. You’ve gotta work hard for them. You’ve gotta be resilient. Just like the 87 meetings that we had with investors, you’ve gotta believe that you can get there. You’ve gotta be hungry, passionate, courageous. You wanna have a challenging mindset. You look at the big guys, and you say, “Right, we are never gonna be as big as you, but we are gonna be so much better than you, so much better than you. And we’re gonna be seen as the best SME business bank in Australia. Not the biggest, but the best.”

And when small to mid-sized businesses say, “I wanna do something. Who should I talk to?” “Judo Bank. Go see Judo Bank because the people inside that company are deeply experienced in banking. And all they talk about, all they dream about, all they think about, all they plan about is how to be the best SME bank in Australia.”

Stuart: I mean, that’s what you’re thinking about when you’re shaving in the morning, basically, is how you can better serve your customers, right?

Joseph: Correct. There’s nothing magical about that, right? This is a traditional old-fashioned recipe.

Stuart: Well, Joseph, are you sure you’re not the original JP Morgan who died in 1913 back from the dead because you have a lot in common with him, may I say? And he managed to take a small bank and grow it into a big bank. Let’s see what Joseph Healy can do at Judo Bank.

Joseph: Thank you.

Stuart: Thanks for joining us at “Stocks Down Under.”

Joseph: Great pleasure, Stuart. Thank you.