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Low rates, ‘fierce’ competition to test mutual banks: S&P

Mutual bank margins are set to come under pressure amid record-low interest rates and “fierce” competition in the home-lending space, according to S&P.

Ratings agency S&P Global Ratings has published an analysis on the operating environment facing the mutual banking sector.

According to S&P, the mutual banking sector’s higher exposure to interest earnings relative to its larger competitors would compound its vulnerability to low interest rates and heightened competition in the mortgage market, triggered by the Reserve Bank of Australia’s (RBA) cuts to the cash rate.

“While mutuals’ margins remain higher than those of the major banks – reflecting their higher proportion of interest earnings assets and the free fund effects of their large capital bases – they have contracted faster than major bank margins over the last 15 years,” S&P noted.

“For rated mutuals, net interest margins have fallen by an average of six basis points each year for the past six years.


“We anticipate a similar rate of margin decline in the next two years given our expectations of continuing low interest rates and competition in the market.”

S&P claimed that the sector’s service proposition is “eroding”, stating that a mutual’s ability to charge a “premium” for an “exclusive” brand and personalised service at a branch has diminished.

The ratings agency added that the sector’s increased efforts to engage with non-traditional customers via the third-party distribution channel have forced it to tighten its price offerings to better compete with larger players.  

“[Mutuals] are increasingly targeting ‘non-core’ customers, including via broker and online channels, where the commoditised nature of customers and products means that mutuals need to price close to the major banks to win business,” S&P noted.

However, according to S&P, the mutual sector’s capital flexibility would offset some of the margin pressures, allowing the sector to “grind through” headwinds caused by low rates and fierce competition.


“On the positive side, we view capital as a key credit strength for mutuals, and we expect it to remain so for at least the next two years,” Lisa Barrett, credit analyst at S&P, said.

“In our view, the larger mutuals in particular have some flexibility in their ability to manage capital with, for example, capital relieving securitisation or mutual capital instruments.”

S&P noted that as at September 2019, the mutual sector’s combined market share in residential mortgage market was 4.5 per cent – spread across 68 institutions in Australia.

In light of the headwinds raised, S&P expects mutual banks to continue to play a relatively minor role in the broader banking sector.  

“While the size of the average mutual continues to grow and consolidation continues to play out in the sector, we expect mutuals to remain at the small, fragmented end of the Australian banking system,” S&P concluded.

[Related: Mixed RBA signals cloud rate outlook]

Low rates, ‘fierce’ competition to test mutual banks: S&P
S&P Global Ratings

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Charbel Kadib

Charbel Kadib is the news editor on the mortgages titles at Momentum Media.

Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.

You can email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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