Fintech, major bank competition fuelling mergers: Newcastle Permanent

Newcastle Permanent flagged that it was considering a merger with rival mutual group Greater Bank in August, with the two now deep in a due diligence process.

The next step is applications to APRA, ASIC and the ACCC, before the banks seek member approval.

Newcastle Permanent chair Jeff Eather told Mortgage Business that the banks hope to have their resolutions around business case completed by the end of November and to then be looking at merger and integration agreements in a formal sense before Christmas.

“These things aren’t easy to do, but it’s a really good thing. It’s highly compelling in its proposition and it’s something we’re keen, both sides are keen, to get happening and to then look at the next steps,” Mr Eather said.

The marriage of the two Newcastle-based organisations would create a bank with $19.8 billion in total assets and around 600,000 customers.

It would also be one of multiple deals that have occurred among mutual banks, with Heritage Bank also looking to combine with People’s Choice, while Teachers Mutual is close to completing its second amalgamation with a credit union this year.

Mr Eather believes there will be more mergers to follow, as smaller banks will seek scale to handle the costs of technology.

“The reality of trying to compete in the future with the neobanks, the fintechs, Commonwealth Bank who has a technology department that’s probably three times the size of both our organisations [Newcastle Permanent and Greater Bank] in terms of employees, we actually compete with the Commonwealth Bank each and every day,” he said.

“We need to maintain our relevance. We need to have the scale to be able to continue to support the work we do in the community. We need to continue to support the customer service and the award winning products that we develop because they’re our points of difference.”

In contrast to a merger of two public or private companies, a merger of customer-owned banks means there will be no money leaving the balance sheet, he added.

“We retain both our capital and add them together, so your ability to invest basically doubles and these sorts of things are really important for us to be able to build the technology of the future and to keep investing in it. Not just build it once and then have to build the war chest again,” Mr Eather explained.

“It’s highly compelling and it’s very exciting. It will ensure our relevance, we’ve been around for 118 years and we’re going to leave it in a better place for the next generation and guarantee its future for the next 20, 30, 40 years.”

Record repayments squeeze loan growth

Newcastle Permanent also released its 2021 financial year results on Wednesday (13 October), revealing its net profit after tax had surged by 41.6 per cent on the previous year, to $42.7 million.

However, despite the bank writing a record $2.5 billion in new home loans during FY21, its book had grown by $330 million year-on-year.

The bank had seen record numbers of people chipping away at their loans, with 92 per cent of customers ahead on their repayments.

“In large ways, people have taken the declining interest rates and continue to repay the rate that they were repaying out previously and continue to get further in advance, but it also meant that they were repaying at a higher level as well,” Mr Eather said.

Around 45 to 48 per cent of the new loans had been sourced through the broker channel, while 52 per cent were direct originations.

Meanwhile, customer deposits had increased by 5.2 per cent to $8.9 billion – boosting the group’s liquidity alongside the strong loan repayments.

Around 80 customers are working through some form of loan relief – a relatively small number compared to the onset of the pandemic.

However, Newcastle Permanent has maintained its COVID-related provisions for the year ahead, with Mr Eathers citing uncertainty.

“No one’s sure how this economy’s going to bounce back and how quickly it will bounce back, and what it will look like when it comes back as well, what things will change, so we’re being cautious on that front,” he said.

[Related: Mutual bank’s broker loans up 54% in FY21]