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Consolidation ‘inevitable’ for mutuals to compete

Continued consolidation is needed to “neutralise” some of the disadvantages mutual banks face and compete on a more level playing field with the big four, a new S&P report has stated.

According to a new Standard & Poor’s (S&P) report, titled Larger, Well-Managed Australian Mutuals will Prevail as Market Consolidates, size does matter when it comes to competing against the major banks.

The report, authored by S&P credit analyst Lisa Barrett, noted that while the margins of mutual lenders continue to remain higher than those of the major banks, they have shrunk faster than the big four over the last 10 years as competition in the mortgage market heated up.

Larger mutuals have been able to grow their assets over that time, while smaller players struggled, the report noted. 

“The strong growth in larger mutuals has occurred through both organic and inorganic means, while outpacing system growth in recent years. In our view, mutuals will continue to expand outside their traditional common bonds to facilitate future merger opportunities,” Ms Barrett wrote in the S&P report.


The report claimed that continued consolidation between mutual banks is “inevitable” for them to be able to effectively compete with the big four and regional banks, who have much lower operating and funding costs.

“Substantially higher operating and funding costs have materially impeded mutuals’ ability to compete with the major and regional banks,” Ms Barrett wrote.

“Enhancing the scale of operations through mergers is one obvious way for the mutuals to neutralise some of these comparative disadvantages, particularly in the face of rising regulatory and compliance costs.”

Numerous mergers are currently being considered or in progress, such as between Regional Australia Bank and Holiday Coast Credit Union, which is expected to be “one of the largest” in the customer-owned banking sector, as well as between P&N Bank and bcu and between Sydney Credit Union and Endeavour Mutual Bank.

The S&P report acknowledged some of the advantages mutual lenders have over their major and regional bank competitors. One is that they are in a better position to update their digital systems compared to the big four who are anchored down by legacy systems.

“As a result, these mutuals have been early adopters of new customer-facing technologies, particularly where they can benefit from industry collaboration. Two recent examples are the implementation of the New Payments Platform and the introduction of Pays, both through Cuscal Ltd., resulting in many of the larger mutuals being first to market with these products,” the report stated.

“We expect that mutuals will continue to transform their digital offerings while streamlining their backend digital systems (such as core banking platforms) to reduce costs.

“Mutuals that keep pace with technological developments are better placed to attract a younger demographic.”

Other key advantages that mutuals have are their customer-centric business model, sustainability and social-responsibility values, and their position within various niches. 

“The values that mutuals champion appeal to a small but still sizeable portion of the Australian banking market,” the S&P report stated. 

However, the ratings agency still expects the mutual banking sector, which currently accounts for just 2.5 per cent of the Australian banking system, to remain “a small cog” in the wider banking industry.

In April, the Treasury Laws Amendment (Mutual Entities) Bill 2019 had passed Parliament, allowing mutual banks, credit unions and building societies to raise capital more easily and grow, as previous provisions had restricted the customer-owned banking sector’s capacity to issue the full range of regulatory capital instruments, such as convertible debt instruments, due to uncertainties around their tax status.

The new bill includes a new definition for a mutual entity as a company where each member has no more than one vote; changes to demutualisation rules to ensure that it is only triggered by an intended demutualisation, not by other acts such as capital raising; and the creation of a mutual-specific instrument that can be used to raise capital.

Prior to the passage of the bill, Heritage Bank CEO Peter Lock said the legislation would “remove a handbrake that’s been holding back customer-owned options… from becoming a more competitive force in the banking sector”.

The CEO noted that commissioner Kenneth Hayne’s findings have “starkly illustrated what can go wrong when the greed and profit maximisation apparent at the big banks goes unchecked”.

“Customer-owned banks offer a different model that is focused more on people than profits, and it’s time we got the chance to better compete with the big bank model,” Mr Lock said, adding that consumers have been “crying out for more competition”.

[Related: Mutuals poised for growth as Parliament passes bill]

Consolidation ‘inevitable’ for mutuals to compete

Tas Bindi

Tas Bindi is the features editor on the mortgage titles and writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.  

Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business. 

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



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