Mutual bank lending growth outpaces majors

According to KPMG Australia’s Mutuals Industry Review 2019, Australian mutual banks have continued to perform well, despite ongoing challenges facing the retail banking sector, including regulatory scrutiny and declining net interest margins.

The research included analysis of the 2018-19 financial year (FY19) results of 44 mutual banks, making up over 95 per cent of mutual sector, as well as a qualitative survey of the mutual banks’ views on risks, challenges and opportunities in the mutual bank space.

The total loan portfolio of the mutual banks increased by 7.0 per cent in FY19, to a total of $101.9 billion, far outpacing the average growth of both the major banks (1.7 per cent growth) and the average growth for all ADIs (3.8 per cent).

The mutuals’ loan book is comprised largely of residential lending, with 93.7 per cent of their combined portfolio comprising of residential loans at 30 June 2019.

Further, residential lending across the mutuals increased by 7.3 per cent to a total of $95.5 billion, after experiencing growth of 6.6 per cent the previous year.

Growth in deposits also outpaced that of the major banks, with mutuals experiencing an 8.5 per cent increase in deposits to $98.97 billion, compared with the major banks’ growth of 2.8 per cent.

Total assets for mutuals grew by 7.6 per cent to a total of $124.8 billion, following an increase of 5.2 per cent the previous year.

However, the average net interest margin across mutuals fell by 5 bps to 1.99 per cent, and non-interest income decreased by 3.2 per cent to $533 million, following a decrease of 2.3 per cent in FY18.

Further, while the combined mutual banks’ balance sheets grew by 4.3 per cent in FY19, overall operating profit before tax fell by 6.1 per cent to $593.3 million.

According to KPMG, this drop in profit is linked to lower interest rates, squeezing the mutuals’ net interest margins.

Ian Pollari, KPMG Australia’s national sector leader, banking, said the results prove that mutual banks have continued to perform well despite growing challenges in the banking sector.

“The financial result underscores the ability of the mutuals to deliver balance sheet growth across key segments such as residential lending, despite the extremely tough operating environment for the industry more broadly,” he said.

“At the same time, the mutuals operating in a financial services industry facing unprecedented political and regulatory scrutiny, as well record low interest rates, strong competition and subdued demand for credit, have not been immune from the downward pressure on margins and profitability.”

Brendan Twining, KPMG national sector leader, mutuals, commented: “The primary consideration for mutuals in today’s business environment is how to use their unique position in the market, and in particular their reputation for trustworthiness and operational agility. 

“Mutuals have the opportunity to proactively take charge of their transformation journey in a simple and open manner, but they must remain resilient in the face of competitive and regulatory change.”

“It comes down to trust and transformation. Continued success will lie in the mutuals’ ability to retain their strong presence as ‘purpose-driven organisations’ while innovating clear and compelling solutions for all customers,” he added.

The KPMG report results remain consistent with the Australian Prudential Regulation Authority’s (APRA) statistics released in June 2019, which highlighted that growth in the customer-owned banking sector was far outpacing that of the major banks.

At the time the data was released, Heritage Bank CEO Peter Lock observed: “The latest figures from APRA are evidence that Australians are placing a greater focus on becoming more informed on who they choose to bank with.

“That’s why it’s so important for financial institutions to keep the needs of their customers top of mind and adapt accordingly.”

“The biggest difference is that listed banks exist to maximise the dividends they pay to shareholders. Mutuals are the opposite – owned by our customers, not shareholders. We exist solely to deliver great value to our customers and put their needs first,” he continued.

“APRA’s latest findings are an indication that consumers want to bank with an institution that puts their interests first and aren’t afraid to move somewhere that will.”

[Related: Dependence on lending to dampen big bank profits]