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Mutuals’ positivity persists despite headwinds ahead: Report

Continued size, staff, demographic, and economic challenges for mutual banks lie in wait, a KPMG survey has highlighted.

Mutual banks need to be progressive on several key fronts through current economic conditions given possible (and potentially great) impact to them, a KPMG industry review has recommended.

KPMG’s Mutuals Industry Review 2022 examined the performance and trends of mutuals in Australia’s financial services industry for the past financial year.

The mutual sector covers Australia’s mutual banks, building societies, and credit unions and the survey also considered the responses to a qualitative questionnaire covering the risks, challenges, and opportunities facing the industry, plus KPMG-authored articles.

Australia’s mutual banks, building societies, and credit unions (‘mutuals’) increased net assets by 7.8 per cent to $11.2 billion in the 2022 financial year, up from 5.5 per cent growth the previous year, the report revealed.

Overall operating profit before tax declined by 11.1 per cent to $604.7 million (2021: $680.5 million), with this fall “primarily due to a decrease in net interest margins and a slight increase in cost-to-income ratios,” it explained.

Other key financial results for the mutual sector for the year included the following:

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total assets have increased by 7.5 per cent to $158.8 billion (2021: $147.7 billion);

  • lending had increased by 8.1 per cent to $120.9 billion (2021: $111.9 billion);
  • deposits grew by 7.0 per cent to $124.9 billion (2021: $116.7 billion); non-interest income increased by 2.4 per cent to $430.7 million (2021: $420.6 million);
  • operating profit before tax decreased by 11.1 per cent to $604 million (2021: $680.5 million);
  • net interest margin decreased by 6 bps to 1.93 per cent (2021: 1.99 per cent);
  • cost-to-income ratio increased by 48 bps to 80.3 per cent (2021: 79.9 per cent); and
  • write-back of credit provisions of $19.5 million (2021: $34.9 million); and
  • notably, two mergers completed in the financial year 2022 (2021: 2).

Punching well above their weight

Despite current headwinds, the KPMG review found the sector outlook remained positive amid ongoing market and economic uncertainty, with 75 per cent of respondents revealing they “feel confident” in their three-year growth prospects (compared to 77 per cent in 2021).

KPMG national sector leader, mutuals, Darren Ball, explained: The mutuals punch well above their weight, but if the mutuals want to continue this outsized impact for members and communities they need be progressive on several fronts.

“These include identifying and attracting talent, accessing innovation and scale through as-a-service models, partnering with RegTechs to respond to regulatory requirements, and managing the substantial climate risks in their lending books proactively, as extreme weather events become the ‘new normal’ in Australia.

The success of the mutuals in seizing the opportunities and dealing with the challenges will determine how they continue to make an impact through the delivery of member value and community contributions.

“A proactive and responsive mutuals sector will be able to build on its positioning as purpose-driven organisations, to continue to find new ways of serving their members and their communities.”

Challenges and impacts to loan books

Mr Ball commented that there were several factors affecting mutuals’ performance.

“Continued economic growth, in combination with a range of supply-side constraints, has resulted in a spike in inflation,” he said.

“The series of interest rate increases by the Reserve Bank of Australia (RBA) is affecting the mutuals and their members in several ways.

“The second half of the financial year in particular has seen an arrest in the long-running slide in net interest margins, as lending rates have increased more than deposit rates.

“There is also a nationwide decrease in house prices and a more restricted willingness and ability by customers to borrow to own or invest in homes.

The floods in many parts of Australia at the same time have provided a stark reminder of the exposure of many mutuals to local weather events, especially for smaller lenders with a geographically concentrated membership.

“It reinforces the need to understand and manage future climate risks within their loan books.”

Importance to the sector

The suggestion comes after Assistant Treasurer Stephen Jones recently flagged their ‘people first’ approach and key role in providing genuine competition in the banking sector.

Last Wednesday (23 November), in an address to the Customer Owned Banking Association (COBA), at Parliament House, Canberra, Mr Jones, highlight the importance of the mutuals, but also challenges ahead – particularly in cyber-crime protection.

“I wanted to start by acknowledging the great work that customer‑owned banks do for Australians,” the assistant treasurer stated.

“Customer owned banks have $160 billion in assets and 5 million customers. You collectively manage 735 branches across Australia, which of course includes a presence in my own electorate of Whitlam. 

“With a ‘people before profit’ focus it is no wonder that customer‑owned banks perform so well on customer satisfaction surveys,” he explained.

“They are important to ensuring competition in the banking sector,” he underlined.

“And you are valued for the role you play in the communities in which you operate,” he said.

That trust cannot be taken for granted, given “banks are tempting targets for those who wish to do Australians harm”, in terms of data theft, he added.

“And the customer‑owned sector is not immune from this issue, with your sector dealing with, on average, hundreds of thousands of scams attempts per year.”

He concluded: “I look forward to hearing about the work the customer‑owned sector is doing to tackle this issue.”

[Related: ‘Provisional yes’ as Heritage, People’s Choice set to merge]

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