Mutual banks continue growth after a difficult year

KPMG Australia’s Mutuals Industry Review 2020 revealed that mutuals’ balance sheets (net assets) grew 4.6 per cent (2019: 6.4 per cent) to $9.8 billion, while overall operating profit before tax fell by 19.1 per cent (2019: fell 3.6 per cent) to $494.3 million (2019: $611.0 million).

The report is based on the financial results of 47 mutuals (representing over 97 per cent of the sector by total assets and profit before tax) as well as a qualitative survey, which asked the lenders to share their views on the risks, challenges and opportunities they see facing the industry. 

It revealed that residential lending from this segment of the market increased by 3.0 per cent (2019: 8.9 per cent) to $100.2 billion while deposits grew by 7.0 per cent (2019: 10.6 per cent) to $108.4 billion.

Mutuals also had 5.52 per cent, or $5.56 billion, of COVID-related mortgage deferrals come June 2020.

Australian Mutual Bank, formerly Endeavour Mutual Bank, recorded the highest growth at 77.6 per cent after a merger with Sydney Credit Union, while WA-based P&N Bank recorded a sizeable 45 per cent annual asset growth following a merger with credit union BCU.

The report also found that the mutuals sector continues to maintain a positive outlook in the face of ongoing market and economic uncertainty, with 70 per cent of survey respondents revealing they feel confident in their three-year growth prospects. This was a notable increase from 63 per cent in 2019. 

It was noted that the top three drivers of this growth would be: a greater focus on increasing residential lending, the digitisation of banking services, and increasing deposits.

“The 2020 financial year will be summarised as a challenging year for business, communities and individuals – and the mutuals were no exception,” Ian Pollari, KPMG Australia head of banking, commented.

“The past year has also been categorised by low interest rates, and hence a flow-on impact to net interest margins – essentially the life blood of the mutuals’ financial performance – and increased levels of provisioning.

“The uncertainty in the market has seen the mutuals incorporate revised economic assumptions and model overlays in their provisioning models. This has had a flow-on impact to the bottom line of many market participants,” he said.

However, Mr Pollari said the institutions were well positioned to meet these challenges. 

“During these difficult times, customers look to their financial institution to provide them with clear solutions and support,” he said. 

“The success of mutuals lies in their strong customer bond and affiliation as ‘purpose-driven organisations’, providing value to the community and members alike.”

Brendan Twining, KPMG national sector leader, mutuals, said the pandemic had “escalated the need for change as customers’ preferences shifted to online banking and interaction with their financial services provider”.

“Without doubt, technological change that was originally thought to take two to three years to implement was – in many cases – achieved in less than two to three months and at a lower cost,” Mr Twining said.

“Going forward, the challenge will be to continue to maintain this momentum, both with respect to the operational changes made, identifying and transforming additional aspects of the business, as well as cultural change. 

"Ultimately, mutuals, while maintaining the customer trust/bond that they have built up over many years, must continue to identify ways to invest and transform in a cost-efficient manner, while building a resilient organisation into the future.”

Increasing move to mutuals

This comes as mutuals have seen strong growth over the last couple of years, with socially conscious customers increasingly asking their brokers about alternatives to the major banks – and brokers highly rating their overall experience with them.

However, the deputy chair of the Australian Prudential Regulation Authority (APRA), John Lonsdale, recently warned that it would be “prudent” for smaller banks to “consider the preparatory steps required for a merger or transfer of business” should they face a severe financial stress.

In a speech delivered to the Customer Owned Banking Association (COBA) 2020 Convention on 2 December, Mr Lonsdale forewarned that the industry would need to work together to “overcome current challenges and to plan for those challenges that are yet to materialise”.

APRA had reportedly completed a thematic review of small to mid-sized ADI recovery plans as part of its ongoing work to improve recovery planning capability across the ADI industry and “to ensure that institutions are prepared as much as they can be to recover from severe stress”.

According to Mr Lonsdale, APRA observed that the general quality of recovery plans among smaller ADIs was “weaker than [it] would like it to be”, and that there was a lack of understanding of APRA’s expectations.  

Mr Lonsdale therefore suggested that while there may be a range of recovery options available to ADIs, “APRA recognises that for smaller ADIs with simple businesses, the range of recovery options may be more limited, and that a merger or transfer of business may be the most effective recovery option”. 

“Therefore, it is prudent that such ADIs consider the preparatory steps required for a merger or transfer of business, including criteria to identify potential partners at an early stage rather than wait for a deterioration in financial position,” he told the COBA conference.

He concluded: “The composition of the mutual sector has changed over the last couple of decades, with increased consolidation in the industry, which is expected to continue to play a part as mutuals seek to gain scale and remain competitive...

“The need to be working together to continue to build strength and resilience has never been more important,” Mr Lonsdale said.

[Related: Mutuals may need to prepare for mergers: APRA]