Mutual banks need transformation: KPMG

Peter Russell, national head of mutuals for KPMG Australia said the mutuals faced the perfect storm of increased competition for home loans, cheap funding from wholesale markets, continued low interest rates and the need to reinvest in new technologies and capabilities – keeping the cost-to-income ratio stubbornly high.

“Clearly, the time for industry transformation has arrived,” Mr Russell said.

“Maintenance of the status quo is not an option as it will only result in a further widening of the gap against major banks as a customer-owned business; a mutual is uniquely differentiated from shareholder-based institutions,” he said.

“This differentiation allows a mutual the opportunity to take a long-term perspective on customer value creation by providing a wide range of products to a broader constituency during their life stages.”

KPMG’s Mutuals Industry Review 2014 found mutuals’ assets grew at 3.0 per cent from the previous year, well below the loan growth of 7.4 percent achieved by the major banks.

The review found mutual lenders did not obtain the benefits of lower wholesale funding costs, with retail deposit funding (over gross loans) at 96.6 per cent compared to 74.7 per cent for the majors.

Meanwhile, maturing fixed rate loans were repriced at lower rates as interest rates remained low.

Mutuals’ cost-to-income ratios remained high at 78.7 percent compared with 45.9 percent for the majors.

However, capital levels of 18.2 percent remain comfortably above minimum requirements, compared with 12.3 percent for the majors, the report found.

KPMG’s Mr Russell said the value of the brand ‘mutual bank’ is now emerging.

“We have two full years of data and 10 institutions operating as mutual banks,” he said.

“These results add further impetus for the recommendation put by KPMG Australia to the Financial System Inquiry (FSI) that all ADIs should be able to call themselves a ‘bank’.”

In its submission to the FSI, KPMG made three recommendations exploring the scope for concessional risk weighting for low-risk lending, allowing mutuals to license as banks and to recognise perpetual debt instruments as capital without the requirement to be converted to equity.

Mr Russell said the results of the survey support KPMG’s recommendations to the FSI.

“Allowing a higher leverage of the capital base – that is 5.9 per cent greater than that of the major banks – will enable more competition in the market,” he said.

The report found the concentration of assets in residential housing loans has increased to 92 per cent.

Mr Russell believes more diversification of service and product offering is necessary for growth, as mutual lenders cannot compete on price against the majors, who enjoy significant cost advantages.

“Overweight home loans need to be revisited and a unique value proposition, coupled with service innovation and customer bond, must be created,” he said.