Mutual asset growth rises above system

According to KMPG’s Mutual Industry Review 2016, total assets held by credit unions, building societies and mutual banks (collectively referred to as ‘mutuals’) increased by 7.8 per cent in 2016, up from 0.2 per cent the year before. Comparatively, the overall banking industry (including foreign banks and other ADIs) saw total assets grow by 5.1 per cent for the overall banking industry, while the major banks saw total assets fall by 2 per cent.

The professional services firm said that the mutuals “performed strongly” in the 2016 environment, which saw “low economic growth, interest rates and inflation”.

The report reads: ‘2016 saw the mutuals benefit from increased penetration into the residential lending market. Borrowers increasingly saw the mutuals as an attractive choice through their online and branch offerings as well as increased third-party distribution. The uptake resulted in 9.8 per cent growth of the residential lending book across the sector.’

While the residential lending book growth was up from 7.9 per cent in 2015, it continued to make up the majority of the loan portfolio at 93 per cent.

Overall, gross loans and receivables increased by 9.5 per cent, up from 7 per cent the previous year.

Of the top 10 mutuals, CUA topped the charts in terms of assets, with $13.5 billion, followed by Newcastle Permanent ($9.8 billion), Heritage ($8.4 billion), and People’s Choice ($7.5 billion).

Profitability metrics were also up overall, with mutuals bringing in $626 million profit before tax, an increase of 2.7 per cent on 2015.

‘Mutuals have a very compelling value proposition’

Peter Russell, national head of mutuals for KPMG Australia, attributed the strong results to five key factors: growth in lending portfolios (led by residential property activity); continuation of effective credit risk management practices and well-defined risk appetites; expansion of distribution networks (leveraging digital reach and third-party distribution channels); benefits from increased technology spend on new mobile platforms as well as transaction origination and servicing capabilities; and continued strengthening of staff capabilities.

He commented: “Mutuals’ performance this year has improved on previous years. What’s particularly interesting this year is that we’ve seen some breakout strategies. Some of the smaller mutuals have grown in the region of 20-30 per cent, and some of the larger mutuals have also grown strongly.”

“Mutuals are recognising that they can utilise their capital more efficiently, and have a very compelling value proposition in the current environment. We are seeing the return of mutuals as a more competitive force.”

Mr Russell warned, however, that mutuals are “not without their challenges”, with interest margins falling to 2.14 per cent from 2.18 per cent. KMPG said that this fall reflects the increased competition for deposits and loans.

“A smaller margin results in less buffer to absorb future credit losses, requiring increased focus on pricing for risk, particularly in areas that have sustained high property price growth or are affected by cyclical downturns in areas such as mining and manufacturing,” it added.

Calls for reform

KPMG also called on the government to implement recommendations from the senate economics reference committee’s report on the role, importance and overall performance of the sector, which called for regulatory reform to promote better competition within the banking sector.

For example, recent analysis from the Australian Prudential Regulation Authority has revealed that regulatory capital rules give the four major banks a 14-basis point advantage over their smaller competitors.

The Customer Owned Banking Association (COBA), an industry body for credit unions, building societies, mutual banks and friendly societies, welcomed both the findings of the KPMG report, and its calls for reform.

COBA CEO Mark Degotardi said: “[The report is] a positive endorsement of our sector’s investment in better products and services, innovation and strategic partnerships.

“We also welcome KPMG’s support for implementation of regulatory reform to promote competition, including recommendations of the Senate inquiry into mutuals.”

He added that APRA had been engaging with COBA to implement the recommendation on regulatory capital for customer-owned banking institutions. 

[Related: Capital rules give big four a 14bp advantage: APRA]