Mutual banks without scale will be ‘unsustainable’: Bank CEO

The CEO of Greater Bank, Scott Morgan, has warned that the future viability of mutual banks is under threat given the growing cost of technological investments – adding that only those that have the ability to scale and fund innovation would be able to survive.

Mr Morgan made the comments after Greater Bank announced on Tuesday (3 August) that it was looking to merge with Newcastle Permanent.

The two mutuals have signed a memorandum of understanding to explore merging the two organisations to create what they state will be “Australia’s largest customer-owned bank”.

If approved by shareholders and regulators, the combined entity would collectively have $19.8 billion in total assets and a combined customer base of approximately 600,000 customers.

However, it is intended that the two brands would be “preserved” if the merger is finalised in 2022.

‘Mutual banks without scale and financial strength will be unsustainable’

According to the two mutuals, the merged entity would benefit from “the shared capabilities of both brands, investment and technology enhancements to continue to deliver a best-in-class customer experience”. 

The chair of Greater Bank, Wayne Russell, said: “Both organisations independently have exceptional financial strength. Our collective capabilities and capacity will enable us to invest more in technology and innovation, and offer great value for our customers. We believe this is an incredible opportunity to grow our brands and help more Australians with their retail banking needs.” 

Indeed, the CEO of Greater Bank, Scott Morgan, echoed sentiments made by the deputy chair of the Australian Prudential Regulation Authority (APRA) earlier this year, suggesting that the viability of the mutual sector is only sustainable for players with scale and large financial coffers.

Speaking in a media briefing, Mr Morgan said: “Our DNA is built in our collective histories, but our future is not guaranteed by standing still, or looking in the rearview mirror at past success. Success in the banking sector, more than ever, is dependent on the ability to adapt rapidly to meet evolving customer expectations and new regulatory demands...

“We must, and will, continue to respect the needs of our current loyal customers, but there’s no doubt that there has been a seismic shift in customer behavior, which has been driven by changes in technology.

“It’s critical that we adapt our business and work with like-minded people, to deliver the banking services and products our customers need today, or want in the future.

“Unfortunately, it’s a fact of life that smaller organisations can be a disadvantage in keeping pace with the required investment in frequent and complex technology advancements.”

Mr Morgan noted that a decade ago, there was around 200 mutuals in operation across Australia, but today, that number is fewer than 70.

“Mutual banks without scale and financial strength will, in the longer term, be unsustainable,” the Greater Bank CEO said.

He added: “I genuinely believe this merger is an incredible opportunity. We are choosing to come together now – and both from a position of strength – to continue the necessary investments and technology innovations to drive even greater value for our customers.”

Speaking of the merger on behalf of Newcastle Permanent, the CEO of the bank, Bernadette Inglis, said: “A merger provides an opportunity for transformational change to future-proof both organisations – more so than can be achieved individually. It enables the combined organisation to carve out a presence as a beacon for the mutual sector, and be a significant competitor in retail banking.

“Newcastle Permanent and Greater Bank have attractive and complementary characteristics which we believe make this merger highly compelling, and provide significant value to customers, through improved technology and organisational capability.” 

She told our sister publication, The Adviser, that the lender would continue to operate in the third-party channel should the merger complete, and a review would be had of Greater Bank’s mortgage distribution too (the lender does not currently partner with brokers).

The chair of Newcastle Permanent, Jeff Eather, added: “This proposed merger of two highly successful Hunter-based organisations will create a large, forward-thinking financial institution that sustains the core principles of customer-owned banking.

“It will also position the Hunter region as a financial powerhouse in Australia. Our vision is to be a vibrant employer of choice that delivers fulfilling and rewarding careers for more than 1,600 people.” 

What the merged entity would look like

The mutuals have said that the combined entity would employ more than 1,600 people (with no forced redundancies as a result of the merger for a period of at least two years) and would retain a combined network of 100 branches for a period of at least two years. They would also maintain their locally based customer contact centres and headquarters. 

If the merger is approved, there would be an “aligned board” to govern the merged entity, and the retention of both existing CEOs to support the integration process and the “acceleration of value to customers”.

A new leadership structure would “harness the strengths of both entities, ensuring it has the commensurate skills to grow the brands while retaining critical institutional knowledge and expertise from both parties,” according to the two lenders.  

It is proposed that Greater Bank chair Wayne Russell will chair the merged entity, alongside Newcastle Permanent’s chair, Jeff Eather, who will assume the role of deputy chair.

Newcastle Permanent chief executive Bernadette Inglis will be chief executive officer and Scott Morgan, currently CEO of Greater Bank, is to be the entity’s deputy CEO.  

Completion of the merger remains subject to due diligence and then approval by the members of both Newcastle Permanent and Greater Bank, along with regulatory approvals, including the Australian Prudential Regulation Authority and the federal Treasurer.  

Subject to these steps, the target date for the completion of the merger is early 2022.

More mergers in the mutual bank sector

The move is the latest in a string of acquisitions and mergers undertaken by mutuals in the recent past. 

In May, Firefighters Mutual Bank, a division of Teachers Mutual Bank Ltd (TMBL), welcomed the new members after finalising the data transfer to formalise its merger with Firefighters Credit Co-operative Ltd.

TMBL already comprises Teachers Mutual Bank, UniBank, Health Professionals Bank and Firefighters Mutual Bank.

The announcement came following predictions that players in the mutual bank sector would need to consolidate to survive.

In a speech delivered to the Customer Owned Banking Association 2020 Convention in December 2020, the deputy chair of the Australian Prudential Regulation Authority, John Lonsdale, suggested 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.

He reiterated this sentiment in May, stating that it is the responsibility of the boards to design strategies that enable their business to sustain into the future.

He said: “This means close monitoring of risk, making investments that are manageable and provide an adequate return, and a realistic assessment of the prospect of ongoing profitability. This may require members of [the Customer Owned Banking Association] to work more closely together, including considering the possibility of mergers where that makes sense.”

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