Lender alliance won’t dent the big four

Last month, Bendigo and Adelaide announced an agreement with an alliance of four credit unions that would make Bendigo their approved deposit taking institution responsible for compliance and balance sheet management.

AWA, BDCU, Circle and Service One will remain 100 per cent member-owned, and branch networks will not be affected.

“We like this low-risk strategy, with $640 million in assets and $550 million in deposits instantly taken on the balance sheet, and potential to provide new products and technology to the 39,000 members of the four credit unions,” Morningstar analyst Nathan Zaia said.

“There is little downside risk to the strategy, sharing in the profit on which Bendigo controls loan approvals and sets product rates,” Mr Zaia said.

“While the deal is not material to Bendigo’s $53 billion loan book and $52 billion in deposits, its success could open up the door to additional agreements.”

Small credit unions will benefit from leveraging Bendigo’s banking licence, risk management and compliance systems, investment in technology, and access to funding.

In a joint statement, Bendigo’s managing director, Mike Hirst, and Service One chief executive and Alliance spokesman, Peter Carlin, said the alliance model was compelling, enabling the credit unions involved to remain true to their traditional ideals and values while positioning for growth in the changing financial market.

“Every financial organisation needs a clear plan to grow in the face of increased regulation and new technologies,” Mr Carlin said.

“By working with Bendigo to develop the Alliance model we have been able to achieve the best of both worlds for our members and for the communities we serve,” he said.

“We keep our independence, remain 100 per cent member-owned and continue to provide a very caring, personal service.

“At the same time, the agreement with Bendigo opens up greater capacity to meet our members’ needs, offer greater competitive choice and provide access to a wider range of services and modern service technologies.

“For Bendigo, this is a way to grow its business that is totally aligned to its strategy.”
In time, the Alliance credit unions will have access to new products and technology from Bendigo, with the Alliance credit unions retaining pricing and loan approval discretions.

Mr Hirst said Bendigo would continue to play an active role in the changing financial landscape.

“We have a proven track record of working with organisations and communities on solutions to challenges they face. This is just one more example of that,” he said.

While such arrangements help Bendigo’s loan growth and scale, and potentially shareholder returns, Morningstar does not expect additional deals to be material enough to weaken the competitive advantages its major bank competitors hold.

“Even if Bendigo can sign deals with a large number of the remaining 80-odd credit unions in Australia, who combined have loans of $33 billion, it would still be dwarfed by the major banks' Australian gross loans, which range from $325 billion to $500 billion for each of the big four banks,” Mr Zaia said.

Bendigo’s smaller-scale operations, lower credit rating and requirements to hold more capital means Bendigo will remain a price taker in both mortgager and deposit markets, he said.

AWA Credit Union has approximately 4,608 members and balance sheet assets as at 30 June 2014 of $132 million. AWA also manages $131 million in securitised loans on behalf of Perpetual Trustee Company Limited as well as $8 million in loans that have been sold to Adelaide Bank.

BDCU provides a range of financial services to approximately 12,000 members across the Southern Highlands and Tablelands of NSW. As at 30 June 2014, BDCU had assets of $181 million.

Circle Credit Co-operative Ltd has approximately 3,300 members and as at 30 June 2014, its asset size was $63.6 million.

Service One has approximately 19,300 members and balance sheet assets (as at 30 June 2014) of $297 million. It also manages $6.9 million in securitised loans on behalf of Perpetual Trustee Company Limited.

The agreement with Bendigo requires approval from 75 per cent of members voting at the respective credit union AGMs on 10 December 2014 and final approvals from APRA and the federal treasurer.