The mutuals have undergone a huge amount of change in the past year, with lenders merging, new tech being released, and brokers highly rating their experiences with them.
In December 2020, as Australia was closing off one of the most disruptive years on record, the Customer Owned Banking Association was holding its annual conference. It was here when the deputy chair of the Australian Prudential Regulation Authority (APRA), John Lonsdale, warned that change may need to come in the mutual bank space in order for the sector to survive.
Noting that the coronavirus pandemic had resulted in a (somewhat short-lived) economic downturn and increased the need for lenders to have a digital offering, Mr Lonsdale suggested that a large number of the small banks – and not only mutuals – have business models that were “challenged” in the current environment.
Mr Lonsdale highlighted that a low interest rate environment had reduced net income margins, while high cost-to-income ratios and high cost operating models – coupled with an increasing expectation of a quality digital offering (and associated cyber protections) from consumers – were posing risks to smaller lenders.
“Mutuals face a particular set of risks due to size and scale… 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 said.
While the mutuals had performed well during COVID (with the sector having a much lower repayment deferral uptake and relatively low non-performing mortgages), the sector has been through substantial change.
As Mr Lonsdale forecast, many lenders have merged in the past year.
In fact, the number of mutual ADIs almost halved between 2010 and 2020, from 116 to 64.
Among the mergers in the last year alone were:
More mergers are also expected, with Macquarie Credit Union and Orange Credit Union now exploring the possibility of merging the two longstanding member-owned banking organisations based in the Dubbo and Orange regions, too.
Much of the reasoning for these mergers has indeed been to pool resources and create innovative new products and offerings.
As Teachers Mutual Bank Ltd CEO Steve James said in May: “To remain competitive and provide members with superior products and services, we must continue to grow and invest in digital capabilities.
“While the mutual banking industry has grown strongly over the last 12 months, the number of mutual financial institutions is declining due to the tougher economic conditions prevailing at this time.
“We believe in the mutual movement and want to see it succeed for the benefit of members. If we can help more Australians secure their financial future through mergers, then we are very open to these discussions.”
Teachers Mutual Bank is using its pooled resources to make good on its strategy to deliver a more tech-based offering, launching Australia’s first fully digital mutual bank brand, Hiver. The new app-based brand is targeting younger essential workers across the education, emergency and healthcare sectors.
Regional Australia Bank has also been on the front foot when it comes to technology, becoming the first organisation in Australia to become an accredited data recipient under the Consumer Data Right – and then being the first bank to both publish and receive CDR data.
Other mutual lenders have been updating and catering to younger audiences by rebranding. Customer-owned bank Credit Union Australia changed its name and branding in June of this year, becoming Great Southern Bank.
As CEO Paul Lewis said: “We decided to change our name because our research showed us clearly that half of the country doesn’t know what a credit union is.
“Now everyone will know that we can challenge the big four banks, without being one of them.”
Several lenders have also been streamlining and simplifying their product offerings, also in a bid to make the brands and products more transparent and approachable to a younger audience.
How the sector is faring
The ability to respond to member concerns and move with the times does seem to be working in the sector’s favour. Despite a large reduction in the number of mutuals, market share has risen – with market share of total assets increasing to close out 2020 at 2.7 per cent, and housing loans increasing to 4.7 per cent.
In fact, KPMG Australia’s Mutuals Industry Review 2020 revealed that the combined balance sheets of the 47 largest mutuals grew 4.6 per cent to $9.8 billion over 2020 alone, while residential lending from this segment of the market increased by 3 per cent to $100.2 billion and deposits grew by 7 per cent to $108.4 billion.
However, overall operating profit before tax fell by a substantial amount, falling 19.1 per cent (compared with just 3.6 per cent the year before) to $494.3 million.
Part of the attraction is that customer-owned lenders put the power back in the consumer’s hands. By being owned by its members, the members (e.g. the shareholders) have a strong say and sway in how the lender operates.
For example, mutuals were among the first advocates for sustainable investments and green loans, with Heritage Bank announcing in 2020 that it had enacted an environmental, social and governance position statement that codifies the bank’s practice around sustainability issues, as well as opening the door to further products and services aligned with an ESG approach.
Other attractions include having personnel that members – and brokers – know and are able to contact easily.
Why brokers value customer-owned lenders
Brokers have been taking note of the strong offering from mutuals recently.
As outlined in the July edition of The Adviser, two customer-owned lenders ranked in the top 10 lenders by brokers in Momentum Intelligence’s Third-Party Lending Report 2021. Newcastle Permanent was the seventh highest-rated lender overall (and the highest-ranking mutual lender), as well as the second most highly rated lender in the ranking for smaller lenders. Meanwhile, Bank First closed out the top 10 of all lenders, and fourth in the ranking for smaller lenders.
According to brokers, the area in which mutuals particularly excel is in their personnel and support, with brokers responding to the Third-Party Lending Report 2021 rating these particular attributes very highly.
Having a happy broker channel is paramount to mutual lenders, with many customer-owned banks and credit unions having physical presences where they are headquartered – thus requiring the channel to disseminate products and services.
Given this, it’s perhaps unsurprising that a huge amount of investment and resourcing has been put into ensuring that the broker channel is serviced quickly and effectively.
While challenges will remain regarding rising operating costs – particularly in the midst of a more digitised banking environment – the agility in which the customer-owned banking sector has, and continues to, pivot is impressive. The willingness and dedication to keep up with the changing needs of borrowers – and their brokers – shows that people power truly is here to stay.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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