A member of the prudential regulator’s board has highlighted a “widening structural divide” between the largest mutuals and smaller customer-owned banks.
Therese McCarthy Hockey, executive board member at the Australian Prudential Regulation Authority (APRA), has urged mutual banks to review their long-term strategies, warning that smaller institutions could struggle with cost structures, growth capacity, and evolving operating models if they fail to adapt to the changing landscape.
Speaking at the 2026 Customer Owned Banking Association (COBA) CEO & Director Forum on Tuesday (17 March), McCarthy Hockey said mutuals of all sizes must consider whether current plans will deliver a sustainable future.
At a crossroads
McCarthy Hockey said the prudential regulator had observed “mixed signals” regarding the future of the sector, noting recent consolidation – including four mergers in 2025 – had reduced the number of customer-owned banks to 52.
She said APRA expects consolidation to continue, but stressed that this does not necessarily indicate a sector in retreat, with many mutuals continuing to deliver solid aggregate performance and growth that outpace system-wide trends across assets, deposits, and housing lending.
Despite this, McCarthy Hockey warned of a structural divide between the largest mutuals and smaller players.
“In the largest mutuals, operating profit grew healthily over the past 12 months, while actually falling among the medium to small cohort. Larger mutuals also have a noticeably lower cost-to-income ratio compared to the smallest mutuals,” she said.
“APRA firmly believes there is a place for smaller mutuals in the market, and we also recognise the importance of choice for driving good community outcomes. Alongside our regulatory peers, we are consciously trying to support banks of all sizes to remain sustainable.”
Regulatory reform
McCarthy Hockey acknowledged calls from mutual bank CEOs for regulatory reform, noting that APRA has taken a number of steps in response.
These include a recent consultation on adding a third tier to the banking prudential framework and ongoing efforts to improve transparency around Pillar 2 capital adjustments, ensuring banks better understand the actions or outcomes required before such adjustments are reduced or removed.
She also highlighted plans to modernise the minimum liquidity holdings framework, designed to incentivise sound risk management practices in a cost-considered way.
“What I hope these initiatives demonstrate is that proportionality is not an afterthought for us – it’s embedded in everything we do,” she added.
“The mutual sector may not get all its ‘asks’ through our policy development process, but you would be mistaken to assume we don’t think deeply about the needs of your sector.”
Main challenges market-driven
However, McCarthy Hockey said regulatory reform alone would not be a panacea for the sector, highlighting that the main challenges to the competitiveness of these lenders are market-driven.
These include the costs of developing and maintaining technology, cyber, and scam protections; navigating a complex risk environment; and exposure to geopolitical risks.
“While all banks are feeling the squeeze as they seek to mitigate new and growing risks, we’ve seen that banks with greater economies of scale are better able to make the necessary investments and absorb the fixed costs of digital transformation,” she said.
“APRA holds some concern, however, that without the necessary deep pockets, some of the smallest mutuals will eventually find their business models are no longer viable.”
The path ahead
McCarthy Hockey was careful to stress that APRA’s view is not “big is good, small is bad,” but that mutuals of all sizes will need to be smart, agile, and innovative to ensure their long-term sustainability.
“Size isn’t everything in banking, and there will always be a place for local knowledge, personal relationships and investing back into communities. The fact that the mutual sector is outperforming the wider banking sector in many areas is evidence of the enduring appeal of the customer-owned business model,” she said.
“But size is also not nothing, which is why so many mutuals are seeking the financial benefits of scale by merging with like-minded partners. As this trend continues apace through 2026, the structural gap in the mutual sector is likely to further widen.”
While the largest mutuals are positioned to gain from scale, smaller ones may face challenges from high cost-to-income ratios and falling profitability.
“In extreme cases, these banks may struggle to find merger partners, as the costs of combining operations could outweigh the prudential and member benefits, limiting their options to stabilise performance,” she said.
“If mutual banks are indeed at a crossroads, then it seems to APRA that the potential roads of travel are achieving growth by being bold, agile and innovative; finding a like-minded merger partner; or remaining in the same lane delivering more of the same – which APRA sees as the highest risk option.”
Evolve or dissolve
Merger activity in the mutual banking sector was explored in the March 2025 edition of The Adviser, which highlighted previous warnings from APRA that mutuals need to evolve in order to “stay relevant.”
The report cited comments from COBA CEO Michael Lawrence, who told The Adviser earlier this year that mutual banks and credit unions are disproportionately affected by rising regulatory costs and resourcing pressures, which can contribute to decisions to merge.
“Customer-owned banks provide a distinct and essential alternative to the traditional investor-banking model, delivering value and purpose to customers and the diverse communities they serve,” he said.
“However, for the mutual model to thrive, it requires a regulatory framework that actively promotes competition.”
Recent years have seen multiple mutual tie‑ups, including Unity Bank’s combination with G&C Mutual Bank and Community First Bank’s merger with Illawarra Credit Union.
Last week, Teachers Mutual Bank Limited and Australian Mutual Bank confirmed members had backed a plan to combine the mutuals, paving the way for one of the sector’s biggest tie-ups.
[Related: Members green-light Teachers Mutual–Australian Mutual merger]
