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Amid ongoing economic challenges, the mutual banking industry is expected to uphold its investment in the third-party channel, a new report reveals.
As outlined in a recent report titled “Australian Mutual Lenders' Competitive Edge All But Gone”, the mutual sector finds itself grappling with intensified competition within the banking arena, rapid technological advancements, and limited competitive differentiation in an increasingly commoditised business landscape.
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In addition, the traditional advantage of loyalty, which mutual lenders have historically capitalised on, has witnessed a significant erosion, the report revealed.
Nonetheless, the ownership structure of mutual lenders provides a silver lining, with the reliance on common equity funding and the retention of profits helping counteract the constraints stemming from their higher cost base, S&P Global Ratings credit analyst Lisa Barrett explained.
In light of this, mutuals are committed to further investing in the third-party channel to sustain their competitive edge.
Given brokers currently originate approximately 60 percent of mortgages within the mutual sector, many mutuals are looking to increase the amount of lending originated via brokers and investing in the appropriate technological systems to achieve this.
For example, a growing number of mutuals are presently striving to streamline their loan origination systems, aiming to curtail approval times – a crucial factor for both brokers and customers.
Ms Barrett noted: “While we anticipate all lenders will eventually settle at similar approval times, those that have the resources to invest quickly will benefit from a first-mover advantage.
“Furthermore, mutuals need to continue to leverage their relationships with their core banking system providers and keep up with technology to maintain or grow their market share.”
The data underscored this trend, revealing that over the past four years, the average percentage of lending that mutuals have channeled through brokers has risen from approximately 30 per cent in 2019 to around 45 per cent.
Nevertheless, the report noted that the extent of broker-originated lending can vary widely across institutions, ranging from 0 per cent to over 80 per cent of overall flow, with some mutuals opting not to engage brokers in their lending processes.
Mergers and acquisitions
Apart from channelling investment into the third-party sphere, mutuals are also expected to maintain their competitiveness by embarking on a consolidation over the coming two years, the report highlighted.
However, Ms Barrett clarified that this strategic shift might not necessarily lead to heightened ratings or substantial shifts in the competitive landscape within the industry.
“Mergers allow mutuals to achieve greater economies of scale, reduce their cost base and invest in technology,” she said.
However, over time many mutuals will “become acquirers or consolidation targets”, she said.
Indeed, the year 2023 witnessed four mutual banks consolidating into two entities, with Greater Bank and Newcastle Permanent joining forces to form Newcastle Greater Mutual Group Ltd (NGM Group), while Heritage Bank and People’s Choice combined to create Heritage and People’s Choice, effective 1 March.
The move propelled both entities ahead of Great Southern Bank (formerly CUA), establishing them as some of Australia’s largest customer-owned banks.
The movement towards mergers is not a new development, with COBA reporting 11 mergers in the past five years within the customer-owned banking sector, ranging from larger banks acquiring credit unions with under $100 million in assets to more substantial mergers this year.
“We believe the banking landscape will settle with a small number of larger mutual players,” Ms Barrett said.
To read more on how the mutual sector is faring, stay tuned for The Adviser’s September edition: “The mutuals buzz”.
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