The mutuals buzz

While mutual banks are on par with their publicly listed counterparts, offering a range of consumer banking products, their defining feature lies in their ownership structure – mutuals are owned by the very customers they serve.

Unlike commercial banks that must balance shareholder interests with customer concerns, customer-owned banks are unwaveringly customer-centric, meaning there’s no need to navigate competing stakeholder demands and the entirety of profits are funnelled back to the customers and communities they serve.

In addition, mutuals are geographically dispersed across Australia, with one in five branches located in regional areas, which presents a distinctive proposition in fostering flexibility, especially in dealing with customers facing financial challenges.

Thus the mutual banking sector continues to surpass major banks in terms of customer satisfaction.

For the six months to June 2023, mutuals achieved 87.8 per cent satisfaction, behind building societies (91.8 per cent) and credit unions (87.9 per cent), while the percentage of customers who were satisfied with major banks was 74.9 per cent, as per the Roy Morgan Consumer Banking Report.

Mutual growth

As such it may come as no surprise that the sector keeps growing. KPMG’s Mutuals Industry Review for the financial year ended 30 June 2022 reported a notable 8.1 per cent surge in lending to $120.9 billion from the previous year’s $111.9 billion, showcasing the sector’s resilience.

However, while KPMG’s national sector leader for mutuals Darren Ball noted the sector “punches well above their weight” they need to be progressive in the face of ongoing economic challenges.

He emphasised the pressing requirement for the sector not only to understand but also to proactively manage economic and climate risks within their loan portfolios.

For example, the challenges of the 2023 financial year, including rising interest rates and the necessity for investments in a slowing economy and a competitive job market, have placed the sector at a critical juncture.

In addition, the recent floods across various regions of Australia served as a stark reminder of the urgency to address this evolving challenge.

As such mutuals must find and attract talent, use innovation and scale via as-a-service models, collaborate with regtechs for regulations, and proactively handle climate risks as extreme weather becomes more common in Australia, Mr Ball said.

Furthermore, as economic challenges persist, the competitive landscape will intensify, putting pressure on the net interest margin that mutuals can achieve.

KPMG’s report revealed that Australia’s mutuals’ operating profit before tax decreased by 11.1 per cent to $604.7 million due to declining net interest margins and a slight rise in cost-to-income ratios.

“This will require a continued focus on cost control, including acceleration of digital transformation within the sector,” Mr Ball said.

During a recent inquiry led by federal Treasurer Dr Jim Chalmers MP and conducted by the standing committee on economics to examine competition and consolidation, Heritage and People’s Choice Bank’s chief executive Peter Lock proposed potential legislative measures, inspired by UK practices, to safeguard mutuals and co-ops and underscored the need for nuanced, sector-specific regulation.

Mr Lock pointed out: “The pressure on the net interest margin affects us all due to a fixed-rate cost structure. Regulation is important, but it tends to be one size fits all. As a result, customer-owned banks often bear the consequences of listed banks’ actions, impacting our customers.”

The inquiry aims to strike a balance between effective oversight and innovation, with the goal of promoting fairness throughout the banking landscape.

Mergers and consolidation

Given the economic challenges, the Australian Prudential Regulation Authority (APRA) had already signalled the need for small ADIs to strengthen their digital offerings, align with evolving consumer behaviours, and prepare for potential mergers.

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.

KPMG has also reported since 2005, the number of Australian mutual banks had shrunk from 170 to fewer than 65, on the back of consolidations. At the same time, the footprint of these organisations had grown substantially, with the sector seeing a ninefold increase in the average asset size of their banks.

While these mergers offer potential benefits, such as enhancing resilience and cost efficiency, it’s important to consider integration costs. For example, KPMG’s analysis of 16 mutuals that merged with competitors from FY12–20 revealed 13 experienced an increase in cost-to-income ratios following the merger.

However, for those who successfully navigate these complexities, consolidation can become a vehicle to enhance competitiveness, fostering cost efficiency, profitable growth, and investments in technology and customer experience.

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.

As of June 2023, the combined total assets of Heritage and People’s Choice reached $26.9 billion, with Newcastle Greater Mutual Group (NGM) valued at $23.8 billion, based on data from the Australian Prudential Regulation Authority (APRA), ADIs statistics.

Greater Bank and Newcastle Permanent remained separate entities under the merged group, while Heritage and People’s Choice paved plans for a “fresh brand name” by early 2024, according to deputy CEO Steve Laidlaw.

Mr Laidlaw said the move enabled them to provide competitive products and contemporary digital banking experiences, as competition in the sector grows.

“In 2023, banks have to provide their customers with very competitive products, a high level of convenience, and contemporary, secure digital banking backed by ongoing investment. This is becoming a real challenge for smaller financial institutions,” he said.

As such, the group is working on harnessing the knowledge and experience from both entities to create “an even stronger” third-party relationship with the third-party channel.

While mutual banks have won customer satisfaction in recent years from the majors, remaining unique is essential in the growing competitive market.

For instance, Gateway Bank positions itself as an environmentally conscious lender, aiding members in saving money and reducing environmental impact.

“We’ve also developed a diversified lending portfolio covering commercial property lending and reverse mortgages to be able to support members throughout their life stages with a range of competitive and innovative products,” Zeb Drummond, chief operating officer explained.

Moreover, other mutuals target specific demographics to set themselves apart.

Teachers Mutual Bank Limited (TMBL) supports essential workers through tailored credit offerings, such as income inclusion of overtime and allowances as well as recognition of casual and contract arrangements through to no-postcode restrictions.

Head of third-party distribution Mark Middleton added there had been an upward trend in members seeking banks with responsible lending and social responsibility credentials, emphasising the importance of the third-party channel in this pursuit.

“Looking to the future, we’ll see an ongoing focus on working with the broker sector as the trend of mortgage holders seeking out banks with responsible lending and social responsibility credentials continues to grow,” he said.

“We’ve been on our CSR journey for 10 years and recently named the World’s Most Ethical Company from 2014–22.”

TMBL has also embraced the advantages of consolidation, merging with Pulse Credit Union Limited in November 2021 to expand its offerings, now serving over 220,000 members across Australia.

He expects consolidation in the sector will persist as mutuals seek to strengthen their member offering.

Rebranding

In yet another strategic manoeuvre aimed at maintaining a competitive edge, Great Southern Bank rebranded in 2021, transitioning from Credit Union Australia (CUA) while retaining the trading acronym CUA.

The move was executed after the bank cited that approximately 50 per cent of Australians, and a staggering 70 per cent of Millennials, lacked familiarity with the term “credit union.”

“Rebranding has helped us increase our appeal to that broader audience, with brand awareness, consideration and conversion all trending in the right direction,” head of broker partnerships at Great Southern Bank, Mat Patterson, said.

Over the last 12 months, partnerships with SFG, Loan Market, and Lendi Group have resulted in a growth in brokers to over 7,000, with 70 per cent of home loans now originated via brokers, up from around 56 per cent two years ago, he added.

“We quite deliberately set out to increase the percentage of our home loans originating via brokers,” Mr Patterson said.

Broker preferences

With 70 per cent of mortgages being handled through the third-party channel, it’s no surprise that customer-owned banks are investing in their broker services.

A recent survey by Agile Market Intelligence, which gathered insights from 1,004 mortgage and finance brokers between 1 March and 30 April, revealed that the mutuals were rated well by brokers.

For instance, Newcastle Permanent led the rankings (for mutuals) at 78 per cent, followed by Great Southern Bank (77 per cent) and Teachers Mutual Bank (71 per cent).

These attributes covered areas such as personnel, products, speed, support, and technology.

The combination of customer-centric values, strategic consolidations, and strong partnerships with brokers positions mutual banks to thrive in the competitive financial market while maintaining their unique identity and purpose.