Australian mutual banks face wave of consolidation as $20 billion asset threshold emerges
Twenty billion dollars in total assets is emerging as the new threshold for competitiveness in the Australian retail banking market, a shift that could drastically reduce the number of mutual lenders, according to S&P Global Ratings.
The credit rating agency suggests that as consolidation accelerates, the number of mutual banks in Australia could dwindle to fewer than 10, down from the current 50 or so.
“That means that about 40 mutual banks will disappear in the coming years as consolidation continues to accelerate,” said Lisa Barrett (pictured above), director at S&P Global Ratings.
“Merging provides smaller lenders greater economies of scale and eliminates material duplication costs. This should make them more efficient and able to price competitively.”
Historically, most mergers in the mutual sector involved larger entities absorbing smaller ones. However, the landscape has shifted since mid-2021, with mergers now increasingly occurring between larger mutuals. Examples include the 2023 mergers between Greater Bank and Newcastle Permanent Building Society, and between People’s Choice Credit Union and Heritage Bank, which created two of the largest mutual lenders in Australia, with assets of $24.4 billion and $26.9 billion, respectively.
“The ongoing requirement to invest in technology to keep up with customer expectations and industry trends adds further fuel to the merger fire,” Barrett said, adding that traditional barriers to consolidation, such as differences in mutual common bonds, have diminished in recent years.
She said that boards have become more pragmatic, and customers are more focused on the benefits of competitive pricing and enhanced service capabilities that mergers can offer. Examples are the ongoing mergers involving G&C Mutual Bank and Unity Bank, as well as Bank Australia and Qudos Bank.
S&P Global Ratings noted that despite the potential benefits, mutuals continue to face significant challenges. The net interest margin (NIM) for Australian mutual lenders has fallen from about 3% in 2004 to around 2% as of March 2024. Profitability has also declined, with the return on assets dropping to 0.4% in 2024 from 0.8% two decades earlier. In contrast, major Australian banks saw a smaller decline in return on assets, from 1% to 0.7% over the same period.
Moreover, margin pressure is expected to persist, particularly for those mutuals that have increased their reliance on brokers, where the return on a mortgage can be reduced by as much as 40 basis points. As of March 31, 2024, mutuals originated an average of 47% of lending via brokers, up from 25% in 2019.
Looking ahead, S&P Global Ratings expects mutual lenders’ costs to remain high due to ongoing investments in technology, including efforts to enhance digital banking capabilities.
“In time, a fully digital mortgage will become a customer requirement in the Australian banking market,” Barrett said, noting that mutuals will need to invest heavily to keep pace with larger banks.
Over the past two decades, the number of mutual authorised deposit-taking institutions in Australia has fallen sharply, from about 185 in 2004 to the mid-50s as of March 31, 2024. Despite this consolidation, the cost-to-income ratio for mutuals remains high, averaging 75.8%, compared to 47.8% for the major banks.
“Fundamentally, we see mutual mergers as credit positive,” Barrett said, although the agency cautioned that even the largest mutuals remain much smaller than Australia’s major and regional banks, meaning higher ratings may not follow immediately or in all cases.
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