The mutual banking sector has “turned the corner”, according to new research by global financial services firm KPMG.
According to KPMG Australia’s recently released Mutual Industry Review 2015
, total assets for the sector grew by 7.4% in the year ended 30 June 2015, almost doubling the growth rate of 3.8% achieved in 2014. Further, total profits before tax increased by 3.1% to $624 million while capital levels were at 17.8%, compared with 13.4% for the major banks.
Peter Russell, national mutuals leader for KPMG Australia, said these results show that the mutual lending sector has “turned the corner”.
“The signs are that the mutuals have turned the corner, with a strong improvement in overall performance,” he said.
“Mutuals have a huge opportunity to harness the benefits of transformational change now emerging in the industry and with their capital well above minimum levels have the ability to grow the sector by over 25%.”
According to Russell, this growth could be achieved if the mutual sector could reduce its capital adequacy ratio to that of the majors, thus allowing it to increase its residential mortgage lending.
“Excess capital that is not being effectively deployed to fund productive capacity in the Australian economy represents a waste of effective resources. Total capital in the mutuals sector is $7.6 billion. The mutuals could increase residential home lending by some $25 billion if it reduced its capital adequacy ratio to an industry benchmark of 13.5%, increasing the size of the sector by over 25%.”
However, Russell says mutuals face capital restrictions due to their inability to source new capital via share issues, as well as the prohibitive establishment costs associated with accessing wholesale funding to support lending growth.
As such KPMG has suggested the establishment of an industry liquidity support scheme to help mutuals in periods of stress as well as supporting securitisation issues.
“Currently many mutuals are precluded from accessing the securitisation markets due to the cost of a credit rating and the establishment costs of securitising assets,” Russell said.
“In relation to customer outcome measures we continue to support the use of the terms ‘banking’ or ‘bank’ by all mutuals without having to seek APRA
But despite some of the barriers the mutual lending sector may face, Russell says the mutual sector may be better placed to adapt to a digital future.
KPMG’s Review found that 62% of mutuals are willing to invest in new technologies. It also highlights a number of emerging fintech startups that have the potential to add significant value to mutuals and their members.
“Because the price of new technologies has come down dramatically due to the lower costs of starting new businesses, good ideas can be turned into business applications at a fraction of the cost of five years ago. Mutuals have the advantage that they don’t have to deal with as many challenges as their bigger competitors. They can move more quickly to embrace disruptive fintech solutions,” Russell said.