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CoreDate-brandmanagement dramatically stated that the second-tier is "dead". Meanwhile research from KPMG suggest credit unions and building societies are on an upward trajectory. MPA investigates these trends...

Non-banks are not the only entities to have suffered from the GFC. Australia has witnessed a rapid deterioration of the mid-tier banks, which had weaker deposit bases than major banks and were much more reliant on securitisation.

The second-tier gang of five, has been reduced to three - Suncorp, Bank of Queensland and Bank of Bendigo and Adelaide.

Of the remaining independent regional banks, Suncorp has a market share of just 2.79%, followed by Bendigo & Adelaide Bank which has 2.49%. Bank of Queensland, which does not use brokers to distribute its mortgages, has 1.99% of the market.

Suncorp chief executive Patrick Snowball attempted to repress rumours that the bank had plans to divest in November, commenting in his update to the market: "We have all no doubt read the tea leaves that suggest the further consolidation in banking is unlikely to achieve regulatory and government approval at least in the short term."

He added that the continued speculation around a sale had been the biggest threat to the bank's prospects.

In an effort to compete more effectively against the major banks, Suncorp revealed that it would reduce costs across its banking and insurance business through job cuts.

Snowball was optimistic the bank could pull through.

"There's an appetite for a second-tier banking system in Australia and Suncorp is probably the strongest bank in that sector... If we get the economics behind running it correct, then we have a very good future."

Merger talk and operating efficiencies aren't the barriers to success in the second-tier. The government's retail deposit guarantee and wholesale funding guarantee has also been problematic for the regional banks.

Bank of Queensland CEO David Liddy has been very outspoken of the differential fees charged by government for banks versus second-tier banks, saying the system undermined competition.

As he quipped on ABC: "Clearly, when elephants dance, ants tend to die".

The major banks, which are seen as more secure by ratings agencies, currently pay about half of what their BBB-rated regional counterparts pay.

Suncorp's former acting chief executive Chris Skilton compared trying to compete with the Big Four banks in this market and match or undercut their rates was like a corner store trying to beat Woolworths.

Credit unions and building societies (CUBS) face similar disadvantages with the guarantees.

Louise Petschler, head of Abacus, the industry body representing mutual banking institutions, says there are two aspects to the guarantees.

"The retail deposit guarantee up to $1m, which covers all banks, building societies and credit unions - that's been a timely and welcome stabilizing influence on the economy generally and on the banking system in particular... so that was an important pro-competitive element of the government's response, but we do have serious concerns about the government's guarantee scheme for large deposits and wholesale funding, because that scheme has pricing that significantly advantages the major banks."

She adds that the wholesale guarantee has disadvantaged smaller ADIs in being able to fundraise, particularly while the markets were closed and which they still really are shut for the smaller players without a government guarantee.

Abacus also argues that the guarantees feed into the perception that there are different classes of ADIs, which Louise says is not the case "and certainly not born out by our risk profile".

Abacus has made a number of submissions to the government and regulators about the wide differential in pricing in the wholesale guarantee and while the organisation has received some sympathy, Petschler says the government has not been moved by the body's arguments.

"But our sense is that as soon as the government can get rid of that wholesale guarantee they will and their preference is to see markets normalise - we just don't want to see that happen at the expense of major banks clawing back market share or having a funding advantage which they do at the moment."

There are currently 113 credit unions and nine building societies in the sector, but the number is constantly shrinking as the pace of consolidation grows.

Petschler says it's definitely a continuing trend and one that emulates what credit unions and in Canada and the US are doing.

"And its part of a maturing credit union system where you become a mainstream competitor."

But not every merger is a good merger, says KPMG financial services partner Martin McGrath after releasing KPMG's annual performance survey of the sector.

He argued that mutuals had to ensure mergers didn't alienate members who were often attracted to the institution based on geographic identity.

Mutuals have a strong deposit base and sit behind the four major banks and Suncorp in terms of total on-balance sheet assets.

Collectively they hold 8.1% of the new home loan market.

But where they really stand out from their competitors is on bad debt - which sits at .03% for building societies and 0.1% for credit unions compared to the bad debt ratio at major banks which rose to 0.45% in 2009.

Prior to the GFC, about 15-20% of CUBS' funding was derived from securitisation, but there was a lot of variation in that, Petschler says, adding some didn't use any, while others (which are no longer around) were at about 50%.

"So it was important and it was funding growth, but it wasn't a critical funding source and that's one of the reasons we didn't see a liquidity crisis across our sector," she says.

But Petschler adds the sector needs to see some form of securitisation come alive again in order for CUBS to be in a stronger position to compete.

The sector isn't relying on securitisation to increase its market share, however. Petschler says the main strategies will be around marketing and market presence.

Never the same
When (not if) securitisation comes back, will market competition look the same as it did pre-GFC? Most think not, and some think that's a good thing.

Hall says he's a big believer in securitisation because it works.

"Investors who've invested in Australian mortgage backed securities haven't lost money on their investments, what they've found is those investments haven't been that liquid and so if they've had to sell those investments they might have held below what they bought them for. But in terms of actually paying their coupons and repaying principal there's been no issues with that.

"I don't think we'll see money being raised as cheaply as it was for quite some time and that's because the supply and demand equation has been altered for a long period of time. One of the reasons why securitisation became such a cheap source of funding was that there was a lot of short term money market investors and a whole range of investment businesses looking to get a yield above the cash rate and invest it in securitised products, without really taking into account the maturity mis-match between a mortgage backed security and their needs to get cash in a hurry. And I think the markets won't forget about that for a long period of time which means securitisation will take some time to come back at cheap rates."

But as much faith as Hall has in securitisation, he doesn't want to see it return to where it left off.

"I wouldn't like to see it come all the way back to pre-GFC days because if you took it to its extreme - what you saw in the UK and the USA is you get a very loose credit and people writing business for the sake of it and writing business at a loss and that ultimately is unhealthy for the markets and we've seen the consequences of that in the collapses offshore. I think Australia didn't get to that point but if nothing had happened for another five years, you could certainly see a trend in that direction."

Petschler is certain that Australia will never see a return to that great completely wholesale funded securitisation lending arrangement which sat outside any kind of regulation.

However she says there will be innovation in the market.

"There is a competitive gap at the moment so there will be innovation from outside the deposit taking institutions ... we feel that there's a strong appetite amongst consumers for competition but also safety and reliability, so we think that's an excellent environment for our sector which is member based and member driven to be able to have a stronger competitive position. So ideally in three year's time we'd like to see our market share closer to our population penetration so about a 20% figure and we're optimistic that subject to getting those elements right we will."

And from Cannon's perspective the proposed liquidity rules from APRA could have result in a few surprising changes as well, regardless of what happens with securitisation. 

"That could have severe effects on margins for deposits and rates for deposits and that may drive customers' rates up going forward and give us a distinct advantage again. We've been talking about becoming a bank, and we're still looking at it. But who knows with these new liquidity guidelines, it may be cool to be a non-bank going down the track?"

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