The Australian mutual banking sector is under threat in an increasingly competitive and complex banking landscape, according to a major research and analysis company.
Slowing economic growth coupled with increasing competition in residential mortgage lending will hinder the growth and profitability of Australia's mutual banks over the next 12-18 months.
These are the findings in a Moody’s report on the Australian mutual sector, entitled Australia's Mutual Financial Institutions: Rising Competition to Challenge Growth.
“On a fundamental level, mutuals are facing increasing competition in their core franchise of home mortgage lending from Australia's four major banks, whose large economies of scale and superior access to wholesale funding put them at a competitive advantage,” says Daniel Yu, a Moody's vice president and senior analyst.
Specifically, the proliferation of online and third-party banking channels, as well as the use of multi-brand strategies by the major banks, directly threaten mutuals’ traditional relevance and appeal as community-based niche players.
Further, Moody's says the increased competition, along with rising IT, compliance and regulatory costs, are also challenging mutuals’ profitability. This pressure on profitability is exacerbated by the Reserve Bank’s monetary easing, which has lowered mutuals’ loan rates more than their deposit rates.
This outlook is particularly alarming given the mutual sector is already one which has undergone significant industry consolidation. According to the report, the mutual sector has been shrinking by an average of eight entities per year over the past 10 years.
However, Moody’s says these pressures are eased by the absence of a shareholder structure, enabling management to fully reinvest profits back into the business. Moody's views this as a key support for the mutual sector's credit profile, as it provides mutuals with the flexibility to forego growth in order to converse capital when operating conditions turn volatile.
“While most mutuals will continue to generate sufficient capital internally to maintain their existing capital levels, those with weaker franchises or a smaller scale will be affected by price competition and higher operating costs – factors that will likely continue the sector's long-standing consolidation trend into 2016,” Yu said.