Mutuals: Time to take off | KPMG | AU

Mutuals: Time to take off

Mutuals: Time to take off

The performance of Australia’s credit unions, building societies and mutual banks (the mutuals) for the year ended 30 June 2015 shows the return of solid growth to the sector. KPMG Australia’s Mutual Industry Review 2015, released today, reveals total assets for the sector grew by 7.4 percent, almost double the growth rate of 3.8 percent recorded in 2014, while total profits before tax were A$624 million, a 3.1 percent increase from 2014.


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The Review identifies six key trends benefitting mutuals:

  • A more competitive position due to the impact of changes from the Financial System Inquiry (FSI).
  • Constraints on lending growth across the banking sector requiring consumers and investors to look at alternatives.
  • Investment in new technology starting to pay dividends.
  • Falling technology costs allowing investment in new and improved business methods.
  • Fintechs providing new business models and concepts that can be implemented and embraced quickly.
  • Continued rationalisation from within the industry leading to increasing levels of collaboration between mutuals.

Peter Russell, National Mutuals Leader for KPMG Australia, commented “The signs are that the mutuals have turned the corner, with a strong improvement in overall performance. 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 percent. Customer-owned institutions are well placed due to their size and nimbleness to seize a competitive advantage by implementing new technologies and ideas, collaborating with fintechs.”

KPMG’s Review features the key indicators for the 2014-2015 financial year:

  • Capital levels of 17.8 percent (2014: 18.3 percent) remain comfortably above minimum requirements, compared with 13.4 percent for the major banks.
  • Impairment provisions remain low at 0.08 percent of average gross receivables (2014: 0.08 percent)
  • Net interest income grew by 4.0 percent (2014: 2.9 percent)
  • Non-interest income increased 2.0 percent (2014: -1.8 percent)
  • Total members increased by 0.5 percent (2014: 0.4 percent)
  • Total branches reduced by 3.3 percent (2014: -3.0 percent)

Financial System Inquiry

The results of the FSI continue to support the need for reform of Australia’s financial system.

There is a concentration of housing lending with the larger banks, however mutuals hold overall capital levels of 17.8 percent, well above the minimum requirements providing the sector with the capacity to increase its residential home 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 percent, increasing the size of the sector by over 25 percent,” Mr Russell noted.

“Mutuals tend to hold more capital due to their inability to source new capital via share issues in a period of stress and the prohibitive establishment costs associated with accessing wholesale funding to support lending growth.”

KPMG’s Review identifies two opportunities to resolve this problem. First, the establishment of an industry liquidity support scheme to support mutuals in a period of stress and second, supporting securitisation issues by purchasing tranches of notes subject to meeting appropriate credit criteria.

“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,” Mr 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 approval,” concluded Mr Russell.

Looking forward

According to KPMG’s Review, the challenge for mutuals in 2016 will be to hasten the pace of change, introduce new technologies, increase collaboration and improve their overall customer value proposition.

Advances in technology provide mutuals the ability to source core capabilities from established vendors and new fintech ventures, as well as allow them to focus on their primary purpose – adding long term sustainable value to the communities they serve.

“Mutuals no longer have to build all the infrastructure required to run their business. Increasingly, alternative arrangements are available by utilising existing functionality already operating in a cloud based environment which reduces implementation risks and provides substantial cost advantages,” said Mr Russell.

KPMG’s Review found that 62 percent of mutuals are willing to invest in new technologies and highlights a number of emerging fintech startups that have the potential to add significant value to mutuals and their members, as well as access to innovative propositions at a lower entry price.

“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,” he concluded.

About KPMG’s Mutual Industry Review 2015

The Review examines the performance and the role of mutuals in Australia’s financial services sector for the financial year ended 30 June 2015.  It is the largest and most comprehensive analysis performed in Australia, covering 60 mutuals representing over 95 percent of total assets in the sector. It considers financial performance for the year ended 30 June 2015, as well as responses to a qualitative survey covering the risks, challenges and opportunities facing the industry.

Further information

Kristin Silva

Head of Communications, KPMG Australia

Mobile: +61 411 110 953

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