Implementing the recommendations of the Senate Inquiry into Mutuals should be prioritised to support momentum, says KPMG
2016 saw Australia’s credit unions, building societies and mutual banks (‘the mutuals’) perform strongly in an environment of low economic growth, interest rates and inflation. KPMG Australia’s Mutual Industry Review 2016 finds that mutuals’ balance sheets were strengthened with asset growth of 7.8 percent, compared with 5 percent for the overall banking industry. Profitability metrics were up, with $626 million profit before tax reported for the year, an increase of 2.7 percent on 2015.
Peter Russell, National Head of Mutuals for KPMG Australia, commented: “Mutuals’ performance this year has improved on previous years. What’s particularly interesting this year is that we’ve seen some breakout strategies. Some of the smaller mutuals have grown in the region of 20-30 percent, and some of the larger mutuals have also grown strongly.”
“Mutuals are recognising that they can utilise their capital more efficiently, and have a very compelling value proposition in the current environment. We are seeing the return of mutuals as a more competitive force.”
Mr Russell attributes the strong results to five key factors: growth in lending portfolios (led by residential property activity); continuation of effective credit risk management practices and well-defined risk appetites; expansion of distribution networks (leveraging digital reach and third-party distribution channels); benefits from increased technology spend on new mobile platforms as well as transaction origination and servicing capabilities; and continued strengthening of staff capabilities.
“Pleasingly, the fall in capital levels shows mutuals are using their capital more efficiently as they grow their businesses. However, overall capital levels remain well above prudential requirements, providing a strong platform for future lending growth,” said Mr Russell.
Mutuals are not without their challenges, with interest margins falling to 2.14 percent from 2.18 percent. This fall reflects the increased competition for deposits and loans. A smaller margin results in less buffer to absorb future credit losses, requiring increased focus on pricing for risk, particularly in areas that have sustained high property price growth or are affected by cyclical downturns in areas such as mining and manufacturing.
Looking forward, KPMG expects the momentum to continue - particularly with possible regulatory reform following the March 2016 Senate Economics Reference Committee report on the role, importance and overall performance of co-operative, mutual and member owned firms in the Australian economy.
The Committee made 17 recommendations – six of which related to Capital and Regulations affecting mutuals.
“We encourage the Government to respond to this report as a priority, given a number of the recommendations have important implications for the future growth, diversity and strength of the mutual sector,” said Mr Russell. “Implementing the Committee recommendations will be a key step for mutuals to continue to position themselves as a challenger in the Australian banking landscape.”
In March 2016, the Senate Economics Reference Committee released its report on the role, importance and Mr Russell cites residential lending limits on mutuals as one example. “While recognising the need for prudent lending practices by Australian banks, the current 10 percent cap for investment property lending imposed by the Australian Prudential Regulation Authority (APRA) is disproportionately limiting growth opportunities for mutuals.”
“With residential investment lending estimated at $500 billion for all Authorised Deposit-taking Institutions (ADI’s), the expected market growth with a 10 percent cap is $50 billion. With mutuals’ investment lending estimated at $20 billion, a 10 percent lending cap effectively means $2 billion loan growth is available for mutuals, versus $48 billion for larger institutions. Consequently, under the cap, mutuals are restricted to a maximum of 1 percent market share of investor lending growth.”
“A graduated approach to the lending cap across ADIs will provide an improved regulatory setting that is fairer for smaller players, more in line with best practice, whilst still reinforcing sound residential investment lending,” advocated Mr Russell.
Looking forward, KPMG is optimistic about the future for mutuals. “Technology change is reducing the need for costly back office support, origination and servicing processes. This change dynamic means smaller, nimble organisations can implement new technology solutions without the need to replace legacy business practices,” he said.
“We have seen technology and the ‘platformification’ of business support growth in the UK banking sector, with UK challenger banks’ lending assets growing by 31.5 percent in 2016. Australian mutuals can draw from these profiles to expand growth, improve competitiveness and increase market share,” Mr Russell concluded.
Head of Communications, KPMG
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