Mutual banks and credit unions comprise around 2.5% of all ADIs in Australia by assets, but over 50% by number. The sector has been consolidating rapidly with numbers reduced from over 200 fifteen years ago to around 70 today. The majority of mutuals have merged in this time but a few have demutualised and listed on the ASX to access external capital.
Until recently, nearly all mutual mergers were defensive in nature with smaller mutuals with high cost to income ratios simply not being sufficiently profitable to make the technological investments necessary for effective risk management and to compete as banking moves more online and away from branch visits.
This is one reason Amicus has generally been cautious regarding recommending investments in smaller unrated mutuals. Apart from a lack of transparency (no rating, no ASX listing, compulsory disclosures and reporting) their competitive position as a group is poor so investors rely almost entirely on APRA supervision and mergers within the sector to prevent the weaker ones being wound up or worse becoming insolvent.
Even larger mutuals continue to struggle for scale and efficiencies relative to regional and major banks as per the charts below from S&P comparing S&P rated mutuals, regional banks and major banks.
However, a new industry trend is possibly emerging. In early August 2021, Newcastle Permanent and Greater Bank announced their plan to merge with an estimated completion date in 2022. The merger between the No.2 largest mutual by loan volumes with the No.6 mutual will result in a merged bank that will be larger than the No.1 mutual Great Southern Bank (formerly CUA) with $19.8 billion in assets, 1,600 employees and over 600,000 customers. Geographically, the merged bank will remain centred within the Newcastle and Hunter Valley region where both entities are based.
In mid-August, Heritage Bank (No.3 mutual by loans) and People’s Choice (No.4) also announced their plans to merge, with an expected completion date in early 2022. This merged bank would have a new name (yet to be determined), creating a bank with a wide operating presence as Heritage operates in Queensland (with plans to expand in NSW), while People’s Choice is focussed in South Australia and the Northern Territory (with plans to grow in Victoria). A merged Heritage Bank and People’s Choice will be larger than the Newcastle Permanent and Greater Bank merger as Heritage and People’s Choice will have $22 billion in total assets and around 700,000 customers.
The mergers differ starkly in that the first gives the merged entity far greater market share in the Newcastle and Hunter regions, whereas the second combines two entities with very little overlap in geographic coverage and creates a largely national brand. S&P analysts conclude the driver for each merger was a desire to increase their competitive positions from a position of strength rather than weakness. This potentially reflects a shift in attitude of the boards of mutuals in general towards proactively looking at their long term commerciality rather than waiting until their competitive position has been eroded.
If this is correct, it is likely to lower the bar for other mutual mergers. While mutuals compete with non-mutuals for customers with a differentiated offering or a focus on people rather than profits (members vs customers), they also compete with each other on levels of service and technological advancement. Larger and more efficient mutuals with superior technology (who are able to offer a superior customer experience) will put additional pressure on the smaller mutuals, particularly those that are geographically rather than industry focussed. This will probably further hasten the pace of industry consolidation.
