What are the key priorities for Australia's mutuals?

Mortgage slowdown an issue, KPMG report reveals

What are the key priorities for Australia's mutuals?

Despite a series of challenges, mutuals punch well above their weight, but they will need to be progressive on several fronts if this trajectory is to continue, KPMG says in its latest mutuals review.

A Mutuals Industry Review 2022, released by KPMG in November, reports across Australia’s customer-owned financial institutions, including banks, building societies and credit unions. The survey examined the performance and trends of Australia’s mutuals for the 2022 financial year. It found 75% of respondents felt confident in their three-year growth prospects, a slight drop from 77% in 2021.

Mutual lending grew by 8.1% to $120.9bn over the 2022 financial year, results showed. Operating profit before tax was down 11.1% to $604.7m, which KPMG acknowledged was mainly due to a decrease in net interest margins, and a slight rise in cost-to-income ratios.

The 2022 financial year represented a series of challenges for mutuals, including deteriorating economic conditions and significant weather events, particularly floods, it said. More specifically, KPMG identified the environment mutuals’ operate in was influenced by rising interest rates, declining house prices and lower lending demand from owner-occupiers and investors.

Read more: Could customer-owned bank borrowers be better off?

It also identified the large number of fixed-rate borrowers refinancing loans, a move towards interest-only repayments rather than principal reduction and an expected increase in loan defaults.

KMPG national sector leader Darren Ball (pictured above) said the spike in inflation and the series of 2022 interest rate rises were affecting mutuals and their members in several ways.

“The second half of the financial year in particular has seen an arrest in the long-running slide in net interest margins, as lending rates have increased more than deposit rates,” Ball said. “There is also a nationwide decrease in house prices and a more restricted willingness and ability by customers to borrow to own or invest in homes.”

The report identified four key strategic and financial issues for mutuals coming out of 2022 and heading into 2023, the first being a slowdown in mortgage lending performance.

“The end of a long period of low interest rates in the final quarter to the 2022 financial year is having various major impacts on the residential lending market that the mutuals focus on: the balance of these impacts pointing to a slowdown in mortgage lending performance,” KPMG said in the report.

The second key issue was identified as a growing requirement to invest, putting pressure on mutuals’ capital base and the need to generate profits. Investment was needed in regulatory compliance, cyber defences, digital transformation and innovation, and ESG initiatives, KPMG said.

Other challenges highlighted by the report included talent scarcity (half of mutuals’ employees live and work outside of metropolitan areas), and consolidation. Many mutuals were looking to grow through mergers, as the limitations of operating medium and small-scale banks remained firmly in place, KPMG said.

Coinciding with economic pressures, Ball said the recent floods across many parts of Australia provided a “stark reminder” of the exposure of many mutuals to local weather events.  This was particularly relevant for smaller lenders with geographically concentrated membership. 

“It reinforces the need to understand and manage future climate risks within their loan books," Ball said.

Mutuals “punched well above their weight”, but if they wanted to continue this outsized impact for members and the communities they serve, they would need to be “progressive on several fronts”, he said.

“These include identifying and attracting talent, accessing innovation and scale through as-a-service models, partnering with regtechs to respond to regulatory requirements and managing the substantial climate risks in their lending books proactively, as extreme weather events become the ‘new normal’ in Australia,” Ball said.

The success of the mutuals in seizing the opportunities and dealing with the challenges would determine how they continued to make an impact through the delivery of member value and community contributions, he said.

“A proactive and responsive mutuals sector will be able to build on its positioning as purpose-driven organisations, to continue to find new ways of serving their members and their communities," Ball said.

Key financial results for the mutual sector for FY22 are:

  • Total assets: $158.8bn (up 7.5% year-on-year)
  • Operating profit before tax: $604m (down 11.1%)
  • Lending: $120.9bn (up 8.1%)
  • Deposits: $124.9bn (up 7%)
  • Cost-to-income ratio: 80.3% (up 48bp)
  • Net interest margin: 1.93% (down 6bp)
  • Average capital adequacy ratio: 16.29% (down 6bp)
  • Writeback of credit provisions: $19.5m
  • Mergers completed: two

The top three contributors to mutuals’ growth identified by respondents in the report were better product pricing (27.5%), better customer service (23.5%) and customer centricity and product innovation (16.3%)  The top three competitors were identified as big four banks (62.3%), other banks (22.6%) and brokers (9.4%).

Looking ahead, 38.47% of respondents expected net interest margins to increase in the next three years, and 25% expected them to remain at the current level.  Half of respondents (50%) expected cost efficiencies to improve (cost-income ratio down by more than 5 percentage points), and 23.08% expected cost efficiencies to strongly improve.