More mutual lenders to merge as they seek scale

Australia's mutual lending sector will continue to consolidate in the next two years triggered by the recent merger deals between four of the top players.  

The tie-up of Heritage Bank and People’s Choice and the merger talks between Newcastle Permanent and Greater Bank suggest that more merger deals will follow.  

“In some cases, it will be a marriage of equals; in others, the big fish will absorb the minnows,” said S&P Global Ratings.  

 “Larger mutual lenders will look to mergers to reinforce their capacity to invest, compete, and sustainably grow. For smaller mutuals, the need for business sustainability will push them to the deal table, often with larger players.” 

S&P believes that thinning margins over the past decade will continue to see mutual lenders increase their focus on costs, and in turn scale.  

High operating costs due to lack of scale mean the mutual sector's returns have trailed those of larger peers. 

"We believe that many mutual lenders now see consolidation as the key to reversing this," said S&P credit analyst Lisa Barrett. "Increasingly, skilled and commercially minded leadership teams are eyeing the benefits of mergers, and this should continue to facilitate deals," said Barrett. 

Barrett expects boards to look more at the economics when assessing value for members and that concerns about relinquishing control will pose less of a barrier. 

In their core business of funding mortgages mainly with deposits, Australian mutual lenders are price takers.  

To be viable, they must therefore meet the market on price.  

"The capacity to invest in a brand, superior service, and product innovation will be key," added Barrett who anticipates that that tight interest margins will prevail for at least the next two years.  

"In these conditions, gains from scale should help avoid a vicious cycle of weak profitability, insufficient investment, and ultimately failure to grow member numbers or service the existing ones." 

Scale underpins returns 

In the banking industry, she went on to say, scale usually means efficiency and underpins through-the-cycle returns.  

Barrett said this is clear when comparing Australian mutual lenders with midsize regional peers and when comparing midsize lenders with the major banks. 

But at the same time and after accounting for scale, the operating efficiency of Australian mutual lenders varies, according to the ratings agency who argued that some of the largest mutual lenders have a similar cost base to those a fraction of their size. 

 "Paring back the cost base presents obvious opportunities. These include removal of back-office duplication, scale in risk and compliance, and consolidation of highly skilled senior management and board members." 

Upcoming Events
Australian Banking Innovation Summit 2021
Sydney, NSW, Australia
See all upcoming events
Subscribe to receive insights delivered straight to your inbox
Latest news, unbiased expert analysis and insights across banking and finance