Mutual ADIs losing the pricing war with major banks

Smaller, retail-focused Australian financial institutions "cannot afford a long-term price war with the major banks while continuing to maintain their business franchises, financial viability, or current ratings," Standard & Poor's said in a report yesterday.

S&P said Australia's regional banks as well as mutual financial institutions were losing the battle against the four major banks.

The rating agency said that, to compete longer term, smaller retail-focused financial institutions, including mutual ADIs would need to  "continue to improve their operating efficiencies by building scale through consolidation and organic growth, or through greater back- and front-office collaboration with peers."

Through consolidation and other initiatives, mutuals could pool their resources and thus have the opportunity to compete against some of their larger rivals, S&P said. The observation chimes with this week's confirmation that an alliance has been made between four credit unions and Bendigo and Adelaide Bank.

"The game is on, and the major banks plus Macquarie are winning it," S&P said.

"The factors that are underpinning the major banks' favourable pricing position are their funding cost advantage; their superior operating efficiency; and the more favourable regulatory capital treatment of their residential home loans," S&P said.