Mutual banks rate with S&P

Mutual bank status is a net benefit for mutually owned credit unions and building societies that make the switch, Standard & Poor's argued in a report yesterday.

Since September 2011, 10 credit unions and building societies have shifted status: bankmecu, QT Mutual Bank, Heritage Bank, Defence Bank, Victoria Teachers Mutual Bank, Teachers Mutual Bank  (in NSW), P&N Bank, Police Bank, BankVic and Beyond Bank Australia.

This list will soon expand to 11.

Hume Building Society has announced that it will seek permission from members at their October 17 AGM to become Hume Bank.

S&P said that "longer term, bank license status may better position these entities to meet negative rating pressures that may emerge with respect to our business profile assessments."

Of the 10 existing mutual banks, S&P has BBB+ ratings on six. It does not rate the other four.

S&P said that "although this conversion has not, to date, in itself resulted in any issuer credit rating uplift, bank-licence approval is a supportive factor in our view of a financial institution's business stability, risk-management capability, and the stability of their funding and liquidity bases.

S&P pointed out that "at BBB+, our average rating for a mutual bank is higher than that of the average rating for a non-bank credit union or a non-bank building society."

"The rating differential reflects the fact that Australia's mutual banks generally are larger, more diversified, and more sophisticated risk managers than are non-bank mutual financial institutions."

S&P noted "there is a good track record of business stability for many of the larger Australian mutuals - including through the global financial crisis - reflecting the support of ongoing membership. "

"Nevertheless, despite this experience, we believe that all mutuals are susceptible to heightened competition from the four dominant major banks, which often have superior financial capacity to compete on price, and greater resources to lead the market in the provision of enhanced products and services to retail customers."

Concerns over concentration risk in particular geographies may lessen.

"Our view is that the mutual banks in Australia are likely to be significant aggregators in the ongoing consolidation of the remaining smaller or less-financially-successful credit unions and building societies."

Damien Walsh, managing director of bankmecu, in a speech on Wednesday night, argued that at bankmecu, at least, they were creating a "values based challenger brand in the Australian market," one " differentiated by more than a couple of basis points and a shallow customer service promise."

"As a customer owned bank we know exactly who we exist for, we know why we exist and whom we're working to deliver value to."