Underperforming mutuals face ratings downgrade

Ratings agency Standard & Poor's has warned mutuals they face ratings downgrades if they fall too far behind the banks in terms of mortgage portfolio growth, interest margin and service standards.

S&P has issued a report on Australian mutual financial institutions identifying a number of negative trends in the mutual sector that could result in ratings downgrades.

S&P currently rates 17 mutuals - all at BBB+ or BBB.

"Competitive dynamics are moderating mutuals' business growth and profits," S&P said.

It believes the relationships between mutuals and their customers are breaking down, as new retail technologies developed by larger banks chip away at mutuals' customer service advantage.

Traditional over-the-counter service, at which mutuals excelled, is being replaced by personalised digital banking platforms. Customers report high levels of satisfaction with internet and mobile banking services.

"Change is expensive and keeping up requires ongoing investment," S&P said.

"We believe new product and service standards are morphing into a hygiene factor pertinent to long-term business stability. Mutual financial institutions will need to move quickly to match the standards set by the larger banks."

Another concern is that big banks are using their funding cost advantage and operating efficiencies to offer better pricing on loans and, as a result, mutuals face challenges achieving loan growth.

"As a group their share of banking assets has been in decline and many fell below system growth in home loans during the 2013/14 financial year," S&P said.

"Price competition is here to stay and some smaller mutual financial institutions will be forced to consolidate to improve operating efficiency."

"A continuation of modest or no growth against system could result in ratings downgrades. There is declining rating tolerance for mutuals with mortgage growth that is substantially below system," it said.

"We also take into account interest margins relative to industry and peers, membership trends and service capabilities."