Following a robust financial year in 2023 – perhaps the best on record - Australia’s lively, but still ever so small, mutual banking sector stands little chance of repeating last year’s profits.
Quarterly APRA ADI statistics for the March 2024 quarter, released on Wednesday, show that at a headline level, sector profits this year will be struggling to better the aggregate earnings of 2023.
Over the nine months to March 2024, the sector’s 56 mutual ADIs reported a combined pre-tax profit of $599 million, and a net profit of $421 million.
These numbers compare with a pre-tax profit for the sector of $1040 million and a net profit of $745 million in FY2023.
So, financial performance so far in FY2024 looks constrained – and all depending on sector margins (which are said to be stretched), cost management (which ranges from best practice to lousy, at least among the larger mutuals that Banking Day most closely follows) and bad debts (which are bound to bounce, given near recessionary conditions, though property prices have been holding up).
On the other hand, the quarterly APRA data puts the sector’s return on equity at this point in the cycle at 5.5 per cent (or it was, over the year to March 2024), which is up from 5.2 per cent over the year to March 2023.
The mutual banking sector’s ROE over FY2023 was 6.5 per cent, a number the sector seems unlikely to repeat, unless there are profit drivers below the radar that will help mutual’s surpass this level.
By comparison, the industry-wide ROE at March 2024 was 10.8 per cent, while for major banks it was slightly less at 10.6 per cent.
The payroll line is one facet of operational management at mutual banks and credit unions where the sector (out of necessity) outperforms major banks, with the ratio of personnel costs to total operating expenses in the sector at 52 per cent. This is markedly less than the bewildering ratio of 62 per cent at major banks, as reported yesterday.
As ever, one of the main themes recasting the unstable foundations of the minnows banking sector is mergers in pursuit of economies of scale.
A series of mega-mergers – some fact, some proposed – are finally reshaping what remains of the credit union movement into what, in fairly short order, may be a dozen or even fewer remaining mutual ADIs.
The most hefty tie-up announced so far this year is that announced most recently, between Beyond Bank Australia and P&N Bank. This merger would create a mutual with close to $20 billion in assets, making it the fourth largest.
The enlarged mutual bank will have around 450,000 members, which will be the second ranked by member numbers.
The second merger at scale announced this year is that between Bank Australia and Qudos Bank, which will be the fifth-largest behind Beyond/P&N. This will create an entity with assets exceeding $20 billion and 300,000 customers.
The third but less material merger announced this year is that between Community First Bank and Illawarra Credit Union. This entity will have almost 80,000 members and combined assets of $2.5 billion.
Also in the works is a merger between G&C Mutual Bank and Unity Bank. This will create a mutual with 70,000 members and $4 billion in assets.
Assuming all these mergers proceed (following member votes and APRA approval) the top five mutual banks will account for 58 per cent of all mutual assets, and the top 10 more than 75 per cent, leaving a not so long tail of 50 odd smaller mutual ADIs.
One of the greatest challenges for all the mergers mentioned above (and those consummated, such as People First Bank and NGM Group) is that in each and every merger the respective boards invariably commit to retaining all branches and offering all staff a role.
So where are the cost savings? Years and years down the track.
Admittedly not all staff will want to remain, for all sorts of reasons. The management of each newly merged mutual bank will be counting on an increase in attrition and a rise in staff turnover to manage the payroll cost line.
As for retaining current branch footprints; this is part of the aggravating sector politics behind each and every merger scenario.
This approach also increasingly defies both common and commercial sense.
Mutual banks and credit union have points of difference and in-person services, whether for transactions, “conversations” or something complex is one of them.
But when listed banks are closing branches left, right and centre – most often for the reason that daily foot traffic into those branches is immaterial, thanks to the popular embrace of digitial transactions – it is obvious that conservatism around branch closures in mutual banking and credit union land won’t cut it for much longer.