Australia’s banking landscape “will settle with a small number of larger mutual players”, S&P Global said in a forthright assessment of this industry sector yesterday. “Mergers remain compelling for mutual lenders,” S&P said, leaving out that there have been uncharacteristically few such mergers in the sector in recent years.  “Brand strength and customer loyalty continue to evaporate such that price becomes a key determinant of customer acquisition,” S&P said.  “Merging provides smaller lenders greater economies of scale. This makes them more efficient and able to price competitively. Mutuals will over time become acquirers or consolidation targets. “It's tough being a small fish in a big pond. The commoditised nature of Australian banking makes it difficult for mutuals to stand out from the crowd.  “Winning and keeping business hinges on four main factors: pricing, efficiency, end-to-end processing, and product and service features. “Loyalty, a traditional strength that mutual lenders have leveraged, has eroded significantly. “As price takers, mutuals focus on defending and growing market share through sustained competitive pricing. Their balance sheet structure allows them to play in this market.  “They have higher capital levels on which they do not need to pay returns compared with publicly listed banks.  “Profitability is nevertheless crucial. Good earnings will support the ability of Australian mutual lenders to invest in products and services, technology, and operating efficiencies.” S&P questioned the legacy cost structure of the mutual ADI sector, in particular a bloated branch footprint. About 18 per cent of bank branches in Australia belonged to mutuals compared with their market share of less than 3 per cent, S&P pointed out. “Branches are expensive. Rationalisation would enhance the ability of mutuals to compete,” they said.  “Rent, personnel, and the underlying running costs of a branch remain high relative to the cost of serving customers online.  “This is notwithstanding the shift across the industry for reduced operating hours and the use of idle branch staff to conduct other back-office bank functions to optimise staff costs. “In addition, mutuals could reinvest the savings made through branch rationalisation into digital enhancements.”?