Since the 2008 global financial crisis banks around the world have been focused on boosting their retail deposit bases and lightening their reliance on wholesale funding.
The GFC punished wholesale-funded lenders, especially those that borrowed short term cash to fund long term loans.
The takeaway lesson for banks was to chase lots of deposits to avoid getting caught out by another liquidity crunch.
However, Bendigo Bank’s latest set of full year accounts indicates that lenders dependent on wholesale funding are more likely to prosper in the next few years as the Reserve Bank keeps a tight lid on the cash rate.
Right now, home lenders are able to raise wholesale cash for smidgeons above one quarter of one per cent, but deposit-funded banks such as Bendigo, CBA and Bank of Queensland are stuck with large back-books of term deposits priced at legacy rates.
The protracted low rate environment is hurting these banks most because they are being forced to sacrifice more of their interest margin to keep their loan products competitively priced.
And as the economic crisis intensifies Australian households are pouring more of their wealth into digital deposit accounts that are paying rates above 1.5 per cent, like Bendigo’s UP mobile banking platform.
Bendigo revealed yesterday that UP more than doubled its customer base to 250,000 in the 12 months to the end of June.
It also disclosed that UP now accounts for 1 per cent of the A$51 billion of deposits on its balance sheet.
That means UP was Australia’s largest neobank at the end of June with deposits of around $510 million on its books.
According to APRA, mobile banking rivals Xinja Bank and the Cuscal-owned 86 400 had $457 million and $310 million, respectively.
In normal times this rapid expansion would be a cause for celebration but in today’s low rate environment UP’s sharp pricing (it pays 1.6 per cent on account balances) looks expensive.
UP is Bendigo’s fastest growing customer brand even though the business seems to deviate from the relationship banking style of its other banking brands, such as Delphi and Rural Bank.
UP doesn’t yet have a lending operation but Bendigo is using the deposits it raises to fund mortgages marketed through brokers and its own branch network.
Bendigo grew its mortgage book by a whopping 9.4 per cent last year, which was 3.6 times the industry average.
However the growth was largely profitless, partly because of Bendigo’s relatively high funding costs.
A lot of the bank’s mortgage growth was attributable to sharply priced white label products sold through third party brokers and originators.
The outcome was a 6 basis point contraction of the group’s second half net interest margin that offset loan volume gains.
While Bendigo’s long term bottom line stands to benefit from UP’s success, it seems that the switch to new digital and third party distribution channels during the current economic crisis is forcing the company to rethink its business model.
Since it secured banking status in the early 1990s, Bendigo has carefully crafted its business to deliver relationship banking through a large branch network.
On a number of fronts that now seems to be shifting as young customers demand digital ways of banking and the branch network loses its origination power.
About 54 per cent of Bendigo’s new residential lending in 2020 came through brokers and other external partners, while only 32 per cent was attributable to its network of more than 700 branches.
Building new customer ties through a relationship model is a tad tricky when more than half of your home loans are being sold to new customers by a third party under a white label arrangement.
Managing director Marnie Baker yesterday reiterated the company’s commitment to retaining its community purpose and values, but she also acknowledged that the bank was accelerating its cost reduction program to deal with the immediate challenges created by the pandemic.
“This will see us increase productivity by taking out costs, and investing in new capabilities, particularly in customer experience and digitisation,” she said.
“These changes will impact our operations and improve how we engage customers.”
Baker also noted that the bank would “continue to match positioning of our branch footprint with customer and community demand”.
That sounds like code for branch closures.
Given the limited wriggle room for adjusting the bank’s funding mix, an attack on costs, including branches, seems Baker’s only chance for improving bottom line returns for as long as rates stay low.
The question that Bendigo’s management is preparing to address is whether relationship banking fits a bank that wants to be digital.