According to KPMG’s Mutuals: 2013 survey 2012/13 was a year of varied successes, with the emerging trends presenting real insights for the upcoming inquiry into Australia’s financial system.
“We see a number of implications of this year’s survey worthy of deeper analysis,” said Peter Russell, National Head of Mutuals for KPMG Australia.
“Considering the consumer appeal of mutual banks within the Mutuals sector, should the threshold for becoming one be lowered? Should smaller Mutuals be given access to wholesale funding in order to remain competitive? Should a scalable regulatory framework be considered to reduce the burden on smaller players? Can a mechanism for distributing franking credits, currently trapped in Mutuals, be created?” commented Mr Russell.
KPMG’s survey found operating profits before tax decreased marginally by 1.3 percent in 2013, however, the top 10 Mutuals outperformed the industry recording an increase in operating profit of 7.9 percent. In contrast, 50 percent of non-top 10 players experienced a decrease in profit greater than 10 percent. The top 10 Mutuals also outperformed the industry for returns on investment (ROE), with an average ROE of 8 percent compared to 4.4 percent for non top-10 players.
Mutual banks grew their asset base most significantly (by 5.4 percent), compared to the remaining Mutuals with 2.9 percent. “Our survey shows that the title ‘mutual bank’ appeals to customers and improves the competitive positioning of an organisation. Consideration could be given to reducing the barriers to becoming a mutual bank, broadening the ability for more authorised deposit taking institutions to be able to apply for mutual bank status,” said Mr Russell.
Capital levels increased from 17.4 percent in 2012/13, to 17.9 percent during the year. Bad debt levels remained at the same low level as the previous year, at 0.06 percent of average gross receivables.
Staff numbers rose by 1.5 percent. However, total members fell by 1.3 percent and total branches reduced by 3.6 percent. Operating costs increased by 4.9 percent during the year, up from 3.4 percent in 2012.
“Cost management continues to be a key area of focus for the Mutuals, with indications that there are significant pressures on resources due to the increase in regulatory requirements, particularly for the smaller Mutuals. Coupled with continued margin pressure, the industry will be looking for key changes in efficiency, product sales and cost of funds. This may include reviewing distribution channels, funding strategies, product positioning and margin management.”
While deposit rates grew by 4.2 percent during the year, the rate of growth continued to slow for the third consecutive year. Historically, deposits have always formed the primary funding source for Mutuals.
“Going forward the industry must continue to look at diversifying funding as competition for deposits remains strong. Consideration should also be given to providing a wholesale funding vehicle for smaller Mutuals to be more competitive – less Mutuals means less competition in the industry,” Mr Russell said.
KPMG’s report notes that while technology was seen as one of the biggest risks to Mutuals this year, it also provides the greatest opportunity for growth.
“Technological innovation supports the launch of new products as well as increases the ability to reach more people in more varied locations. The industry sees this capability as crucial to satisfying existing customer needs, as well as a mechanism for geographic expansion without the need to build a physical infrastructure,” said Mr Russell.
Mobile banking technology continues to grow, with 84 percent of Mutuals providing a mobile banking app or mobile-friendly website - up from 76 percent the previous year. Almost 80 percent of Mutuals expect to spend more on mobile technology in 2014, and almost half believe mobile banking will drive down the relevance of the traditional branch.
According to KPMG, the biggest opportunity to improve performance will be through more innovative collaboration, strategic alliances and partnering.
“The efficiency arguments for mergers remain strong, however underlying performance across the industry is robust.
The Mutuals continue to look for merger opportunities, while innovation and knowledge sharing may result in further opportunities for the industry such as shared service centres, back office options and shared branches. Expansion through co-operation would allow for varying forms of consolidation, including strategic partnerships, alliances and shared processing.”
Mr Russell believes the outlook for the industry remains positive.
“A series of complex challenges and opportunities face the industry, including the ongoing relevance and purpose of physical branches, the need for innovation and collaboration to grow, and the building of momentum in the youth market.”
“Commitment to community remains a fundamental component of the Mutuals’ value proposition, with 61 percent believing community involvement is a key differentiator and competitive advantage for future growth – particularly as they target the youth market,” added Mr Russell.
Mr Russell believes the upcoming financial inquiry will be welcomed by the Mutuals sector.
“Smaller players’ profitability is decreasing and if this continues, mergers are the likely outcome. The inquiry provides an opportunity to consider whether less Mutuals is the best outcome for Australia, or whether more needs to be done to support Mutuals or remove current barriers so they can grow and compete more effectively with the larger players,” he concluded.
About KPMG’s Mutuals: 2013 survey – The survey examined the performance and the role of the Mutuals in Australia's financial services sector for the financial year ending 30 June 2013. It considers financial performance for the year ending 30 June 2013, as well as responses to a qualitative questionnaire covering the risks, challenges and opportunities facing the industry.