Mutual Banking – is merger inevitable?

The existential challenge facing Mutual Banks

Are you confident your mutual bank meets its obligations to Members?

Are you compliant with regulation at all times?
– Can you meet APRA’s evolving capital, liquidity & risk requirements?

Do you have the investment capacity and delivery capability to:
– Protect against cybercrime?
– Build true digital customer solutions, including core banking replacement?

If not, merging with another entity to access scale and a larger capital base is almost inevitable.

Mutual Banking in Australia – the current state

The search for scale

Mergers and consolidations give access to a larger capital base which can defray costs, especially investment in digitisation & technology to meet regulatory requirements.

Recent significant “mergers of equals” including Newcastle Permanent Building Society & Greater Bank and Heritage Bank & People’s Choice Credit Union in 2022 have created new market-leading entities.  However, the market remains fragmented. The largest 16 mutuals account for only 44% of assets.  More than 30 mutuals hold <$1.7bn in assets.

Figure 1: Australian mutual banks by total assets (Sept 2023).

Mutuals must meet critical obligations – or merge

1. Maintain 100% compliance with regulation: Being compliant is non-negotiable, but the burden and costs of compliance continue to increase.
2. Meet minimum capital and liquidity requirements: APRA continues to express concern about the capital adequacy of participants in the Australian FS market, including mutual banks. Achieving and maintaining compliance with CPS230 will be a challenge for many.
3. Protect member against cybercrime: Financial service firms remain a major target of global cybercrime. A breach at Latitude in 2023 compromised the accounts of 14m users.
4. Offer members a compelling digital experience: As millennials become a major customer cohort, digital channels, personalisation and convenience become core elements of the value proposition to overcome attrition of younger members.

Joining forces with another entity may be challenging

The mutuality of customer-owned banks creates additional complexity as outcomes must be in the best interests of Members. Many potential issues must be resolved including alignment of purpose and culture, governance and management structures, brand and product strategy, technology migration, policy aggregation, realizing synergy benefits, among others.

A trusted partner with the experience to guide you through critical merger processes will reduce the potential for any mis-steps.

Where to next? Consider a facilitated half-day workshop to explore strategic options.

Our structured workshop approach will help you with questions such as:

• What are your major strategic options – including how to access the benefits of scale?
• How could you best position yourselves for success as the mutual model evolves?
• Is your current strategy a likely “winner” or is a change of course required?
• What are your highest priority next steps?

The outcome will be a deeper understanding of your strategic options and a practical action plan to best meet the expectations of critical stakeholders (Members, regulators etc.).

Other ways that SPP can help

Mergers and acquisitions are part of SPP’s DNA. We have a “playbook” developed from experience and possess a range of tools and techniques to navigate the complex set of organisational challenges created including:

1. Aligning behind the case for change: Creating a compelling case for change.  Supporting management to communicate staff and Members about the benefits and pathways to merger.
2. Selecting potential partners: Using comprehensive evaluation criteria to assess and screen potential partners to ensure cultural and organisation fit and identify operational synergies.
3. Pre- and post-merger planning: Planning for the merger including facilitation of governance and management structures. Creation and operation of a PMO to oversee the process.
4. Brand, product & technology strategy: Post-merger approach to branding, product, distribution, technology pathway, policies legacy terms and conditions, etc.
5. Accessing operational synergies: Extracting post-integration synergies while meeting cultural needs of the organization and the expectations of Members.

1. In 2023, the mutual banking sector generated an aggregate return on equity (RoE) of 4.7% vs a market average of 10.9%. ↩︎