Australia is a country that gravitates toward industrial and business oligopolies.
Think of supermarkets, airlines, beverages, paper and packaging, transport and, of course, the major banks. Even large multi dealership car yards seem to dominate over single brand standalone car dealerships. IGA and the corner store are doing their best to hold back the tide in groceries from the Coles/Woolworths duopoly and of course the retail landscape is rich in many different brands but often these are either franchises or owned by someone like Premier group.
For whatever reason it is an increasing fact that when its a national business we only end up with two or a few dominant players.
Banking is a case in point.
We have the 4 majors dominating the landscape nationally with other players, even big guys like Suncorp, more narrowly focused. Building societies naturally have a geographic footprint and focus while credit unions seem more often to be based on industry grounds.
It is the credit union and building society sector (“the mutuals”) that I want to discuss today.
Up until recently I was Treasurer of one of Australia’s biggest mutual ADI’s and the Hunter’s dominant financial institution. I’ve spent a lot of time thinking about the place of mutuals in the Australian banking system in various ways but particularly:
- in light of their core values,
- of their product offering,
- the attractiveness of their member base to the Major Banks, particularly their sticky depositors
- and whether they can become a genuine alternative to the Major banks
Now because of the GFC and the pressure it has put on the funding of Australia’s majors and because it has been associated with a massive fall in demand for the majors core product, lending, there is little doubt that Australia’s mutual and regional ADI’s are in a fight.
More often than not when Australian’s think about competition they think about lending. Certainly the government and industry seems to think so too. Wayne Swan’s “Banking Reforms” website says:
The Australian Government is introducing a range of measures to increase competition to help you get a better deal.
- The first reform was a ban on mortgage exit fees on new loans from 1 July 2011.
- From 1 January 2012 lenders must provide home loan fact sheets when you ask for one.
- Lenders that offer online loan applications or enquiries about standard home loans must also make the home loan fact sheets available on their websites.
- Changes to credit cards are next. These changes will mean a fairer deal for card holders from 1 July 2012.
Lending, lending lending.
But increasingly the fight or the competition in Australia is becoming a fight for deposits, a and a fight for a sustainable future as the majors come looking for the mutual sector customers to bolster their own flagging fortunes and reliance on offshore funding. And why wouldnt they as these two charts from Abacus most recent fact sheet show:
Individually in the Australian banking landscape there is no 5th pillar but in aggregate mutuals certainly represent a potential competitive force. But equally, due to the disaggregation of the more than 100 mutual banking institutions, their customers are at risk in a way that the ACCC would never allow if it was one or even two single mutual banking institutions.
So the majors are coming for the mutual’s members and particularly their deposits and the deposit market as a result is becoming increasingly competitive. Just look at the change in TD pricing over the past few years and the price leadership the majors take in this market these days – forcing mutuals, which are often heavily reliant on this source of funding as their dominant source of funding to offer even higher rates.
Once again the evidence is stark as these next two charts from this months RBA Bulletin article on Bank Funding show:
This is what the RBA says about TD’s:
Within banks’ deposit funding, there has been a marked shift towards term deposits, which pay higher interest rates than other forms of deposits. Indeed, term deposits have accounted for most of the growth in bank deposits since the onset of the financial crisis and now account for about 45 per cent of banks’ deposits, up from 30 per cent in the middle of 2007 (Graph 2). The increase in the share of deposits, particularly term deposits, reflects a number of interrelated factors. First, banks have offered relatively attractive rates to depositors (discussed below). Second, strong business profits and business caution have resulted in larger corporate cash holdings, which have been increasingly invested in deposits rather than other financial instruments, particularly short-term bank paper. Third, households have significantly increased their term deposits placed directly with banks instead of investing in other financial assets. There has also been a rise in deposits placed via superannuation and managed funds.
For banks, term deposits have the advantage of generally being a relatively stable funding source: while the average maturity of term deposits is fairly short, at somewhere between four and seven months, these deposits are typically rolled over a number of times. The rates on new term deposits can also be adjusted quickly to influence the growth in this source of funding.
Can you see the oxymoron in the above excerpt? It is one that as Treasurer of an ADI I was and would be worried about. The majors and the mutuals, and the regionals are in a fight for TD’s because they are a “stable” source of funding. Indeed as the chart below shows locally sourced deposits are reducing the majors reliance on overseas borrowing. But part of the reason that TD’s have increased so much as a share of funding is what could possibly be a transitory moves by Australian households to “significantly increased their term deposits placed directly with banks instead of investing in other financial assets”.
Potentially there is a massive funding gap in the Australian banking system at some point in the future when Australians are happy to deploy their funds back into equities or other assets:
So the mutuals are in a fight for their members, who the banks see as customers, and it is a fight not just for relevance in an increasingly competitive market but also for survival as the rules of the game are about to change in a way that reinforces the dominance of the majors. Basel II already reinforced the majors’ strength by making them more capital efficient in their home lending than their standardised competitors in the mutual space. Now Basel III and particularly APS210, which is APRA’s funding and liquidity dictum, are changing the ground rules for all ADI’s and putting more pressure on the mutuals in both a management and reporting sense, as well as pushing the majors to go after the members of the mutuals and acquire their sticky retail deposits.
Not to mention the obvious need to capture as much of the Australian mortgage market as possible to bolster low loan originations in the system.
In a week’s time I am giving a presentation to the Federation of Police Credit Unions Annual Conference on the Mutual Model in the Future of Banking and it occurred to me that while I have my own views about how things will play out over the next 5 or 10 years I had not tapped into the rich MacroBusiness reader knowledge base.
So dear readers, I’ll leave you with a question. What is the future of the mutual banking model? How do you see it’s relevance in a modern economy? Will the majors eventually just grind the sector into the dust or can CUA or someone else emerge as a real competitive force and a 5th pillar. What would you do to differentiate yourself if you were managing a mutual credit union or building society and what are the core challenges that lie ahead for the sector?
I’d appreciate your thoughts.
Gregory McKenna