Mutuals assets grow but profits fall amidst macro-economic challenges

KPMG

Australia’s mutual banks, building societies and credit unions (the “Mutuals”) increased net assets by 7.8 percent to AU$11.2 billion in the 2022 financial year, up from 5.5 percent growth the previous year. At the same time, overall operating profit before tax declined by 11.1 percent to $604.7 million (2021: $680.5 million). This fall was primarily due to a decrease in net interest margins and a slight increase in cost-to-income ratios.

Following on from two disruptive years in 2020 and 2021, the 2022 financial year again saw significant events and challenges. Not only did all Mutuals face deteriorating economic conditions and rising interest rates, many also were exposed to significant climate-related weather events, especially floods.

Darren Ball, KPMG National Sector Leader, Mutuals, commented: “There are several factors affecting Mutuals’ performance. Continued economic growth, in combination with a range of supply-side constraints, has resulted in a spike in inflation. The series of interest rate increases by the Reserve Bank of Australia (RBA) is affecting the Mutuals and their members in several ways. The second half of the financial year in particular has seen an arrest in the long-running slide in net interest margins, as lending rates have increased more than deposit rates. There is also a nationwide decrease in house prices and a more restricted willingness and ability by customers to borrow to own or invest in homes.

“The floods in many parts of Australia at the same time have provided a stark reminder of the exposure of many Mutuals to local weather events, especially for smaller lenders with a geographically concentrated membership. It reinforces the need to understand and manage future climate risks within their loan books.”

Key financial results for the mutual sector for the year are:

  • Total assets increased by 7.5 percent to $158.8b (2021: $147.7b)
  • Operating profit before tax decreased by 11.1 percent to $604m (2021: $680.5m)
  • Lending increased by 8.1 percent to $120.9b (2021: $111.9b)
  • Deposits grew by 7.0 percent to $124.9b (2021: $116.7b)
  • Non-interest income increased by 2.4 percent to $430.7m (2021: $420.6m)
  • Net interest margin decreased by 6bps to 1.93 percent (2021: 1.99 percent)
  • Cost-to-income ratio increased by 48bps to 80.3 percent (2021: 79.9 percent)
  • Average capital adequacy ratio decreased by 6bps to 16.29 percent (2021: 16.35 percent)
  • Writeback of credit provisions of $19.5m (2021: $34.9m)
  • 2 mergers completed (2021: 2)

Key challenges facing Mutuals in 2023

In the current turbulent environment, there are several strategic and financial key issues for Mutuals coming out of 2022 and going into 2023:

  1. Strategic: The end of a long period of low interest rates in the final quarter of the 2022 financial year is having various major impacts on the residential lending market that the Mutuals focus on – the balance of these impacts pointing to a slowdown in mortgage lending performance.
  2. Investment: The requirements for the Mutuals to invest continues to increase, putting pressure on both their capital base and the need to generate profits. Investment is needed in regulatory compliance, cyber defences, digital transformation and innovation, and ESG initiatives. This investment impacts the Mutuals disproportionally due to their relatively small size.
  3. Talent scarcity: An issue for many Australian employers. It is of particular focus for Mutuals due to access and affordability, with over half of all Mutuals’ staff living and working outside of the metropolitan areas.
  4. Consolidation: Many Mutuals are looking to grow through mergers as the limitations of operating medium- and small-scale banks (especially cost inefficiencies and the ability to invest) remain firmly in place.

Outlook

Despite these headwinds, the sector outlook remains positive in the face of ongoing market and economic uncertainty, with 75 percent of respondents to the KPMG Mutual Industry Review survey revealing they feel confident in their three-year growth prospects (compared to 77 percent in 2021).

Darren Ball said: “The Mutuals punch well above their weight, but if the Mutuals want to continue this outsized impact for members and communities they need be progressive on several fronts. These include identifying and attracting talent, accessing innovation and scale through as-a-service models, partnering with RegTechs to respond to regulatory requirements and managing the substantial climate risks in their lending books proactively, as extreme weather events become the “new normal” in Australia.”

“The success of the Mutuals in seizing the opportunities and dealing with the challenges will determine how they continue to make an impact through the delivery of member value and community contributions. A proactive and responsive Mutuals sector will be able to build on its positioning as purpose-driven organisations, to continue to find new ways of serving their members and their communities,” he added.

About KPMG’s Mutual Industry Review 2022

The survey examines the performance and trends of mutuals in Australia’s financial services industry for the 2022 financial year. The mutual sector covers Australia’s mutual banks, building societies and credit unions. The survey also considers the responses to a qualitative questionnaire covering the risks, challenges and opportunities facing the industry, and includes a number of articles by KPMG authors.

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