Post GFC there has been a pronounced shift in the funding composition of Australian banks, in particular a move away from wholesale funding and securitisation into domestic deposits (see Figure 1)
Funding composition of banks in Australia
Per cent of total, all banks
Competition for households’ savings has heightened, as majors move to capture more term deposits thus putting the Australian mutual sector’s (mutual banks, building societies and credit unions) margins under pressure.
In its recent paper “How a changed competitive environment affects Australian banking mutuals’ niche business advantage”, S&P assessed the potential implications for the “smaller players”. Some of the main points of the report are:
- Historically, mutuals were considered niche businesses, comfortably enjoying their focus on particular industries or geographical areas. However, post-GFC the established boundaries are being erased, with the major banks taking away deposit market share from credit unions and building societies. For instance, according to RBA and APRA statistics, credit union deposits decreased 14.7% from $46.5bn in August 2011 to $39.6bn in August 2012. Building societies also experienced a decrease of 15.2% from $22.1bn to $18.7bn over the same period. At the same time, major banks experienced a 5.1% growth from $1.0tr to $1.1tr in deposits. Part of the change can be attributed to the fact that a number building societies and credit unions moved to change their names and changed classification from mutuals to banks (Heritage Bank, QT Mutual, Teachers Mutual Bank etc).
- Increased demand for term deposit funds resulted in narrowing spreads between what major banks and other ADIs offer. FIIG receives term deposit rate data from some 60 Australian ADIs, and Figure 2 below shows the average rate differential for all maturities between the majors and credit unions. At the peak of the GFC, the spreads were as high as circa 80bps, since then there is a clear trend of tightening spreads. On the 4 October 2012, the spread was as low as 4bps. Narrower spreads continue to bite at mutuals’ net interest margins. According to S&P, many mutuals are anticipating lower margins in 2013.
- Elevated funding costs, coupled with the majors push for depositors’ money have put a squeeze on mutuals’ interest margin as “smaller players” find it harder to increase lending rates above the ones major banks are offering. According to APRA data, major banks have experienced an increase in net interest income of 6.2% between March 2011 and March 2012, while credit unions saw a 9.9% decrease (see Figure 3).
- The banking industry enjoyed numerous technological advancements over the past several years and the majors are usually at the forefront of any infrastructure upgrades. As a result, majors influence industry standards for customer service and payment innovation, while the “smaller players” find it challenging, costly and uneconomical to implement large upgrades. Consequently, mutuals might face a challenge of diminishing common bonds with member-customers, as large banks set new standards of what is expected in the industry.
- On the other hand, there are transactional deposits that are more franchise and service related, and typically more “sticky”, as customers are less likely to switch from one provider to another (e.g. salary linked accounts). Mutuals enjoy the benefit of stickiness of these accounts, and despite government efforts to simplify the process, are expected to make the most of this advantage (especially the mutuals that are linked to members from particular industries).
Major banks are expected to continue “eating into” the customer base of the Australian mutuals, eroding traditional advantages the latter have enjoyed in their niches. According to the S&P report, mutuals face a threat of falling behind industry service levels and a weakening of the member-customer bond. However, well-matched mergers and continuous consolidation within the mutual banking industry can present new opportunities for expanding business in the Australian banking sector.