Consolidation is the name of the game for Australia’s customer-owned banking sector as mutuals compete to build scale and digital capability — and cultural alignment and strong governance are paramount.
They’ve come a long way since a crowd of people met at Adelaide’s White Horse Inn in 1847 to form probably Australia’s first building society. Following an English model, it allowed its working- class members to pool funds to help each other buy their homes. Soon, dozens of similar societies were springing up across the colonies.
Australian Prudential Regulation Authority (APRA) deputy chair John Lonsdale says the customer-owned banking model has withstood a raft of challenges since that first meeting — from Australia’s banking crisis of the 1890s through to the global financial crisis a century later and, more recently, COVID-19.
According to Business Council of Co-operatives and Mutuals (BCCM) CEO Melina Morrison, because the structure of mutual and customer owned banks is member-owned and governed, the major governance challenge is how to balance member rights (participatory governance) and the increasingly complex and costly compliance and risk frameworks of banks and banking. Member directors and engagement are part of how co-ops and mutuals ensure they’re attuned to and making decisions based on the needs of the members and the community they serve.
However, as Lonsdale notes, hundreds of mutuals have disappeared along the way, some because of poor governance or financial stress. Morrison says that’s more because of hostile takeovers or demutualisation brought on by the push to access growth capital to keep abreast of the cost pressures on financial institutions. Until the sector led by the BCCM succeeded in advocating changes to the Corporations Act in 2019 — facilitating mutuals to issue equity without demutualising — they were hamstrung in the sources of capital they could access to fund lending growth and operating expense investments like digital transformation.
APRA recently reviewed the performance metrics of mutuals one year out from their industry exits and identified several signs of why they might have exited. In particular, it found that poor performance on cost management, lending growth and profitability should have been concerns for their boards. In addition, APRA suggested that some of their constitutions, drawn up when they started, were now out of touch with evolving public expectations of good governance, particularly as they related to board tenure and composition.
Notwithstanding APRA’s views, mutually owned banks did not come before the banking Royal Commission for misconduct like their listed competitors, which suggests their governance arrangements are working when it comes to the right alignment between users or customers and the purpose of the business. Put simply, their focus is on member interests rather than shareholder interests, because members are the shareholders.
Morrison says that the answers to governance improvements lie somewhere between throwing the baby out with the bathwater and modernising the tried and tested accountability of mutual governance with stricter tenure, a focus on the right skills mix, and diversity and inclusion objectives.
According to Lonsdale, APRA has too often seen mutual boards solely rely on self-assessment and peer review, and at times, fail to implement the recommendations from reviews by independent experts. In response, the Customer Owned Banking Association says it appreciates the frank conversation with APRA on the opportunities and challenges of the sector. “As customer-owned banks, we want to ensure our boards reflect the customer voice and reflect our communities, as well as having the right mix of skills and renewal.”
BCCM chair Terry Agnew FAICD says it’s appropriate that APRA challenge industries and sectors — including the mutual sector — in the best interests of long-term sustainability. He notes the focus on governing in the best interests of members has paid off during the past 20 years, with mutuals successfully navigating the GFC, banking Royal Commission and COVID-19. “Based on its track record, there should be confidence that the mutual financial service sector will continue to address the challenges with an appropriate balance of organisational sustainability, good governance and member focus,” he says.
In addition to the governance challenges highlighted by Lonsdale, directors of mutuals continue to navigate a tricky landscape of mergers. According to KPMG, the number of banking mutuals has shrunk from more than 170 to less than 65 since 2005. There’s also been a ninefold increase in the average asset size of Australian mutuals over the same period.
Two big mergers are underway. One is the merger of Greater Bank and Newcastle Permanent, which will result in a bank with $19.8b in total assets and around 600,000 customers. The merger is expected to help both parties keep pace with increasing regulation and reporting, and the rapid advancements in banking technology, both of which require big investment.
Similarly, Heritage Bank and People’s Choice are joining forces to create a bank with 720,000 members and $22.5b in total assets. The aim is to unlock significant member benefits, such as enhanced products, services, digital capabilities and competitive pricing through a growing national footprint. More mutuals are expected to follow suit. Indeed, 24.4 per cent of the 46 mutuals polled in KPMG’s Mutuals Industry Review 2021 expect to be involved in merger activity during 2022 — and a further 20 per cent are considering the possibility.
Teachers Mutual Bank has grown significantly through small mergers and expects to undertake more. Chair Maree O’Halloran GAICD says the mergers fit into its strategy of providing banking to workers (and their families) in essential services such as education, emergency services and healthcare. Overall, Teachers Mutual Bank has been through five mergers since 2015 and, according to O’Halloran, now has a repeatable process for mergers. This includes having the same team, if possible, to draw together operationally and at a governance level — having a meeting between the chairs of each organisation and between the CEOs. Also important is having a dedicated project team for the merger — with representatives from both organisations.
“It’s amazing what you can achieve when both organisations want good outcomes for their members,” says O’Halloran.
There are ways that directors of co-ops and mutuals can boost their governance skills. One is via the Foundations of Directorship for CMEs (co-operative and mutual enterprises) course, which the AICD and BCCM developed in partnership. The course uses industry case studies to guide participants through the challenges of member- owned and democratically controlled entity governance. Another is the CME 100 Chairs Forum, which meets twice yearly. The forum shares best practice principles and ways to lift the quality of governance across the co-op and mutual industries.
Top 3 Priorities
61% Maintaining profitable, sustainable growth
29.3% Digital transformation
9.8% Keeping up with pace of change (regulations, fintech, open banking, NPP)
Top 3 Key Tech Challengers
7.3% Channel digitisation
Teachers Mutual Bank
Teachers Mutual Bank has come a long way since it was formed in a tennis shed in 1966 — by six female teachers who couldn’t access the same credit as men. Today, their mutual is one brand of Teachers Mutual Bank, alongside brands for health professionals, firefighters, the university sector and essential workers. It has more than $9.75b in assets and over 220,000 members.
“We are very mission-driven,” says Teachers Mutual Bank chair Maree O’Halloran GAICD. “The purpose across our bank is banking for good for those who do good — and it has always been about our members and their families.”
As it grows, Teachers Mutual’s boards and advisory committees are evolving. “We have nine board members and five have come on since August 2019,” says O’Halloran, who was one of the five. The board is now going through a period of stability before it starts again with renewal to get the skills it needs.
At present, three board members have banking backgrounds. “We are very much supportive of prudential regulation and APRA is very important,” says O’Halloran. “But because our members own us, the main aim is to make sure we govern in their best interests — and it’s obviously in their best interests to have a diverse range of skills on the board. In the past, we were smaller, so there was a deeper connection in terms of election within the industry. We still need to keep that balance. We don’t want to move too far away from our membership base, but we need to make sure we have the skills we need on the board. We have a tenure policy of 12 years and that can be extended, but only by one year at a time if it is in the best interests of members.”
All Teachers Mutual’s board members are independent, non- executive directors. The majority are elected by members (its shareholders) on rotation every three years, but it also has three board-appointed directors.
O’Halloran says Teachers Mutual has been through several small mergers that fit into its strategy, but none of its recent mergers have resulted in changes to the board. Last year, it merged with the Victoria-based Firefighters Credit Co-operative, a small credit union with seven employees, around 3100 members and $63mc in assets. “Nobody came onto the board from that credit union, but we have advisory committees for each industry we serve,” says O’Halloran. “So, they came onto our advisory committee for the Firefighters Mutual Bank brand. That works well in that space and fits into our strategy.”
Another merger completed in 2021 was with Pulse Credit Union, which had 6000 members in the Victorian health and tertiary education sectors and $122m in assets. Its members joined Teachers Mutual’s Health Professionals Bank and UniBank brands and Pulse got seats on both brands’ advisory boards.
Australian mutual banks
$150b+ in assets
10% retail deposits
77.9% cost/income ratio
50.23% cost/income ratio of big four banks (average)
Source: KPMG, Statista
Inside a mutual merger
The merger of My Credit Union (MyCU) and Beyond Bank in 2018 was hardly one of equals. MyCU had 18,000 members, four branches in NSW and nearly $210m in assets. Yet even though MyCU was dwarfed by Beyond Bank’s more than 200,000 members and over $5.4b in assets before the merger, it was MyCU that went looking for a partner.
Rebecca Richardson GAICD, MyCU’s chair at the time, explains that unlike many smaller mutuals, MyCU had had a merger policy in place for some time and mergers were a matter regularly considered by the board and management. What worked for members was at the centre of this policy, including what the right technology was to provide banking services in the way they wanted, having the right range of products for them and being able to be responsive to their other needs.
“We looked at what we’d like to do to benefit our members, but couldn’t because we didn’t have the scale,” says Richardson. “Initially, the process was board-led and there was strength in that because we had no invested agenda. We looked across the landscape and at the metrics of all the players. We also made a very deliberate decision to pursue a particular set of criteria around what we were looking for in terms of the outcomes for members and the credentials of the entity we were looking for, financial and non-financial.”
Richardson says MyCU chose a mutual bank rather than a like-sized entity because it felt the operating efficiencies and other improvements it wanted to achieve would be better realised. “We got a small amount of external consulting advice to help fill us in on the landscape, but we pretty much did the deeper research ourselves, [developing] a list of criteria and outcomes we needed to ensure were addressed.”
After a process of due diligence, MyCU came up with two mutuals it wanted to talk to, one being Beyond Bank. “Before talking to them, we prepared a request for proposal document which called for responses from them around what we were looking for,” says Richardson.
“It set out the criteria we were going to use to guide our selection process and what we saw as the essential and desirable requirements for a merger.”
Richardson notes MyCU was looking for a mutual bank with strong financial stability and the potential to offer its members improved efficiencies, cost reductions, an enhanced product range and better member access through all channels. It also had to have the capacity to invest in technology and commitment to the community.
“We wanted the target to be able to clearly articulate why it wanted to merge with us and what attributes it saw us bringing to the merged entity. That’s crucial because you want to ensure it’s voting for the right reasons. Crucially, it had to be able to demonstrate it had a strong and diverse board, good culture and a strong commitment to mutuality — that it could show independent measures of the quality of its service rather than just telling us what a good job it did. In addition, it needed to actively engage with its members and have a brand presence.”
A track record of successful past mergers was also vital. “We looked at the growth in the portfolios of members and staff retention after previous mergers,” says Richardson. “A couple of essentials related to the opportunities for our people, how they would be integrated and the target’s commitment to community and corporate social responsibility.”
Essentials and non-essentials
Further important factors were having a transparent annual report and active strategies for a younger client base. “We also needed to know the target was able to continually evolve and stay relevant,” says Richardson.
MyCU also worked out what wasn’t as important to it in the merger. “For example, we didn’t ask for the MyCU brand name to be carried on in any way. We also didn’t ask for a seat on the board of the new entity. Even though that was offered and taken as a show of commitment, it wasn’t identified on our essential or desirable list.”
MyCU also looked at where it could help fill gaps for the target and play a positive role as part of the new structure. For Beyond Bank, the benefit was a bigger presence in NSW, especially in Sydney. “Ultimately, Beyond Bank proved to be a good choice, but both mutuals we engaged with had a lot to offer,” says Richardson, adding that with a transparent communications process, members accepted the Beyond Bank merger well.
“MyCU wasn’t ramming this through. The benefits of the merger were brought to the fore and spoke for themselves. It wasn’t really hard to sell.”
As arrangements progressed, the board stepped back. Under the leadership of then CEO Gavin Cook, the business embraced the merger and the opportunities it offered members and staff.
That the two entities operated under different banking platforms was probably the greatest practical challenge, but then only a short- lived one. All staff were offered a role at Beyond Bank and Richardson was later offered a seat on its board.
Beyond Bank, meanwhile, has gone on to complete further mergers, the latest of which is with South West Credit.
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