Adele Ferguson | February 23, 2009
Bank of Queensland chief executive David Liddy told shareholders: "To compete with the big banks, smaller banks such as BoQ, as well as credit unions and building societies, have been merging and will continue to do so."
Two weeks later, on December 24, Wizard Home Loans was sold to Commonwealth Bank and Aussie Home Loans for $26million. The remaining non-bank lenders, Resi Mortgage Corp, First Mac, Pepper Home Loans, Better Choice Home Loans, Beat Home Loans and a few others are expected to either close down or merge as credit conditions worsen.
In the regional banking sector, Suncorp and Bendigo Bank are tipped as takeover targets as the dislocation in capital markets, falling asset prices and pressure to re-capitalise make it increasingly difficult to compete with the bigger banks.
On the mutual side, more credit unions and building societies are considering merging to compete with the bigger players, at a time when falling interest rates are crunching their margins and more rigorous regulation is pushing up their costs.
There are 130 credit unions and building societies in Australia, representing $65billion worth of assets, 3.4million members, and 6 per cent of the home loan market.
It is in this market that the Big Four banks are monstering competitors. To put it into perspective, they have doubled their market share in the home loan market from 45 per cent in 2007 to about 90 per cent at the end of November 2008.
For customers, the diminished competition means that banks have regained pricing power over savings accounts, credit cards and -- most significantly -- home loans.
Lenders that have reduced their presence or exited include Majestic Mortgages, Macquarie, Bluestone Mortgages and Virgin Money. For credit unions, their real competitive advantage is in the deposit market, where they capture 12 per cent of all deposits, making them the third largest holder of deposits from the household sector, putting them ahead of ANZ and National Australia Bank.
Commonwealth Bank controls 28 per cent of the market, following its acquisition of BankWest last year, and Westpac has 20 per cent following its merger with St George last year.
In the case of Australia's credit unions and building societies, five are in merger discussions, and at least another 15 are expected to join forces within the next 12 months.
Since the start of this year, HMC Staff Credit Union has announced a merger with NSW Police CU, Regional One has announced it is in merger talks with mecu, CSR has merged with Select Credit Union and Dnister Ukrainian Credit Union is in talks with Karpaty Credit Union but its members are yet to be notified.
Consolidation of the 118 credit unions is based on using economies of scale to compete with the banks in a falling interest rate environment.
Some mergers are likely to have the gentle hand of the industry's self-regulator, Credit Union Financial Support System and the financial regulator APRA, pushing them together.
Such matchmaking is expected after June 30, when a few credit unions, that have indulged in risky practices are expected to report low profits or losses for the year.
"When this happens, there could be a negative reaction from members, such as rapid deposit withdrawal, and the Australian Prudential Regulation Authority will want to avoid this," another source said.
The Australian understands that before the government guarantee was imposed in October, APRA had put at least 10 credit unions on day watch to ensure liquidity levels and forward cashflows were sufficient to withstand the stresses and strains of the global financial crisis.
It now has one on day watch, and is making weekly phone calls to most credit unions to check on liquidity and profits, according to CUFSS chief executive Gary Eggert.
The majority of Australia's credit unions were strong, with liquidity above 18 per cent and sound profit, Mr Eggert said. If anything went wrong, CUFSS had the financial firepower to come to the rescue.
One hundred of Australia's 118 credit unions are members of CUFSS, providing it with 3.2 per cent of their balance sheet. This adds up to $1billion that can be drawn upon to bail out potential blow-ups or liquidity problems.
"In 10 years this fund has been invoked only once and it resulted in a merger with another credit union, and no one lost any funds," Mr Eggert said.
CUFSS can decide whether the support is in the form of a market-rate loan, a concessional loan or a permanent loan (the latter category would be provided only if a credit union was to merge or transfer).
Louise Petschler, chief executive of Abacus, the peak body for Australia's credit unions and building societies, said the tough environment could be the making of the industry.
"Credit unions were born in tough times, and they will continue to do well in this difficult environment," she said.
Nevertheless, as in any industry, a few credit unions wandered outside of their core business, grew too fast, expanded into risky areas and allowed their cost structures to get out of control.
APRA's mission is weed out the weaklings by putting them on close watch, forcing the entire industry to increase its liquidity from the required 9 per cent to 15 per cent, and demanding all provide board-approved funding plans.
These funding plans require each credit union to provide various funding options, assess the impact of various stress scenarios and set out a contingency plan if the credit union loses a significant funding source. Any funding plans not up to scratch are sent back.
As the chairman of APRA John Laker said at a recent conference for the industry: "In the current environment, APRA will not accept a funding strategy based crudely on turning the loan tap off if funds cannot be raised. Easy to do if the ADI (deposit-taking institutions) is writing personal loans; much less easy for mortgage loans where there may be a gap of up to two months between approval and funding, and where the timing of redraws against existing facilities is unpredictable."
Brian Bennett, who has been running the 55-year-old Encompass Credit Union in Sydney for almost four years, said in the past few months there had been a surge in deposits, mainly from self-funded retirees.
"The government guarantee certainly helped ease any concerns about deposit lending institutions and helps explain the 10 to 15 per cent increase in deposits in the past few months," he said.
Mr Bennett estimates Encompass's tier-one capital is 22.93 per cent, compared with the average of the banks at 8 per cent, and its liquidity is 27 per cent.
"Credit unions are a good alternative to the banks because they are mutuals, and that means they are more personal and friendly, charge less in fees and are less risky because we didn't get involved in commercial lending, toxic assets or commercial property or development," he said.
Victoria's largest credit union, mecu, is in talks with RegionalOne to create one of the nation's largest, with assets of more than $2billion. Mecu, with assets of about $1.8billion and 112,000 members, and RegionalOne Credit Union, with more than $270million and 20,000 members, aim to have the deal approved by members in June.
Mecu chief executive Phylip Doughty said both credit unions had annualised growth rates exceeding 20 per cent because of increased deposits, a spike in refinancing and strong demand for loans from first home buyers.
Mr Doughty said consolidation across the sector would accelerate, particularly as interest rates continued to come down and compliance costs rose.
"The shakeout in the banking sector has been astounding and the Big Four now dominate. This will give credit unions an opportunity to step into the breach where the second tier banks were, and non-bank lenders such as Wizard were," he said.
As the global financial crisis continues to take victims in Europe and the US, Australia to date has managed to navigate its way out of the mess relatively unscathed.
The banks, non-banks and mutuals all have their own demons to contend with, but if credit unions can successfully merge to create a few mega credit unions, curb their costs and find alternatives to deposits for funding, they could well emerge as the new force in banking.
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