Australia’s mutual banks, building societies and credit unions (the "Mutuals") increased total assets by 2.5 percent to $163.1 billion in the 2023 financial year, compared to last year’s 8.4 percent jump (to $159.1 billion). At the same time, overall operating profits before tax increased by 27 percent to $769.3 million, a turnaround from 2022 when they fell 18.1 percent to $605.7 million. The increase in operating profits before tax was largely driven by the impact of increased interest rates and the flow through impact on Net Interest Margins as well as continued loan growth.

This has had a positive impact on the Mutuals’ cost-to-income ratios which for the sector as a whole decreased to 73.7 percent (2022: 81.2 percent).

The last three years have seen unprecedented disruption for the Mutuals to navigate, from the impacts of Covid in 2020 and 2021 to the impact of the climate-weather events in 2022. These challenges continued into 2023 with softening economic conditions, high inflation levels contributing to further interest rate increases and the cost-of-living pressure continuing to have an impact on customers.

Darren Ball, KPMG National Sector Leader, Mutuals, commented: “Many of the sector-wide challenges that the Mutuals have been facing, such as the need to continue to invest in digital transformation, innovation and meeting the increasing regulatory compliance, whilst true for all banks, continues to impact the mutuals disproportionally due to their relatively small size.”

“Despite this, it has been a positive year for the Mutuals sector. By in large, the sector has navigated the impact of the ‘fixed rate mortgage cliff’ with the first wave of fixed rate loans from 2020 and 2021 needing to be refinanced. This has not had a significant impact on loan performance this year, however the concentration of residential lending within the sector means that this will continue to be a focus into 2024. “

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

  • Net assets increased by 4.2 percent to $11.7b (2022: $11.3b)
  • Operating profits before tax increased by 27.0 percent to $769.3m (2022: $605.7m)
  • Lending increased by 6.1 percent to $129.4b (2022: $121.9b)
  • Deposits grew by 4.4 percent to $131.1b (2022: $125.6b)
  • Non-interest income decreased by 17 percent to $317.1m (2022: $381.8m)
  • Net interest margin increased by 18 bps to 2 percent (2022: 1.82%)
  • Cost-to-income ratio decreased by 749 bps to 73.7 percent (2022: 81.2%)
  • Average capital adequacy ratio increased by 204 bps to 18.25 percent (2022: 16.21 percent)
  • Increase in credit provisions of $23.6m (2022: writeback of $10.8m)
  • 2 mergers completed (2022: 2)

Key challenges facing Mutuals in 2024

In the current operating environment, there are several key issues for Mutuals to consider in 2024.

  1. Finding a pathway to a sustainable and customer-centric future:
    The era of ‘buyer beware’ is gone and an emphasis on good consumer outcomes has taken its place. Australian and overseas regulators are increasingly shifting the onus of consumer protection onto financial services providers and focusing on the delivery of better consumer outcomes.
  2. Managing the cyber threat:
    Cyber threats are on the rise at an alarming rate in Australia. Smaller Australian mutual banks are increasingly in the crosshairs of cybercriminals due to their perceived vulnerabilities.
  3. Closing the gap on sustainability reporting:
    With an increasing focus on financial institutions assessing their financial risks due to climate change, much of the mutual sector is facing several gaps in their current sustainability reporting, despite historically being set up to drive sustainable outcomes focused on social purpose.
  4. AI introduces new risks as well as opportunities:
    There are immense potential and realised benefits in using AI in financial services. However, the rapid development of AI technology combined with the drive for more data (including personal data) presents significant risks for the mutuals.
  5. Considering CPS 230 Operational Risk Management:
    The APRA CPS 230 standard, particularly relevant to Mutuals, mandates a structured approach towards identifying, assessing, monitoring, and mitigating operational risks. While compliance might seem burdensome at first, delving deeper reveals the hidden potential for Mutuals to reimagine their operational strategies.

Mutuals' Outlook

The mutuals continue to remain positive in the face of ongoing market and economic uncertainty, with 73 percent of survey respondents revealing they feel confident in their three-year growth prospects (compared to 75 percent in 2022).

Consolidation remains a major topic in the sector, with two significant mergers completed during the year. The result of the mergers has seen a threefold increase in the number of Mutuals with total assets in excess of $20 billion. 

Darren Ball said: “The challenge to the mutuals’ for a purposeful future is maintaining this year’s results in the face of increasing demands from members as they navigate the impact of sustained high inflation and significant cost-of-living pressures, demands from the regulator, and increasing community expectations on ESG and data protection.”

“Mutuals that embrace these challenges and see opportunities through leveraging the strong connection to the community, sense of purpose and ability to embrace the possibilities of generative AI will continue to grow sustainably,” he added. 

About KPMG’s Mutual Industry Review 2023

The survey examines the performance and trends of mutuals in Australia’s financial services industry for the 2023 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.

For further information

Ash Pritchard
+61 411 020 680