More mergers of small Australian banks imminent: analysts

Two mergers were announced in August alone, and as regulatory costs remain high, more might seek to consolidate.

Analysts expect to see more consolidation amongst smaller financial entities in Australia, including smaller banks, as regulatory and compliance costs remain high and with investment in IT increasing. 

“Mergers amongst mutual lenders in Australia have gained momentum. Competition for commoditized product and service offerings remains strong, with a growing need for greater efficiencies to compete,” S&P Global Ratings analysts Riley Michel and Lisa Barrett said. 

On 18 August, Queensland-based Heritage Bank (HBL) and South Australia-based Australian Central Credit Union (trading as People’s Choice Credit Union) announced that they have entered into a non-binding agreement to explore a merger. This merger will provide greater geographic diversity for HBL, noted Fitch Ratings.

“People's Choice's business focused mainly in South Australia and the Northern Territory and [will complement] HBL's focus on the east coast markets, particularly its home state of Queensland,” Fitch’s report read.

Whilst the combined entity won’t dent the broader market share, and will still be a relatively small player, Fitch said, it will create one of Australia's largest mutual lenders. Each lender's asset base is currently close to A$10b, with a core business focused on deposit-funded mortgage lending, according to S&P’s Michel and Barrett.

The Heritage-People’s Choice is the second merger announced in August. Newcastle-based Greater Bank and Newcastle Permanent Building Society have announced a similar merger on 4 August. 

Accelerated digitalization of operations and customer preferences amid the COVID-19 pandemic have likely spurred the trend, S&P said.

Bigger geographic diversity, easy integration
The merger of Australian mutual lenders HBL and People’s Union  will provide greater geographic diversity for the combined entity and will not have any major material impact on the business, analysts note.

Should the merger proceed, the new entity will account for about 0.5% of system assets at June 2021, 0.8% of system mortgages and 1.2% of household deposits.

S&P analysts Michel and Barrett said that to reap the benefits from the merger and minimize any drag on the core business, the combined entity would first need to successfully overcome any integration challenges, including those posed by the substantial geographic distance between the entities' headquarters. 

Michel and Barrett added that the combined entity would be well-placed to capture some benefits of scale, an important determinant of profitability among mutual lenders. 

Both Fitch and S&P agreed that the lenders' simple and similar business models should help with the integration. The simple business models should also support ongoing sound asset quality over the long-term if they proceed with the merger.

However, the merged entity would likely remain susceptible to heavy price competition from Australia's larger and more profitable banks, Michel and Barrett said. “In our view, the merged entity's business strength would not be materially different to other large Australian mutual banks,” they added.