Big year tipped for small banks as consolidations loom in order to take on the big four

Small banks must get bigger to compete against the majors and the head of one challenger believes the mutual sector could be reduced to just 10 contenders in a decade.

Qudos Bank chief executive Brendan Wright.

Australia’s small banks must get bigger to compete against the majors, and the head of one challenger believes the mutual sector could be reduced to just 10 contenders in a decade as mergers increase.

Qudos bank chief executive Brendan Wright said it was clear the neobank boom had failed to make a dent on Australia’s majors and the so-called “big four” of Commonwealth Bank, NAB, Westpac and ANZ.

Writing in The Australian, Mr Wright said although attempts to introduce competition into the sector from outside appear to have failed, incumbent banks offered an alternative to the heavyweights.

Qudos bank is currently preparing for a merger with Bank Australia in a deal to be brought before a vote of members this year.

The deal would result in the combined mutual banks forming a $17bn lender with almost 900 staff.

The planned merger is the latest in a series of completed deals, or announced amalgamations of mutuals and smaller lenders.

Mr Wright told The Australian he expected more mergers in years to come and that small banks must combine to compete with the major lenders as well as meet the technological and regulatory challenges coming for the banking sector.

“There’s some thinking within 12 years there could be 10 mutual banks,” he said.

“The theme of consolidation will absolutely continue, because of the need to have that appropriate level of scale.”

Mr Wright said this was due to the needs of banks to provide “contemporary product and service offerings”.

Customer Owned Banking Association chief Mike Lawrence. Picture: Jane Dempster

He said the merger of Qudos and Bank Australia was in part a “deliberate proactive strategy around finding the right merger partner so we can continue to have the scale to meet the regulatory expectations around digital transformation and scams and fraud”.

Many mutuals have ageing core banking platforms, and a key motivation of mergers is often the adoption of new systems or the spread of the cost of integration across more customers.

Heritage Bank’s combination with South Australia’s People’s Choice, forming the new People First Bank, has resulted in the newly constituted mutual select Fiserv as its new banking platform.

ANZ expressed the same sentiments with its acquisition of Suncorp Bank, and it hopes to spread the cost of ANZ Plus between 1.2 million customers.

The Australian Competition and Consumer Commission sought to block this deal, saying it represented a worsening of competition in the banking market.

But the Australian Competition Tribunal approved it after finding “maverick” lender Macquarie was keeping the market competitive.

Mr Wright said competition was “alive and well” in the banking market, and that the mutuals were competitive against larger banks.

But many in the small and medium banking sector felt the deck is stacked against them, due to their concerns the regulators have attempted to impose the same set of standards across the industry irrespective of size.

Summerland Bank chief executive John Williams.

At a recent meeting between the Reserve Bank of Australia governor and the small bank sector, a small bank boss said the system was growing more difficult.

Sources said one attendee told the RBA governor that “being a bank is hard; being a small bank is harder”.

The increase in capital rules introduced by the Australian Prudential Regulation Authority since the global financial crisis has forced smaller lenders to hold more cash on balance sheets, leading to a chase for deposits.

Customer Owned Banking Association chief executive Mike Lawrence said the sector faced a “blizzard of compliance”, but Treasury’s review offered an opportunity to highlight a number of issues.

The review, which began in August, examines the way small and medium-sized banks provide competition and how market trends affect their competitiveness. It is due to report by 1 July this year.

Mr Lawrence said it was critical for governments to review regulator mandates so that they consider competition. He said in the UK there was a requirement when awarding business to consider mutuals and so ensure corporate diversity.

MyState chief executive Brett Morgan. Picture: Linda Higginson

The federal government has explored ways to tilt the scale in favour of regional operators; Treasury has considered a levy on banks with few branches outside the cities to fund those servicing the regions.

But Summerland Bank chief executive John Williams said more work was needed to support the sector, pointing to Treasury’s current regulation considerations as a positive step.

The NSW Northern Rivers-based Summerland is exploring a merger with Regional Australia Bank, based in Armidale.

Mr Williams said unless there was a “reset in the operating environment or government support for small and medium banks” the continued pace of mergers in the sector would continue.

Tasmanian operator MyState Bank, which demutualised in 2009, is preparing for a merger with Queensland lender AusWide Bank.

MyState chief executive Brett Morgan said small listed banks were facing the same issues as the mutual sector.

Mr Morgan said MyState had been on an aggressive growth journey since he took on the top job in 2022, allowing the group to spread costs across more customers and a larger balance sheet.

“To look forward 10 years, I would imagine that of the Australian retail banks, there’s likely to be 15 to 20,” Mr Morgan said.

He said the next part of MyState’s journey would be to get efficiencies from a deal with AusWide and the combined group would secure more of the mainland Australian market.

MyState has rapidly grown its home lending book, securing borrowers from rival banks during the Covid-19 period funded by record low interest rates.