People First Bank prepares for more mergers after posting first profit

People First Bank, the combined Heritage Bank and People’s Choice, is planning for further growth, with boss Steve Laidlaw ­targeting roll-ups with like-minded rivals.

People First Bank chief executive Steve Laidlaw. Picture: James Elsby

People First Bank, the combined Heritage Bank and People’s Choice, is planning for further growth, with boss Steve Laidlaw revealing the major mutual is ­targeting roll-ups with like-minded rivals amid challenges for the small banking sector.

Speaking as People First Bank unveiled its first combined full-year earnings, posting a $41.4m profit up 29 per cent on $32.1m last year, Mr Laidlaw told The Australian the bank was winning business from the big four, with growth on both sides of the balance sheet.

Mr Laidlaw said the profit jump showed the dividend from the merger of the Adelaide-based People’s Choice and Toowoomba-headquartered Heritage Bank.

He said the merger had come amid a busy deals period for banking, with ANZ’s $4.9bn acquisition of Suncorp in the rear-view mirror in the wake of Bendigo Bank’s $116m takeover of fintech Ferocia.

Mr Laidlaw said it was clear more consolidation in the sector was coming, with the number of mutuals and small lenders already slashed on levels 10 years ago.

“When I joined this sector 12 years ago, there were approximately 110 mutuals, now there are about 55,” he said.

“My expectation is you will get to somewhere below 10 mutuals within a dozen years.”

He said the squeeze would be driven by margin compression, which is already hammering home lenders, along with a significant jump in regulatory obligations and the need to spend on technology.

“I think that third piece is perhaps missing in a lot of the considerations that are going into MNA activity,” Mr Laidlaw said.

He said the new People First Bank had “a strong aspiration to be a merger partner of choice” for others in the mutual banking ecosystem. “We think we have a lot to offer in the technology architecture space,” he said.

People First Bank has made a significant show of its tech transformation, with former chief executive Peter Lock announcing plans to adopt Fireserv as a core banking platform, replacing the legacy core banking systems of Heritage Bank and People’s Choice.

Mr Laidlaw, who took on the top job after Mr Lock retired, said banks had historically struggled with tech integration programs.

“We’ve been very focused in terms of governance around the project and how it is proceeding.”

Mr Laidlaw said People First Bank was “on track and on budget” with its build, noting “everything is being changed out and will predominantly be an evergreen and cloud-based infrastructure”.

“We think that’s fundamental in terms of the ongoing viability and relevance of our banking institution to the market,” he said.

“It’s certainly not lost to us that a range of other organisations including Westpac, CBA, Bendigo Bank have finally bitten the bullet and are trying to move to a much simpler technology architecture.”

Former chief executive Peter Lock.

Westpac recently warned it would spend more than $2bn on its Project Unite tech program, aimed at taming legacy systems. This comes amid challenges for banks, which face slumping profitability from home lending.

People First Bank posted a 10 points slide in net interest margins, the core metric reflecting the profitability of its lending, 10 points to 2.04 per cent.

This comes after repaying $680m from the Reserve Bank of Australia’s pandemic-era Term Funding Facility, which lent banks cash at near-zero cost.

Total loans lifted 6.2 per cent in the year, hitting $20.3bn.

Mr Laidlaw said People First Bank aspired to originate one in two loans in-house, but noted mortgage brokers were also an important driver of new business.

Australia’s recent run of bank earnings updates has featured a steady drumbeat of rising arrears figures, as consumers struggle with higher inflation and elevated interest rates.

People First Bank posted a three basis points rise in 60-day arrears to 87 basis points.

Mr Laidlaw said Victorian borrowers were the bank’s most troubled customers, noting there was higher stress in that market amid lower house price growth that has left some unable to exit distressed home loans.

“There would be a large proportion of those borrowers who took out loans when rates were at historic lows,” he said. But he didn’t see a need to tweak lending rules from APRA, which has come under pressure amid a looming Canberra parliamentary inquiry.

APRA requires banks to assess borrowers at 3 per cent above the rate at which they are currently borrowing, stress testing them for potentially higher repayments.

Mr Laidlaw said it was “very difficult to see interest rates going up, even marginally”, noting the current rules made it “very restrictive and another barrier to home ownership” for some borrowers.

“Our preference would be for a more considered and scientific level of thinking going into that type of consideration,” he said.

Originally published as People First Bank prepares for more mergers after posting first profit