Mutual Banks in 2025: Balancing Tradition, Transformation, and Resilience

The mutual banking sector, with its unique and unwavering customer-centric values, continues to serve over 5 million Australians. This commitment is not just a philosophy, but a reflection in the sector's assets of over $180 billion and annual economic contributions exceeding $2 billion. Despite these impressive figures, the sector must address emerging risks strategically. Mutual Banks are key contributors to competition and their communities. As the sector has faced accelerated consolidation in recent years, the future presents complexities for the sector leaders. Here is an updated perspective on how risks for mutual banks may evolve in 2025.

Key Risks and Future Outlook

1. Economic Challenges and Agility

Economic challenges remain as mutual banks rely heavily on retained earnings for capital, as their unique structure limits their ability to raise equity. Since 2018, mutual banks have been able to issue mutual equity interests that meet the requirements for Common Equity Tier 1 (CET1) capital, but there has been minimal issuance to date. This underscores the urgent and continuous need for robust financial and growth strategies. In FY2024, the sector witnessed improved profitability, driven by higher interest rates and continued loan growth. Net assets grew modestly, while the sector's cost-to-income ratio remains higher than that of major banks despite marginal improvements. This is not going to change significantly in 2025.

While global economic instability has limited direct impact, the inflationary pressures present ongoing challenges, particularly in sustaining profitability and supporting local communities.

2. Technology and Cybersecurity Risks

Cyber threats have intensified, with third-party vulnerabilities posing a significant risk across all institutions, including financial services and mutual banks. Many mutual banks continue to outsource core banking systems and critical operations, increasing exposure to third-party incidents. Cyber-attacks' inevitability demands enhanced resilience through collaboration with regulators, investment in advanced security technologies, and fostering a cyber-aware culture.

Rising cybersecurity costs and technological upgrades are expected to continue impacting margins further unless an end-to-end shared service model is implemented. Focusing on integrated business continuity and incident management will help mitigate risks and strengthen customer trust. Yes, CPS 230 Operational Risk Management will assist in guiding mutual banks in the right direction, but at what costs?

3. Third-party Risk and Contagion Effects

The reliance on common third-party service providers has amplified the potential for contagion risks across the sector, highlighting the critical need for robust third-party risk management frameworks.

Sector-wide collaboration and regulatory initiatives aim to enhance operational resilience, but much still needs to be done. These requirements must be contractually binding before reliance can be placed. Ensuring proportionality in regulatory compliance for the mutual sectors remains crucial to maintaining operational stability while keeping costs low.

4. Regulatory and Compliance Pressures

Increased regulatory expectations, particularly around capital adequacy, liquidity, governance, and compliance, have placed significant financial and operational pressure. New mandates across APRA, ASIC, RBA, Treasury, AUSTRAC and ACCC demand continuous governance frameworks and resource allocation enhancements.

The Regulatory Initiative Grid (RIG) provides a consolidated and summarised view of upcoming legislation, but mutual banks need proportionate applications, specialised guidance, and longer implementation timelines. The Customer Owned Banking Association (COBA), representing mutual banks, has advocated for tailored regulations, i.e. "Fit-for-purpose" regulations that consider mutual banks' unique structure and customer-centric values. A sustained focus through government and regulatory engagement and efficient compliance strategies is essential to balance costs and regulatory demands.

5. People and Culture Risks

Attracting and retaining young talent is a pressing challenge for the sector, especially given the ongoing consolidation wave. The urgency of this issue cannot be overstated. Workforce integration further complicates matters, requiring a significant focus on cultural realignment and change management. Investments in employee training, diversity initiatives, and future leadership development will be instrumental in hiring and maintaining a resilient and engaged workforce capable of addressing this sector's evolving risks.

Investments in employee training, diversity initiatives, and future leadership development will be instrumental in hiring and maintaining a resilient and engaged workforce capable of addressing this sector's evolving risks.

6. Liquidity Risks

Liquidity management is under scrutiny as APRA reviews standards for smaller banks. While most mutual banks currently exceed the Minimum Liquidity Holding (MLH) requirements, future changes toward a Liquidity Coverage Ratio (LCR) regime, a new liquidity standard, may pose challenges.

Proactive liquidity planning and sector-wide advocacy for proportionate regulations will be critical to addressing potential liquidity stresses.

7. Digital Disruption and Innovation

The shift toward digital banking solutions remains vital for mutual banks to meet evolving customer expectations, especially those of the new mobile generation. While IT systems and funding constraints impede progress, partnerships with fintech and investments in emerging technologies are gaining momentum. The use of AI and bots is becoming attractive to simplify the process and gain efficiencies.

Sustainable innovation strategies will need to be delivered, for the sector to remain competitive in 2025.

8. Sector Consolidation

Since the early 2000s, mutual banks' market share has declined to 6% of system assets. This has led to Sector consolidation, which has accelerated in recent years as smaller mutual banks seek scalability and operational efficiency. High-profile mergers have demonstrated the benefits of combining technology, resources, and expertise, though cultural integration challenges may intensify further and may take longer to settle.

Consolidation will likely continue, driven by the need to scale technology and meet ever-growing regulatory demands. Success will hinge on strategic alignment, growth strategies, experienced leadership, and a shared vision.

Embracing the Future

As the sector navigates this transformative phase of inorganic growth through consolidation, it is crucial to safeguard the sector's core mission of serving customers and communities, while also identifying and seizing new opportunities. Balancing Tradition will be as important as Transformation, and remaining Resilient.

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