Building Societies And Credit Unions Struggle
Sydney Morning Herald
Tuesday October 29, 2002
Keeping up with banks is costing credit unions and building societies more every year and threatening to put the non-bank lenders out of business, a KPMG report said yesterday.
Remaining a viable alternative to Australia's major and regional banks means credit unions and building societies must maintain their bond with customers and keep their brand in the market.
That means paying mortgage brokers, where 30 per cent of Australian home loans originate, to recommend their products.
Staying competitive has also meant offering the technology, such as BPay and internet banking, that major banks extend to their customers.
KPMG financial services division head Peter Nash said costs associated with creating new distribution channels as well as maintaining branches meant the cost-to-income ratios for building societies and credit unions were higher than for the major banks.
The cost-to-income ratio measures efficiency. While the banks' ratio has fallen to just above 50 per cent, the ratio for building societies increased to 73.5 per cent in the year to June 30, 2002, and to 79.4 per cent for credit unions.
``A higher level of cost to income, relative to the banks, is to be expected in this `not for profit' sector," Mr Nash said.
``Nevertheless, evidence such as relatively high interest-rate margins and comparatively (to the banks) low levels of operating income per employee lead us to conclude that the sector remains a high-cost provider of financial services with significant scale disadvantages."
Furthermore, work by building societies and credit unions to meet stricter regulatory guidelines covering capital and tax requirements, due to be introduced in the next few years, will add further to costs.
Mr Nash concluded the non-bank sector maintained its position in the financial services industry with the help of an increasing flow of fee income from a more diverse range of products.
``Over the past 18 to 24 months a significant number of industry participants have established alliances with wealth management entities and thereby providing an additional product offering for customers," he said.
``Notwithstanding efforts in this regard, inability to compete on this front does pose a significant risk."
Building societies and credit unions increased their profitability in the 12 months to June 30 by 16.8 per cent and 12.2 per cent respectively.
© 2002 Sydney Morning Herald