Tag: Mutual

Australia’s decision to allow Mutuals to issue capital instruments is credit positive

According to Moody’s, last Wednesday’s  Australian government announcement that it would accept all 11 recommendations of the so-called Hammond Review on regulatory and legislative reforms to improve access to capital for co-operative and mutual enterprises, is credit positive for these entities because it provides an alternative to building capital with retained earnings. In particular in the banking sector, the allowance also shows that the government regards mutual authorized deposit-taking institutions (mutual ADIs) as integral to healthy competition in Australia’s banking system.

Mutual ADIs will be able to build capital in case of need by issuing capital instruments as opposed to relying solely on retained earnings to do so. In theory, the ability to issue capital instruments could facilitate a significant increase in mutual ADI loan growth: we estimate that mutual ADIs could raise up to AUD 1.2 billion through the mutual equity interest framework, supporting AUD 24 billion (or 21%) growth in loans.

Our estimate is based on mutual ADIs’ capital as of 30 June 2017, applying a 15% cap on the inclusion of capital instruments in common equity Tier 1 (CET1) capital, and a current CET1 ratio of around 14%. However, we do not expect such strong CET1 issuance because the mutual ADI sector is already strongly capitalized relative to the broader Australian banking sector.

Yet, some mutual ADIs with smaller capital buffers may issue capital instruments to support housing loan growth. Australia’s larger banks have moderated their residential mortgage lending as a result of macro-prudential measures to slow house price growth and steadily increasing capital requirements for banks that utilize the internal rating-based model for determining risk-weighted assets.

Since capital instruments issued by mutual ADIs would be equivalent to ordinary shares, and require dividend payments, some in the market are concerned that they will affect the traditional mutual business model.

Accordingly, the Australian Prudential Regulatory Authority (APRA) has proposed a 15% cap on the inclusion of such instruments in CET1 capital, and a cap on the distribution of profits to investors at 50% of a mutual ADI’s annual net profit after tax. These caps ensure that mutual ADIs continue to prioritize the interests of their existing members and are not incentivized to unduly increase their risk profile to boost returns to their new equity holders.

The government’s actions last week follow the July 2017 “Report on Reforms for Cooperatives, Mutuals and Member-owned Firms,” led by independent facilitator Greg Hammond. The government’s decision also follows a July 2017 proposal by APRA to allow mutual ADI to issue directly CET1-eligible capital instruments through a mutual equity interest framework.

RACQ Launches Regional Bank

From Australian Broker.

Motoring association and mutual organisation Royal Automobile Club of Queensland (RACQ) has launched the RACQ Bank brand, opening 13 branches across the state.

Unveiled 25 September, the bank will provide personal banking products including mortgages to RACQ’s 1.6 million members.

“We’re committed to giving members honest, easy and great value banking products and services, without any hidden fees or excessive charges,” said RACQ group CEO Ian Gillespie.

“We’re also one of Queensland’s last remaining mutual banks, and we are working for our members not for shareholders. Any profits the bank makes will be reinvested back into the RACQ ecosystem for the benefit of our members here in Queensland.”

In the first step of the bank’s expansion strategy, home loans will be offered through direct channels, RACQ Bank CEO Steve Targett told Australian Broker.

Targett was the former CEO of QT Mutual Bank, eventually becoming CEO of RACQ Bank after it acquired QT Mutual in November 2016.

“QT Mutual was a lot smaller. We had about 67,000 members. RACQ has got 1.6 million so the first step of our strategy is to penetrate that member base with personal banking products – the main one of which is mortgages,” he said. “Then we’ll look at the next step of our strategy in terms of penetrating our member base and cross-selling products.”

The bank will consider working with brokers at a later stage once these initial phases are completed, he added.

“It’s on our critical path of things to look at but not in the next six months. At some stage, it’s something that we’ve got to look at and will probably be one of the next things once we feel we’ve got our basic capabilities right.”

The bank’s main products – residential mortgages, car loans and personal loans – will be distributed across Queensland through RACQ Bank’s 13 branches and RACQ’s 34 stores.

“We need to look at providing some sort of banking capability out of some of RACQ’s stores particularly in areas where we don’t have branches. There are quite a few RACQ members up the seaboard between the Sunshine Coast and Townsville. We’ve got some stores there but we don’t have any bank branches. These are things that we need to look at.”

Building a team of mobile lenders was also on the agenda so that banking products could be offered to customers in remote locations, Targett said.

RACQ Bank’s loans will be funded directly through its equity such as transaction accounts and term deposits. The bank can also access wholesale funds through negotiable certificates of deposit or medium-term notes and can draw additional capital through RACQ itself.