Australian Credit Unions May Need to Take on Higher-Risk Products to Compete, Report Suggests

Australian Credit Unions May Need to Take on Higher-Risk Products to Compete, Report SuggestsA new report from ratings agency Moody’s Analytics suggests that heightened competition from major financial institutions in Australia may adversely affect credit unions’ and building societies’ bottom lines, something which may behoove these smaller institutions to inveigle customers by means of higher-risk loan products.

Based on its findings, Moody’s stated that mutual financial institutions could continue banking on the convivial relationship they maintain with their longtime customers, but they may face a greater challenge from larger banks in the mortgage and deposit spaces. According to Moody’s associate vice president Daniel Yu, ‘The main credit issue facing the (mutual) sector in 2014 will be increased competition on both loans and deposits, which will in turn threaten margins and may pressure certain institutions to increase their credit risk appetite.”

Moody’s added that larger credit unions and building societies now have more products with interest-only features and loan-to-value ratios of over 90 percent; these are products generally considered to come with higher risk factors. The agency also observed how mutuals are thinking out of the box, by courting customers that are not from their usual bailiwicks.

”Some mutuals have responded to growth and margin pressure by broadening their geographic coverage, or relaxing their underwriting standards, albeit from a conservative starting point,” said Moody’s, which warns against the chance of a paradigm shift to high-risk lending as a result of this out-of-the-box strategy.

Meanwhile, watchdog groups have separately stated that larger financial institutions are flexing too much muscle over smaller mutuals, something that has to be curbed by the Australian government’s financial arm. According to Customer Owned Banking Association head Louise Petschler, the Moody’s report came at the right time given the prevailing circumstances in the commonwealth.

‘The major banks have unfair advantages delivered by the regulatory framework that they can use to compete aggressively against smaller players,” she added. “It is challenging for our sector to increase market share in this environment but we are maintaining our share of the household deposits market.”