Will banking become more competitive?

Ross Greenwood speaks to Peter Lock, from Heritage Bank, about Treasurer Scott Morrison’s bid to unshackle mutual banks to make it easier to compete against the big four banks’

Introduction: Will banking become more competitive?

Ross Greenwood:  When you go to issues of banks right now, the four big banks made $31.5 billion combined in the past 12 months. Many people say that’s too much money. If you want them to make less than you’ve got to do something active yourself to stop that. Then the issue I’ve actually got to go on move to competition, and you have got to be prepared to take a different deal. That’s it. Full stop. End of story.

Because frankly, I got to say if you’re right now paying 4.2, 4.5% on your mortgage, you are quite clearly giving the banks the profits that you might complain about. It’s up to you. But now you’ve got to have an ability to have others compete on an equal footing. Although reports been handed down to government, the government has taken up in full recommendations to allow mutual organizations and customer own banks here in Australia, to raise their own capital.

Now this is quite a different thing because it means if they can raise capital, they can lend out more money and have more strength backing those loans as well. We’re talking friendly societies, we’re talking credit unions, and we’re talking building societies. In particular, building societies that may have even converted into banks. Here again, is Scott Morrison the treasurer, a little earlier when I spoke with him.

Interview with: Peter Lock, Heritage Bank, CEO

Scott Morrinson: We will enable them to raise capital, particularly Tier One capital which puts them in a much stronger position in taking it up to the larger banks. 10% of the home loan market is actually held by these types of banks and cooperatives. We want to see them being able to compete even more than they are now.

Ross Greenwood:  Okay, right. Let’s go now to the boss of one of the biggest customer own banks in Australia, Heritage Bank. Peter Lock, is the Chief Executive, is on the line. Many thanks for your time, Peter.

Peter Lock: Pleasure, Ross.

Ross Greenwood:  How does the government taking up this recommendations change your world day-to-day?

Peter Lock: We see it as a game changer. Something that we’ve been advocating for a long time but access to capital, access to Tier One capital as the Treasurer said is really the golden nugget that we’re looking for.

Ross Greenwood:  That being the case, can you explain to me practically how you would raise that capital? And just how this would change the outcome for a customer of your organization?

Peter Lock: Firstly, we’d issue– When the recommendations are passed into law through the various legislative instrument, we would go to the market with the capital instrument in much the same way as a bank would. Would be a share type of instrument that will carry a dividend, and that would be a frank dividend in most cases. It would be an attractive investment proposition.

Ross Greenwood:  Just a quick one. How does that differ from right now if I go to a Friendly Society, if I go to a Building Society, if I go to a Credit Union? I effectively become that member but I’m not required to put capital in because ultimately all of the proceeds come back to me as that member in terms of cheaper goods and services or cheaper services, cheaper loans, all that type of thing?

Peter Lock: Correct. Working exactly the same way. We are still owned by members, we’re not being mutualizing. As you go to a capital instrument it’s allowing us to continue the mutual, continue to plow that money back to our customers and the communities which we operate.

Ross Greenwood:  From a practical point of view, would you go and make an offer to all of your existing members to say, “If you wish to, you can put money into the organization.” Or is there already capital there that would effectively give them free shares in your organization?

Peter Lock: No. They way that it would work– The way that we’re sure it would work is the new capital instrument. You would be issuing a– Obviously, issuing to your existing members but also other interest party. This is a well run institution so it’d be a very, very attractive proposition for not only moms and dads but also institutions.

Ross Greenwood:  All right. Do you believe that it would allow you to make more loans therefore, be more competitive against banks? Because one of the problem is, you can come out with an offer. Let’s say, for example, you can get a home loan rate out there at 3.6%, 3.7%. Looks great. But the problem is, everybody floods into the Heritage Bank to try and take advantage of that offer. That pool of funding can dry up pretty quickly for you. You’ve only got a final amount of lending that you can do before the rates have to go back up.

Peter Lock: On the current operations, that’s right. But under the new regime we’re able to issue Tier One capital or a Common Equity Tier One capital. At the moment we can only generate that through retained earnings. When you’ve got an access to a new capital pool it means we’ve got money to accelerate our investment, new technology, bringing out new products, a new access to products, to client. We can extend our range and definitely extend our capacity to lend more because that capital is the basis of our home lending as you’ve just explain.

Ross Greenwood:  I’ll tell you what, really good stuff. Appreciate your time on the program this evening. The Chief Executive of the Heritage Bank, Peter Lock. And this is actually the government taking up– This was also when the Treasurer was talking to me. His whole business as usual thing, which is good. They got to put on that front but a very difficult given the fact you don’t know quite know whether you’re going to have the numbers. Not just in the Senate but also in the House of Representatives. The other side of Christmas and that might make it even more difficult to get some of these things through. Peter lock, as I said from the Heritage Bank, we appreciate your time.

Peter Lock: Thanks, Ross.



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