All non-major banks continue to struggle to compete against the funding edge, distribution channels and brand recognition enjoyed by the big four.

This proposition has been accentuated further by the introduction of the term funding facility and, subsequently, widespread offers of cut-price fixed-rate loans by the major banks.

Enhanced price competition will almost certainly continue while interest rates remain at a record low level – expected to for the next couple of years at least. The scenario has led to some mutual banks thinking outside the box.

Newcastle Permanent Building Society (NPBS) signed a A$300 million (US$228.1 million) whole-loan funding arrangement with Athena in late 2020.

The arrangement adds to Athena’s existing warehouse capacity and creates greater scale for the nonbank lender to grow, and to do so sustainably.

Mark Colless, chief financial and transformation officer at NPBS, said the transaction came about as a way to supplement the mutual bank’s growth during the 2020 downturn.

Like other banks, NPBS’s deposit growth was substantial in the early months of the COVID-19 pandemic. “While we were doing everything we could on organic loan growth, we saw our deposit-to-loan ratio jump to more than 100 per cent from less than 90 per cent. We were carrying a significant amount of excess liquidity.”

It was not just a case of finding something to invest in, though. Colless continued: “We have a conservative approach to risk appetite. In looking at what avenues to invest in, we focused on the opportunities that were close to our core business. The quality of Athena’s loans was a good option.”

Though the arrangement could be seen as a tie-up with a competitor, Colless drew attention to the fact that the four major banks make up around 80 per cent of the lending market in Australia. So there is little chance of NPBS and Athena being head-to-head in many mortgage decisions.

He added: “Even though we are at the larger end of the mutual-bank spectrum, NPBS and Athena are two small fish in a large pond. One of the other benefits from the deal is that we get diversification from a geographic perspective as a lot of our loans are centred around the Hunter region.”

But Colless pointed out that organic growth has to be the key focus for mutual banks. “Having the whole-of-customer relationship is always going to be central to everything a mutual bank does. When we were not getting the level of growth required and we were holding excess cash, the deal was a good way to supplement our organic strategy.”