Warren, you've had a quick look at the Australian mutual banking sector - what are your observations as a value investor?

I’ve spent a lifetime looking at businesses through a simple lens: find those that can deliver consistent value over the long term. In the process, I’ve come to appreciate organisations that understand who they serve, how they make money, and why they deserve to exist.

Today, let’s imagine I had the chance to examine Australia’s mutual banking sector. It’s a fascinating area, with small institutions owned by members rather than shareholders. But can these mutuals stand tall against the big players? Let’s explore.

On the appeal of member-focused institutions

• Community and Customer Loyalty: Mutual banks enjoy a built-in advantage: they are owned by the very people they serve. This nurtures deeper trust. Folks tend to feel more at home with a bank that knows their name. But, as I’ve often said, a business stands a better chance when it truly understands its customers.

• Long-Term Mindset: Without the usual shareholder pressure, these banks can, in theory, focus on long-term value. They can invest in programmes and services that truly benefit members without having to explain short-term results to the market.

• The Flip Side: That same ownership structure can lull people into complacency. If members aren’t clamouring for dividend returns or surging share prices, there’s less scrutiny on daily costs. Yet any bank, mutual or otherwise, runs on how well it balances income and outgoings.

“I always say, if you can’t hold an investment for ten years, you shouldn’t hold it at all.”

In principle, mutuals share that horizon, aiming to improve members’ financial well-being over decades rather than quarters.

The cost structure challenge

• Commoditised Market Pressures: Banking, especially in lending and deposit-taking, is tough to differentiate, other than through cost, convenience, and brand. In any commoditised sector, cost structures become very important. You won’t get far if your competitors can offer better rates, or spend more on technology, because their costs are lower.

• Economies of Scale: Large banks spread fixed costs - compliance, tech infrastructure, regulatory overhead - across millions of customers. Mutual banks often don’t enjoy those same scale benefits, which can mean higher per-customer costs.

• Balancing Service and Costs: Great customer experience usually calls for people, time, and technology. That doesn’t come cheap. Mutuals need to ensure every penny spent on ‘experience’ earns genuine loyalty. If members don’t value these extra services enough to stick around, you’re left with an unsustainable cost model.

• Resilience: When times get tough, mutuals without robust cost structures can end up in a pinch. An investment principle I’ve stuck to is to look for businesses strong enough to weather economic storms. I’d say the same applies to mutual banks.

“One thing I’ve learned: you can’t spend your way out of a basic cost disadvantage. You have to innovate, streamline, or find a niche where you can excel.”

A mutual without cost discipline is like someone trying to win a marathon in heavy boots. You can be determined, but physics is against you.

Staying relevant in a changing market

• Digital Transformation: Banking has moved online at incredible speed, especially when I look back over my lifetime. Mobile apps, automated services, and online platforms are no longer optional - they’re central to meeting customer expectations. This can be expensive. For Mutuals, they must invest wisely to avoid straining their resources while also keeping pace with those evolving expectations. Technology in banking is like electricity – not having it isn't an option, but overpaying for it doesn't make the lights any brighter.

• Consolidation and Competition: The sector has been consolidating as mutuals wrestle with compliance, labour costs, and technology demands. While merging can create scale, it risks diluting the very community focus that sets mutual banks apart. Add broker networks and non-bank disruptors, and you have a real cocktail of competition. Mutuals should carve out unique roles to remain relevant and find innovative ways to create value.

“In times of industry upheaval, being proactive is worth a lot more than being reactive.”

If mutual banks don’t adapt, even the most loyal members might be tempted to jump ship for convenience or lower costs. Staying lean, innovative, and member-focused is crucial.

The importance of leadership & governance

• Strong Boards and Management: I’ve always put my faith in people who put their stakeholders first. In a mutual bank, the stakeholders are members, and a board that champions them will make decisions for the long haul, not just next quarter. A mutual bank’s leadership must advocate for members above all else.

• Accountability and Transparency: In my experience, good governance is like oxygen - nobody notices it until it’s missing. Over the years, I’ve found that clarity in communication builds trust, a foundation to good governance. I think that banks that explain where each dollar goes, especially on cost-heavy items like technology or compliance, will tend to keep faith with their members.

“At Berkshire, we don’t just look at numbers; we look at the people. It’s vital to know who’s steering the ship.”

I think Charlie would say that mutual banks face a classic incentive problem – when everyone owns something, sometimes nobody feels responsible for it. Smart governance bridges that gap.

And, so, in conclusion ...

From my vantage point, Australia’s mutual banks have a real opportunity if they can balance community focus with disciplined cost control. They ought to manage risk carefully, invest in the right technology, and keep a steady eye on how to stand out in a commoditised market. You don’t need to be the biggest if you understand your niche - and serve it better than anyone else can.

If I were to invest in a business like a mutual bank, I’d look for those that treat their capital like the scarce resource it is. With no ability to raise equity except through earnings, every investment decision carries extra weight. I’d also look for boards and management teams that are brave enough to define what success looks like beyond growth – they’d measure member impact with the same rigor they apply to financial metrics.

In short, the mutual banks that deliver consistent member value while carefully minding their costs would catch my eye. They’d have the best chance of thriving in an industry where competition is fierce and scale counts. As with any worthwhile enterprise, you look for strong leadership, a solid economic engine, and a culture that prioritises long-term success. To me, that’s a winning combination.

“Time is the friend of the wonderful business and the enemy of the mediocre.”

As Charlie would say, “A well-run bank is like a well-run kitchen: no waste, no nonsense, and everything in its place” and I think that goes for mutuals as well. Good luck - you'll need a bit of it, but the opportunity's there!