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Loyalty first, now challenge begins at Home

HOME Building Society members have demonstrated that there really is no place like home, placing $12 million into the society in its recent move to become a public company. The response resulted in the early closure of the issue, before it was made available to the general public.

In response, an elated Home chairman Bernard Wright stated: “We are not surprised at the response by members, who have always been loyal to Home. The support highlights the recognition of the high quality of personalised service to its customers that Home has become renowned for during its 55 years.”

Disgruntled former bank customers have repaid loyalty with loyalty, but the challenge now is for Home to maintain that loyalty as it operates under a different business model, one in which the shareholder, not the customer, is king.

Home has been able to maintain member loyalty through greater services and more accessibility, but it doesn’t come cheaply.

Figures produced by KPMG show that, while costs-to-income ratio for Australia’s building societies improved to an average 75.20 per cent, Home’s rate went the other way, rising from 75.6 per cent in 1996 to 84.5 per cent in 2000. By contrast, the big banks have reduced their operating costs compared with operating income from 63.2 per cent to just 55.3 per cent. ANZ operating costs are just 47.3 per cent of income.

At the time of the report’s release, in October last year, KPMG financial services head Peter Nash warned that building societies and credit unions had to continue to differentiate their products and services.

“If they try to be all things to all customers in terms of product, but without any point of differentiation, they’ll just become one of the pack and fade behind the banks,” Mr Nash said.

But with a new stakeholder in the picture, albeit one that is currently also a customer, profits will be demanded and directors will have to look at reducing their efficiencies to provide a strong return to shareholders, he said.

DJ Carmichael industrial analyst Justin Stewart said that, with the changeover to a public company, the profit distribution changed from customer to shareholder.

“What will happen to building societies is that, over the next 12 to 18 months, you will see that many of the benefits that used to flow through to members will begin to flow through to shareholders,” Mr Stewart said.

He said the drive for shareholder return could cause some difficulties for Home.

“If they take those services away then they are going to lose their customer loyalty, and the whole thing that the building society is built on,” Mr Stewart said.

But the main challenge facing Home, Mr Stewart believes, is the size of the society and its subsequent bearing on costs. Consolidation was necessary to gain efficiencies and to get their costs down, he said.

Tying into the services of a bank also could be a possibility, with Mr Stewart putting Adelaide Bank forward as a possible takeover contender.

Banks have in recent years proved highly competitive in the home loan market.

With its traditional market under pressure, Home has resorted to seeking other revenue streams.

Involvement in housing developments has been the answer, with around 40 per cent of Home’s profit coming from direct investments in real estate.

Home CEO Jim Freemantle acknowledges that Home’s traditional heavy reliance on the housing industry, could put it under pressure in the next year if the housing industry falls from its current high.

“Certainly we will see some levelling off in the next six months, but I don’t think we have overbuilt here, so we expect to be able to continue on reasonably well,” Mr Freemantle said.

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