Photo: Dean Jepsen, CEO (left) with Graeme Yeo, Chairman (right) at the 2019 AGM
First Option’s Chairman, Graeme Yeo, delivered an insightful report at the 2019 AGM.
Here is a summary.
Overall, it was a successful year both financially and operationally, despite a number of challenges. We were able to grow loans by 7.5% and deposits by 7.9%, while making a reasonable profit of $572,000. This was lower than last years profit of $691,000, which was expected due to the fall in interest rate margin.
For most of the previous year, we maintained very competitive deposit rates, despite the fact the loan rates started to fall. Twelve months ago, many experts were tipping official rates to rise, but instead the RBA reduced cash rates 3 times during 2019; in June, July and October to a historically low 0.75%. We have also encountered strong competition, especially in the mortgage market.
The report from the Banking Royal Commission was released in February 2019. They came out with 76 recommendations that were largely targeted at the big banks. However, the full impact on First Option is yet to be fully known. They also raised some issues on both APRA and ASIC, which has revved up their oversight of the banking industry.
We also changed our name last year, from First Option Credit Union to First Option Bank. Overall, it was a very smooth transition to the new name and was well managed by staff. We explained the reasons to our members and they have been understanding, as we remain 100% member-owned.
First Option also conducted a review of business operations, to ensure we are directing resources to the right places. We looked at our current branch structure and decided to go cashless, closing branches at Granville and Ringwood. Branches are costly to maintain, and with low foot traffic we could not justify their expense. At Granville, Tabcorp ended our lease as they need the space for themselves.
On the positive side, the money that we save can be better spent by investment in digital bankingsolutions. We changed our phone system to give members more options when they call in for assistance. We also reviewed our products and decided to discontinue our Cash Rewards Credit Card. These members have been transferred to the Low Rate Credit Card product. We also reviewed the feedback that we received from members, to ensure that we continue to meet their expectations.
In order to grow the business, First Option continued to negotiate rates on both deposits and loans when necessary. We also experienced an increase in costs during the year; for example Australia Post imposed a large fee for the use of Bank@Post. Also, a number of levies increased during the year.
Despite all the challenges that faced First Option Bank throughout the year, reduced interest margins, increased competition for deposits and mortgage loans and increased costs, it was pleasing to see that we still achieved great results.
From a broader perspective, economic conditions continued to be weak. Retail sales were lower than forecast, while household debt and unemployment have increased. As a reaction, people are being more conservative; saving more and borrowing less, while trying to pay back their debts as quickly as possible. On the international front, there are increased tariffs, the impact of Brexit and the general slowing of global growth. Consumer confidence has also been impacted by ongoing media reports regarding the exposure by the Royal Commission of activities within banks, insurance companies and super funds.
So what are our challenges in the future? How low can interest rates go?
First Option must continue to grow our profits to further improve our capital base and overall financial position. We must also achieve a balance between deposit and loan interest rates to ensure a financially sustainable interest rate margin. So that means achieving lending growth, despite strong competition.
We must also review the Royal Commission’s recommendations. We need to make sure that we have the right culture within First Option, as we can expect stronger regulatory oversight in the future. We need to continue to monitor our governance and accountability processes.
Most importantly, we need to maintain a focus on servicing our members and giving them alternatives to the traditional branch. This includes improving our products and our use of technology such as our banking app and internet banking. Our members expect personal service, but they also want to do their banking 24×7 on their mobile devices, so we need to add more options to our app. We are also reviewing our logo and brand, so that it appeals to the next generation of members.
To be successful, team work is essential. It makes tackling the daily challenges we face easier. We also need to remain focused on risk management issues and the implementation of appropriate risk mitigation strategies. And importantly we all need to enjoy coming to work every day.
As at 31 October 2019, both financial and operational indicators are tracking well considering the low interest rate environment, current economic conditions and strong competition. We are achieving growth in total loans and strong growth in total deposits. Total assets now exceed $243 million and profit is above budget.
I would like to thank my fellow directors for all their support and contributions over the year. I would like to thank the CEO, Management and Staff for their high level of member service and commitment in running the bank. Over the last 12 months we have employed some new people who bring expertise from a wide range of areas. This will help us in the areas of loans, IT and member service. I’d also like to thank all our hosts for their support.