Bank deposit rate cuts to hurt savers

The big four banks have slashed their key deposit rates while raising home loan rates to safeguard their profit margins, which are under threat from the subdued domestic economy and high wholesale funding costs.

An exclusive analysis carried out for The Australian by Ratecity.com.au, the online financial comparison site, found that the top four banks had each cut 20 basis points off their three-month term deposit rates since the start of the year.

Longer-term savings rates are estimated to have been cut by up to 40 basis points.

The move is the first step in an easing of the fierce competition for deposits and comes after the banks last month raised home loan rates independently of the Reserve Bank of Australia.

A reduction in term deposit rates will hurt million of Australian savers and retirees.

Commonwealth Bank of Australia, the nation’s largest bank, has 10 times more depositors than mortgage customers.

Australian consumers held about $419 billion of retail deposits at the major banks in January, up 8.8 per cent on the year before.

Added to that, businesses have $303bn on call at the banks, an increase of 6.2 per cent.

The Ratecity analysis shows CBA, Westpac, National Australia Bank and ANZ each offer 5.3 per cent on three-month term deposits, down from 5.5 per cent just three months ago.

The banks have sought to fund a higher proportion of their mortgage books from retail deposits to pare back exposure to volatile wholesale funding markets.

Term deposits now make up 45 per cent of banks’ deposit bases, compared with 30 per cent five years ago.

The banks played down the move in savings rates. “We continue to see competitive pricing in both fixed and variable rate deposits and there are still very good deals available to customers,” a NAB spokesman said.

RBA assistant governor Guy Debelle yesterday backed the retail banks’ arguments that higher funding costs, both from markets and deposits, forced mortgage rates to be raised independently of the central bank.

Dr Debelle said since the onset of the financial crisis, banks had increased the spread between lending rates and the cash rate for all loan types.

“The increases have varied across the different types of loans, partly reflecting differences in the reassessment of the riskiness of those loans and expectations regarding loss rates,” he said.

The banks’ likely moves are a factor in the RBA’s monthly decisions on the official cash rate.

“The primary factor driving the increase in the spread between lending rates and the cash rate has been the increase in the relative cost of funding,” he said.

“Financial institutions have increased their lending rates in the face of the increase in costs to maintain their net interest margins within the range observed in recent years.

“In turn, this has been with the aim of maintaining profitability.”

Deutsche Bank analyst James Freeman said the reduction in term deposit rates would help lift the retail banks’ margins by between four and six basis points.

He said net interest margins were up to 10 basis points lower in the first quarter for the banks because of the pressure created by funding costs.

“Deposits have hurt banks’ margins of late, but we believe the conditions are right for a recovery in deposit margins and significant upside surprises to profits are emerging,” Mr Freeman said.

‘Every 20-basis-point improvement in the term deposit spreads are worth about an eight-basis-point increase in margins.

“It could become a major tailwind in the next few months.”

Westpac is the lender that is most likely to benefit from the savings rate cuts because of its large online deposit book, ahead of CBA.

NAB has the least exposure to deposit costs because the bank has a higher proportion of overseas funding.

Each of the major banks had offered term deposit rates of up to 125 basis points above the 4.25 per cent cash rate.

Before the global financial crisis hit in 2008, bank deposit rates were up to 200 basis points below the official interest rate.

Ratecity chief executive Damian Smith said financial market conditions were improving, which had driven down wholesale funding costs. “The cost of wholesale funding has not only stabilised, it appears to have trended down,” he told The Australian.

“That means institutions can again allow deposit rates to come off the boil a bit further.

“Three-month term deposits appear to have borne the brunt of the most recent reductions.

“The reality is that three-month terms are the most popular, so if you want to reduce deposit spreads and costs as an institution, you have to start with three-month products.”

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