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Category: Banking / Consumer Finance / Housing Industry

Banks set to pay 'a bucket load more' to term depositors

Monday, 8 Aug 2016 09:45:52 | Michael Janda And Alicia Barry

The big four banks have only passed on about half of the RBA's rate cut this month. (AAP: Dan Peled)

A leading analyst believes banks will come out worse off after significantly increasing term deposit interest rates while not passing the Reserve Bank's rate cut to borrowers in full.

While political and media attention has centred on most banks passing on half or less of the RBA's 25-basis-point official rate cut, CLSA banking analyst Brian Johnson - a man hardly loved by the financial sector he covers - said the outsized increase in term deposits is more costly.

"While there is no doubt they're clawing back quite a bit from home loan borrowers, the fact is that they're going to pay a bucket load more money out to term depositors," he told ABC's The Business.

Instead Mr Johnson said most banks' net interest margins (NIM) - the gap between what interest rate they pay on average to borrow money and what rate they lend it out at - are likely to fall as a result of the latest rate moves.

"I actually think it was slightly negative for shareholders because, when I look at it, the move up in the deposit rate is actually bigger than the clawback they've done on housing," Mr Johnson said.

So I think it's a rare example of customers actually winning.

While so-called wholesale funding - which is money borrowed by banks through bond and other security issues on global markets - has become cheaper over recent times, Mr Johnson said deposits are actually a far bigger share of funding.

"Commonwealth Bank has got about $260 billion of wholesale funding, and that lasts about five years. So that's about $50 billion of new wholesale funding they've got to refinance every year," he explained.

"That sounds like a gigantic number, but they've got $455 billion of deposits, which re-price every five months.

"So you've actually got a situation where you have five times as many deposits re-priced in the next 12 months as wholesale funding."

In the studio with Brian Johnson Video: In the studio with Brian Johnson (The Business)

Big four banks 'very, very profitable'

Not that Mr Johnson feels overly sympathetic to Australia's big four banks, which he said are still amongst the most profitable in the world.

"The fact is the Australian banks are very, very profitable in a global context with our ROE [return on equity] at around 15 per cent," he said.

"When you have a look at the post-GFC, as interest rates has fallen around the world, deposit businesses have been pressured and bank profits around the world have basically come down.

But in Australia, they haven't come down because every time there's been a problem, they just increase the housing rate.

The recent increases in mortgage rates relative to the cash rate can be seen in the data below from financial comparison company Canstar, which shows that the smaller banks and credit unions are generally also pocketing some of the rate cut.

Financial InstitutionReductionDate
ANZ0.12%12th August
Bank Australia0.25%5th August
Bank of Melbourne0.13%23rd August
Bank of Qld0.15%31st August
BankSA0.13%23rd August
Bankwest0.10%23rd August
Bank Sydney0.25%4th August
Bendigo Bank0.10%29th August
Commonwealth Bank0.13%19th August
CUA0.12%18th August
Gateway Credit Union0.13%18th August
Homestar Finance0.25%2nd August
Hunter United

0.16% Platinum Loan

0.14% Basic Variable

1 September
IMB0.10%24th August
ING DIRECT

0.12% Orange Everyday

0.10% Other Variable

15th August
ME0.10%23rd August
NAB0.10%19th August
Newcastle Permanent0.10%8th August
P&N Bank0.10% - 0.26%26th August
RAMS0.10%23rd August
QBank0.15%19th August
Reduce Home Loans0.25%5th August
St George Bank0.14%23rd August
Suncorp Bank0.10%24th August
Virgin Money0.25%8th August
Westpac0.14%23rd August

Source: Canstar

While most mortgage borrowers will not see the full benefit of the RBA's 25-basis-point rate cut, savers are seeing better offers on term deposits.

Big four banks help RBA


By keeping part of the RBA's rate cut from home buyers, and lifting deposit rates, the big four banks boost financial stability.

The bank four banks, and some of their smaller rivals, have increased various term deposit rates by between 0.5-0.85 percentage points, with many now at least double the cash rate at 3 per cent or more.

On top of the extra cost of deposits, Mr Johnson said the big four are facing other challenges to their profitability.

"Loan loss charges are very low because we've had write backs from prior years," he observed.

"So at some point the loan loss charges are normalised, but also the banks face a very real risk of high capital requirements.

And, when you actually put those two things in, you have to say that there is a real risk of substantial dividend cuts in the future.

However, Mr Johnson said it increasingly looks like the big four have dodge the bullet of a royal commission into financial services.

He said a regular grilling in front of Parliament is a much softer option.

"A royal commission, I feel would be worse [for the banks]," Mr Johnson said.

"It's this idea of public scrutiny but, the other thing about it is, royal commissions have a nasty habit of turning up unexpected things, and that's really what the banks, I think, are genuinely concerned about is not what we've heard today but what we don't know."

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