Banks make sneaky cash grab as deposit rates trimmed

Three of the four major Australian banks have stealthily reduced the interest rate on their term deposits. They might suggest they are getting a head start on the Reserve Bank, but the central bank is not forecast to cut rates for at least three to six months.

Some would call it a margin-plumping exercise – the banks prefer to think of it as margin protection. Either way, it’s good for bank profitability.

CBA, ANZ and NAB – but not Westpac, yet – have cut deposit rates before the Reserve Bank moves. Credit: Stephen Clark

Meanwhile, that head start the banks are making doesn’t apply to lowering the interest rate for borrowers. Mortgage rates won’t move until the Reserve Bank changes the cash rate – an event that is not expected until December at least, and is more likely next year. (A dwindling number of economists are predicting the Reserve could move to lower rates in November.)

Even when the Reserve Bank does move to cut rates, it will probably be by only 25 basis points.

And what about Westpac – the bank that hasn’t moved yet to decrease the interest rate on deposits? I would bet my term deposit that it will follow the others as early as this week.

The Commonwealth Bank, which is the largest and most influential in the market, was the first mover in lowering deposit rates in this round. It cut rates by 50 basis points last week.

For decades, the banking sector giants have been accused of acting as a herd and moving together.

Thus, CBA provided cover for National Australia Bank to drop term deposit rates on Monday by the same amount, and ANZ to shave 80 basis points from its deposit rates.

While interest rates for mortgage holders receive much of the attention, the often-older savers who rely on interest on their savings get less focus from the media.

After 18 months of “mortgage wars”, when the four major banks engaged in discounting mortgages to win customers and raised deposit rates to entice or retain clients, a peace appears to be settling on the sector.

While consumers win when the banks battle for market share, the banks’ margins and profits get squeezed.

The easing competition was clearly evident over the past week when three of the banks delivered their results. The sector overall did better than the market had expected, and there was clear evidence that the net interest margin (NIM) improved or stabilised. NIMs compare a bank’s funding costs with what it charges for loans.

In many respects, net interest margins are a proxy for competition – the banks’ NIMs tend to fall during periods of competition, and vice versa when competitive tension eases.

For decades, the banking sector giants have been accused of acting as a herd and moving together.

But over the past 18 months there was a discernible strategic departure, with a couple of banks engaging in mortgage discounting to win market share.

The Commonwealth and National banks attempted to stay out of the discounting fray to protect margins, but both felt the effect on their profits.

Meanwhile, the lack of competitive verve between New Zealand’s four big banks (which are owned by our big four) has been attacked by the country’s government.

New Zealand Finance Minister Nicola Willis described competition between banks as a “cosy pillow fight”.

She was responding to a report from the country’s competition watchdog that, she said, confirmed “New Zealand’s banking sector is uncompetitive and Kiwis are not being well served”.

“Today’s report calls out the market behaviour of New Zealand’s big four banks: they are highly profitable compared with international peers, they lack innovation and do not aggressively compete for customers,” Willis said.

In response to the reduction in term deposit rates in Australia, one of the big four privately pointed out that other bank lenders – including Macquarie Bank, AMP and Judo – have also crunched the rate on deposits over the past week.

However, the bottom line is that banks don’t want to be locked into paying higher rates for longer-term deposits if the Reserve cuts rates during the term of the deposit.

The Australian government, while not as strident as its peer across the Tasman, has held concerns about how deposit rates are set and how banks delay applying increased rates to savers in response to Reserve Bank rate rises.

New Zealand Finance Minister Nicola Willis has slammed the country’s big four banks, which are owned by Australia’s big four.Credit: Getty Images

At the very least, the government is keen to get more transparency on how rates applied to savings accounts are set.

They are not the only ones.

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