Savers hit as banks use interest rates to lure new borrowers

Banks are holding or even lowering rates on savings accounts to bolster margins from existing customers and give them room to promote attractive mortgage rates to new borrowers.

As the banks mull how to respond to the RBA’s latest move, they are being warned by the federal government not to cut their losses on falling rates and take wins on rising ones. Picture: NCA NewsWire / David Crosling

Banks are holding or even lowering rates on savings accounts to bolster margins from existing customers and give them room to promote attractive mortgage rates to new borrowers.

ANZ, in one instance, has lowered the savings rate from 0.8 percentage points above the official cash rate 10 years ago to 0.4 last year. By November, this had declined to 0.2 percentage points – and it now sits 0.1 below it.

The NAB account has followed a similar path. The rate reduction on that product alone is 0.5 per cent, accounting for one full rate rise.

On Tuesday the Reserve Bank raised rates by 50 basis points to 2.35 per cent, the fastest policy tightening in about 30 years.

As the banks mull how to respond to the RBA’s latest move, they are being warned by the federal government not to cut their losses on falling rates and take wins on rising ones.

“Savers have had it tough for some time with historically low rates and they should get this relief passed on in full,’’ Treasurer Jim Chalmers said in August.

“It’s the least that can be done, and I urge all banks to give their customers a fair go.”

Retirees and those close to retirement have been hardest hit by the moves by the banks to eke out margins where they can from existing customers, which gives them more room to offer attractive rates to new mortgage lenders.

Barrenjoey analyst Jon Mott said banks would see net interest margin (NIM) expansion over the next 12 to 18 months as rates rose. He said banks would widen deposit spreads and see higher returns on their replicating portfolios/equity hedges.

Barrenjoey believes that the focus on NIM is not necessarily the right measure because banks have changed their practices by tapering off business lending and effectively becoming more like building societies.

“The banks’ NIM has been under pressure for more than 30 years. This has been a result of a number of factors: increased competition post-deregulation of the banks in the 1980s; change in the mix of the banks’ loan book towards lower-yielding mortgages; increased reliance on wholesale funding (although that has partially reversed since the financial crisis); increased penetration of third-party distribution such as mortgage brokers; increased holding of liquid assets; and falling interest rates,” Mr Mott wrote in a note to clients.

The investment bank predicts that the major banks’ NIM has fallen from a peak of 4.33 per cent in 1988 to 1.77 per cent this financial year. If net interest income to average credit risk-weighted assets – a measure known as RANIM – is considered, markets have risen from 4.32 per cent in the first year of reporting in 2009 to 4.49 per cent in 2021.

“We believe the extent of NIM expansion by the majors is more likely to be driven by stakeholder management. The banks must balance the needs of shareholders, customers, regulators and governments,” Mr Mott wrote. “Importantly, the banks must remember the lessons from the royal commission and ensure they meet community expectations in a difficult environment.”  

The market expects RANIM to rise sharply this financial year to 4.68 per cent from 4.47 per cent in 2020 as the benefits of higher interest rates flow through.

Unlike many in the market, Mr Mott said he did not expect these margin levels to be sustained for the next three years. Those gains, he wrote, were “likely to be competed away in a low growth environment with intense refinancing activity”.

The challenge for the sector is $500bn of fixed-rate loans nearing expiry in the next 18 months. Efforts to cash in may result in customers choosing to refinance elsewhere, at a time when insiders have already declared competition the toughest in 20 years.

Morgan Stanley believes this pressure on new mortgages has already had an impact on the banks. “Investors are right to view heightened competition in a softer mortgage market as a significant source of downside risk to margins. However, in the near term, we believe it will be offset by the benefits of higher interest rates and favourable pricing of shorter-duration term deposits and online savings accounts,” said bank’s analyst, Richard Wiles.

Originally published as Savers hit as banks use interest rates to lure new borrowers