Banks will cut savings interest to prop up margins once RBA rate cuts start, says Morgan Stanley

Major lenders will cut their rates on savings accounts to prop up their margins once the Reserve Bank begins to cut interest rates, Morgan Stanley predicts.

Australia's four big banks will cut savings rates more than the RBA drops the cash rate, Morgan Stanley says.

Australia’s major lenders will slash rates on savings accounts to protect margins once the Reserve Bank starts its interest rate-cutting cycle, Morgan Stanley predicts.

And it expects the Commonwealth Bank and Westpac to benefit from larger margin tailwinds.

In a note to clients, the investment bank said it expects the big four banks would cut rates on bonus savings accounts by an average of 40 basis points more than the cash rate, while standard savings accounts would take an average 20 basis point hit on top of the cash rate cuts.

It expects the RBA to lop 75 basis points off the current cash rate of 4.35 per cent through 2025.

“In this scenario, we think Westpac and CBA will have a larger margin tailwind given their current savings account rates and greater sensitivity to deposit repricing,” Morgan Stanley analysts, led by Richard E Wiles, wrote.

“Specifically, we believe Westpac’s higher ‘base’ rate of 1.85 per cent on Westpac Life (its bonus savings account), and CBA’s higher ‘base’ rate of 2.35 per cent on NetBank Saver (its standard savings account) will provide them with flexibility to reduce rates more than peers without risking outsized customer attrition,” they said.

The opportunity to protect margins comes amid a period of “benign” deposit competition, the analysts noted.

The total rates advertised on the majors’ standard and bonus savings accounts have been stable in the past month, although term deposit rates have fallen by an average of 10 basis points across the three-month, six-month and one-year accounts.

Banks have also been tweaking the make-up of their savings account rates, the analysts said. ANZ has taken 10 basis points off the base rate of its online saver offering, while topping up the “introductory” offer on the product by the same amount.

Similarly, Westpac has cut the “base” rate on Westpac Life by 15 basis points and simultaneously raised the “bonus” rate by 15 basis points.

“While these tweaks are relatively minor, we believe they are positive for margins. We estimate that every 25 basis point reduction in the Westpac Life ‘base’ rate adds around one basis point to Westpac’s margin,” the Morgan Stanley analysts wrote.

The investment bank’s margin forecasts for the majors are currently an average of three basis points above consensus.

Among the major banks, CBA currently offers the highest base rate on standard savings accounts, while Westpac has the lowest base rate. But Westpac offers a higher base rate on its bonus savings accounts compared to the other majors.

All up, CBA’s NetBank Saver delivers a total introductory rate of 5.1 per cent for savers, compared to NAB and Westpac’s 5 per cent for similar products. ANZ lags with a 3.65 per cent rate on its Online Saver offering.

On the bonus savings accounts, ANZ, NAB and Westpac deliver a savings rate of 5 per cent, followed by CBA’s Goal Saver, at 4.9 per cent.

The expectation of lower savings rates comes as the RBA this week opened the door to potential interest rate cuts by the year’s end if the economy worsens.

The release on Tuesday of the minutes of the RBA board’s September 23-24 meeting removed the line that “it was unlikely that the cash rate target would be reduced in the short term”. This line appeared in the August statement.

The RBA trails central banks around the world which have been cutting rates in recent months, including the US Federal Reserve, the Bank of Canada, the Bank of England and the European Central Bank.