Beating the dive in term deposit rates

Most of the big banks are setting deposit rates at below two per cent. Picture: Stuart McEvoy

A new battle has broken out in Australia’s so-called intergenerational war—bank deposits.

The oldies were victorious in the first battle when the Coalition won the election and Chris Bowen’s dreaded retirement and pensioners’ tax (RPT), levied via cash franking credits, was abandoned.

But now the younger dwelling-owning generation are having their revenge in the new battle and banks also believe the oldies are sitting ducks to be bayoneted.

To be fair to the banks, Treasurer Josh Frydenberg is telling them to reduce mortgage rates for younger people and therefore hit the savers.

Looking at the top four banks’ term deposit rates they are a sea of “under two per cents”.

Most of the big banks have one under-12 months term deposit rate that is a special and offers more than two per cent. But most (not all) have set their one-year rate under two per cent. Longer-term rates are usually even lower, indicating banks expect interest rates to fall again. Small banks like Bendigo and Suncorp have two per cent rates below one-year terms and their one-year rate is at or above 2.2 per cent.

When the banks were hit by the royal commission costs, they saw bank depositors as just too easy a target and dropped the one-year rate from 2.6 per cent to around 2.2 per cent.

Now, with official rates going down by 0.25 per cent, the banks have once again plunged the bayonet into the oldies.

Younger people with mortgages receive a direct wealth transfer, although those saving for a dwelling cop the same hit as the oldies.

To be fair to everyone world rates are falling, led by bond interest rates.

What this means is that holding cash on term deposits for income is now a mug’s game. You can hold cash/term deposits in the anticipation of a future outlay or because you are afraid of equity markets and want to secure your asset base.

A lot of investors have increased their cash content because they are afraid that the trade war will cause an economic slump and may even develop into a shooting war. Those are strategic reasons to hold cash.

But most oldies hold cash simply as a safe source of income and that’s why they are so vulnerable to attack by banks.

What’s the answer? I have a conventional and unconventional response.

The conventional response is that you buy bank and other shares with high income.

Alternatively there are bank hybrids and a limited range of corporate bonds. Corporate bonds are harder to access for small investors but some brokers like FIIG specialise in them.

In other words, you increase your income by taking greater risk. A lot of older people would prefer not to do that but if they need the income, they have no choice—it’s the cost of losing this battle in the intergenerational war. Just imagine what would have happened if the RPT battle had been lost.

My unconventional solution is to ask our large companies who seek community or customer endorsement to move in to help the older generation out.

Currently retailers like Coles and Woolworths, Telstra, BHP, Transurban (often via local toll roads) and many others borrow overseas or through large Australian institutions.

Now bank deposit rates are so low they should consider going into the local market and offer, say, three quarters or one per cent above the bank term deposit rates.

You will generate incredible customer and community goodwill. Distribution will cost money but not that much, because there are established distribution systems.

It’s a lot more valuable to the community than big brand marketing campaigns.