CBA predicts a flood of cash after deposit rate hike

Commonwealth Bank expects $1 billion of fresh cash to flood into term deposits a week after hiking interest rates.

CBA CEO Ian Narev expects the bank to receive $1bn a week in fresh deposits

Commonwealth Bank expects $1 billion of fresh cash to flood into term deposits a week after hiking interest rates as chief Ian Narev shoots down predictions that the deals were a tactic to calm a political storm.

After disappointing investors with CBA’s full-year earnings on Wednesday, Mr Narev revealed that based on prior experience following term deposit rate increases, the bank could receive $1bn a week, with up to 20 per cent coming from small businesses.

“In this low interest rate environment we expect very similar levels of interest coming up,” he said.

The comments suggest the big four banks alone could haul in up to $4bn a week of new deposit funding, boding well in their quest to meet the new “net stable funding ratio” in 2018 that aims to reduce the reliance on volatile short-term wholesale funding markets.

While not providing details, CBA this week became the only major bank to claim it already met the NSFR requirement.

To offset pressure on returns, all the banks last week held back about half of the Reserve Bank’s cut to the cash rate and instead hiked various eight to 36-month term deposit rates by up to 85 basis points for new customers.

The move pushed the big banks’ one-year deposits to 3 per cent — near market-leading — sparking fears among some bankers of a fresh deposit war and irrational pricing.

But Mr Narev said its new deposits were not “crazy rates where we’re going to end up putting the bank at risk” and it was using some of the “extra margin” from the mortgage rate decision to boost income for depositors, who have suffered from falling rates since 2011.

“These things don’t stay forever, but on the other hand this isn’t a sort of cosmetic (thing) we’ll put in the market for a couple days and then pull it,” he told The Australian. “This is designed to give people real options for their money.”

Previously, the big banks have pulled term deposit promotions when political heat from withholding rate cuts from mortgagors died down. Mr Narev would not disclose the breakdown of its $170bn term deposit book, after the RBA claimed 12 to 36-month deposits made up less than 2 per cent of bank funding.

But the bank’s strong funding position and capital generation failed to soothe investor concerns, with CBA shares yesterday sliding a further 1.9 per cent to $75.95 as analysts downgraded the stock and lowered earnings forecasts.

“There were some concerning aspects,” Deutsche Bank analyst Andrew Triggs said of CBA’s annual results, citing the decline in return on equity and spike in the cost to income ratio in the second half.

“While historically CBA has enjoyed a significant return on equity premium versus peers, we see this gap continuing to close over coming years.”

Bell Potter’s TS Lim said flat or negative profit growth in CBA’s key divisions in the second half could suggest the bank’s performance was “as good as it gets for the time being”.