Bendigo lags as banks scramble for deposits

One by one our big banks are calling a truce in the recent interest rate wars to attract home loans in preparation for their next battle — the race for bank deposits.

I was yarning to senior executives of a major bank late last week and they explained that there are very rarely wars over mortgages and deposits at the same time. We are now set for a deposit war.

Several Australian large banks need much greater longer-term deposits (one-, two- and three-year) to satisfy regulatory requirements and so they will need to bid up for bank deposits.

The Commonwealth Bank does not seem to be one of those that needs extra deposits but it still wants to maintain deposit market share, so, in preparation for a likely deposit war, the CBA raised its term deposit rates to 3 per cent for one year; 3.1 per cent for two years and 3.2 per cent for three years (The end of a horrible bank deposit rates rout, August 2).

All the other major banks quickly followed and, indeed, Westpac lifted their rates immediately whereas the CBA rate increase does not come into effect until Friday, August 19 — lots of unwary CBA depositors placing money with the bank for between one and three years have been trapped into lower rates. Term depositors need to decide whether to take the higher one-, two-, and three-year rates that the CBA has triggered or whether to keep their money in cash at what are very low shorter term rates in the hope that there are a lot more term deposit rate rises to come.

Whether the one-, two- and three-year rates jump again will depend on whether the Reserve Bank again cuts Australian interest rates in the light of the rise in the Australian dollar.

It also depends on the inflation rate.

If we take Australia’s current inflation rate at 1.5 per cent then the three year deposit rate of 3.2 per cent represents a real rate of return of 1.7 per cent. That’s more than one percentage point above the level that existed in 2014 and way above the levels of 2009. And while we say that nominal mortgage interest rates are at record lows, given the low rate of inflation, real mortgage rates for owner-occupiers are almost 0.7 of a percentage point above their June quarter 2014 low point. Clearly the mortgage rate war is well and truly over.

Now, of course, the price of dwellings in many areas (but by no means all) have been rising above the rate of inflation but price increases are now slowing in an increasing number of areas, so, the high real home loan rate is becoming noticeable. And so, if inflation stays low, then homeowners with high mortgages will start to notice the fact that real mortgage rates are rising to fund the rises in real term deposit rates.

The Bendigo Bank clearly believes that it’s already “game on” in the deposit war and the big banks have already gone too high.

So, Bendigo CEO Mike Hirst decided not to follow the CBA’s Ian Narev and is now officially only offering 2.65 per cent for one-year deposits, which is way below the big bank one-year rate of 3 per cent.

Hirst has some 82 per cent of the Bendigo funding base in deposits which is higher than most of the other banks. He thinks if money walks out the door he can replace it with the wholesale market.

However, to make sure this does not happen, Hirst has instructed his branches to offer rates that are competitive with big banks to existing customers to make sure they stay with the bank.

But, excepting special circumstances, he does not want to attract new customers.

It’s important to underline that the banks have not increased the rates for the popular currincies deposited for terms of less than one year. Those who want to invest in shorter term deposits will be rewarded with much lower returns than those willing to commit to at least one-year terms.