Depositors slugged below the belt as banks box clever on term deposits

The opening bell in the term deposit war was rung by the Commonwealth Bank when they announced big lifts in the one-, two- and three-year term deposit rates. (AAP Image/Paul Miller)

It’s now apparent that the banks have abandoned the Marquess of Queensberry rules in the great term deposit boxing match. And, accordingly, depositors can very quickly be ripped off because they are unaware that punches are being thrown below the belt.

It is generally agreed among the banks that they do not have the skills to box on both home loan rates and deposits at the same time.

For the last few years, banking has been about gaining market share in the home loan market, so, various deals were made available.

The home loan discounts are now gradually starting to contract as the action swings to deposits because new regulations will require banks to have a greater proportion of so called “sticky” deposits, which generally means they are for one year or more. The banks are getting their deposit books in shape in advance of the requirements.

Many believe that this is a phony war because all the rates are so low. But for the banks operating in a low-interest-rate environment, a miscalculation can be very costly because when rates are around 3 per cent, a half a percentage point difference is a big variation. And remember inflation is only 1.5 per cent and so a 3 per cent deposit rate represents a real return of 1.5 per cent, albeit taxable.

The opening bell in the deposit war was rung by the Commonwealth Bank when they announced big lifts in the one-, two- and three-year term deposit rates, with all of them now over 3 per cent. Most of the other big banks followed (The end of a horrible bank deposit rates rout, August 2).

But the CBA’s higher rates did not take effect until August 19.

Now, one week later, we can see how the boxing match is being fought.

A very big proportion of Australian bank term deposits are for periods less than one year. Australians believe that an opportunity might arise and they want to stay flexible. In practice, money often stays on shorter term bank deposits for a year and, in the lower rate environment, it has been a disastrous strategy.

The six-month term deposit is a very popular and those with six-month term deposits at the CBA that automatically roll over unless the depositor intervenes receive just 1.9 per cent (2 per cent for large sums) which is some two thirds of the 3 per cent one-year rate.

That’s one below the belt, although the CBA would defend the practice by saying that on its website it highlights the seven-month rate of 2.4 per cent, which is still well below the 3 per cent 12-month rate.

To the overall market, as you move through most of the bank term deposit rates you find that anything less than one year carries a rate substantially below the 3 per cent one-year benchmark. And almost all the banks play games in the less than 12-month space. with big variations in rates looking to take advantage of Australians’ laziness in term deposit management.

But, in the last few days, Citibank has decided to throw a punch that all the other banks hope few customers will notice. Citibank is offering 3.2 per cent for six-month deposits but it’s for a minimum investment of $75,000. That’s more than 60 per cent above the CBA’s six-month rate.

The term deposit rate cards of all the banks bristle with traps.

For example, NAB’s 12-month rate is way below the others; most of the banks have an especially low rate around four-year deposits and some extend the low rate to five-year deposits. They are all different.

But the strangest fighter of all is Bendigo Bank where all its one-year and above rates are below its rivals. Bendigo Bank has its book 82 per cent funded by deposits, which is more than what is required and much higher than the other banks. It does not want to attract new deposits on a large scale at the current high rates.

But it also doesn’t want to lose customers. Any depositor that wants to redeem their term deposits at Bendigo will find that the bank’s pencil is immediately sharpened and Bendigo will offer rates that are about the same as the other banks.

But all bank term depositors must stop being passive and feeling embarrassed about negotiating. The Marquess of Queensberry Rules no longer apply and you will cop a blow below the belt unless you watch out.