Cash alert

PORTFOLIO POINT: Cuts to the interest rates on offer is a sign the banks no longer need deposit customers as much as they did.

Following the recent 0.25% official interest rate cut, the majority of banks made little attempt to win favour with depositors. In fact, if analysts within the industry have got it right then investors should brace for cash rates that are effectively much lower in the months ahead.

Rohan Gamble, managing director of the online bank comparison website Mozo, says the razor taken to both bonus and base savings rates is a sign that banks no longer need deposit customers as much as they did in the depths of the GFC. He strongly suspects introductory and preliminary bonus rates are going to disappear and savers can look forward to lower interest rates until lending begins to turn up again – whenever that may be.

“There’s evidence now that deposit rates now are on their way south and people would be well advised to lock in bonus rates or term deposits before they go even further down or potentially disappear,” Gamble said.

As of close of business today (November 9), Canstar Cannex bank analyst Adam Beu said nearly all financial institutions in Australia had moved their savings account rates down by at least 25 basis points.

The big four bank brands have all taken a 25 basis point razor to their rates, matching the cut to mortgage rates last week, but it was NAB subsidiary UBank that made the biggest cuts in its offering, adding insult to injury after its parent’s refusal to pass on the full rate cut to mortgage customers.(It was this move that attracted a broadside from the Treasurer Wayne Swan).

UBank cut the 6.51% bonus rate on its USaver account by 40 basis points to 6.11%, and the base rate by the same amount, from 6.01% to 5.61%. Gamble says that until now UBank’s branding was all about being the market leader, and the fact that it is happy for others to take that position is significant because it means it doesn’t think it needs that market share any longer.

However, Beu is more forgiving and says the NAB subsidiary has been the market leader in both mortgage rates and deposit rates all year and despite the seemingly large bite taken out of its premier at-call savings account, it’s still one of the best interest rates around.

The market leaders are now RaboDirect’s at-call account RaboDirect Savings, and Virgin Money’s Virgin Saver. Both have so far chosen not to diminish their generous offerings. RaboDirect has a 6.26% bonus rate (an enticement that only lasts until November 18, however) and a base rate of 5.75%, while Virgin is tempting savers with an introductory 6.51% rate for the first four months and a 5.35% base rate.

Apart from UBank, the other institutions that chose to cut their savings account rates by more than 25 basis points include Citibank, ME Bank and Qantas Staff Credit Union.

Citibank reduced the introductory rate on its Online Saver by 35 basis points from 6.05% and lowered the base rate by 25 basis points to 5% and the Qantas credit union cut rates by 39 basis points to 4.70%.

Among the other banks that made larger or smaller cuts than the RBA level were: ME Bank, which cut the rate of its Online Savings Account by 30 basis points to 5.3%; St George, which cut the bonus rate on its PowerSaver account by 20 basis points; and Queensland Country Credit Union, which cut the rate on its Online Saver account by 15 basis points.

These institutions are hoping deposit flows remain strong to compensate for less business in home loans, because even though demand for home loans may have grown for the third month in a row in September, according to the ABS, the size of those loans is shrinking dramatically (click here).

That drop in mortgage values has had an impact on term deposits. While changes in at-call account rates are only just starting to appear as smaller loans and high deposit rates squeeze margins, term deposits have been falling since the year highs of up to 6.5% between January and April due to less competition for funds, and the big changes to one and three-year term deposits occurred in October as banks factored in November interest rate cuts.

One-year non-compounding term deposit
Institution	Current Rate	Interest Paid	Highest Rate in 2011	Interest Paid	Date
ANZ	5.18%	Monthly	6.11%	Semi-Annually	11-Apr
Bank of Queensland	5.30%	Maturity	6.40%	Maturity	21-Mar
BankWest	5.18%	Monthly	6.35%	Maturity	6-Jun
Bendigo Bank	5.30%	Maturity	6.25%	Maturity	28-Feb
Commonwealth Bank	5.30%	Maturity	6.10%	Maturity	21-Mar
NAB	5.20%	Monthly	6.05%	Monthly	31-Jan
St George	5.30%	Maturity	6.15%	Maturity	21-Feb
UBank	5.51%	Monthly	6.41%	Monthly	28-Feb
Westpac	5.30%	Maturity	6.10%	Maturity	21-Feb
Source:www.canstarcannex.com.au, 9th November 2011, best effective rate for $10k deposit
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Three-year non-compounding term deposit
Institution	Current Rate	Interest Paid	Highest Rate in 2011	Interest Paid	Date
ANZ	5.18%	Monthly	6.11%	Semi-Annually	1-Aug
Bank of Queensland	5.35%	Monthly	6.30%	Monthly	28-Mar
BankWest	5.33%	Semi-Annually	5.82%	Semi-Annually	18-Jul
Bendigo Bank	5.50%	Annually	6.35%	Quarterly	28-Feb
Commonwealth Bank	5.70%	Annually	6.20%	Annually	8-Aug
NAB	5.60%	Quarterly	6.35%	Quarterly	31-Jan
St George	5.70%	Annually	6.50%	Annually	17-Jan
UBank
Westpac	5.70%	Annually	6.50%	Annually	21-Feb
Source:www.canstarcannex.com.au, 9th November 2011, best effective rate $10k deposit

Mozo’s Gamble said the term deposit race was effectively run in October. “They made their prediction quite some time ago. The banks basically called this rate cut long before anyone else and they moved their term deposit rates quite aggressively down in October.

“When the banks slash rates so much that the products are unattractive they’re making a clear statement that they don’t actually want you to apply for this product unless you’re an idiot.”