Tuesday 22 November 2016 by FIIG Securities dog1

No sign of higher rates for term deposit holders

As published in The Australian on 22 November 2016

A surprise Trump presidency will have many of us rethinking the direction of financial markets in the coming years. His planned spending has the chance to inflate the US economy and US interest rates with it. The big question will be how that affects domestic rates

Our in house expectations for the Australian cash rate remain unchanged. While we are in the minority, we’re still thinking another cut given recent employment data and below target inflation. This would take the cash rate down to 1.25% – giving little hope to depositors frustrated with poor returns. Quarterly inflation figures next due at the end of January will be a key determinant but we think a cut is more likely mid to late 2017.

The last cash rate cut was back in August and while the major banks – ANZ, CBA, NAB and Westpac – didn’t pass on the full cut to mortgage borrowers, they somewhat placated the market by increasing deposit rates. Those investing for longer terms of two to three years or more were rewarded with over 3% per annum returns. I remember seeing 3.4% for a five year term.

Credit unions and building societies were pressured into hiking rates to match those offered by the majors. That run continued for a while but as the banks hit their funding requirements, term deposit rates moved lower.

Over the last few weeks we’ve seen rates continue to pull back for terms of six months or longer. A cynic might say that rates have declined since the parliamentary inquiry ended. In reality it’s more likely that funding needs have been met.

Conversations our team has had with banks in the market indicate there is plenty of cash in the system and few need to raise funds up until Christmas. In past years, there has been some urgency into the festive season to fill gaps in funding but our view is that it’s unlikely this year. So, what does that mean for term deposit investors?

Retail investors

A few weeks ago there were three financial institutions, including a major, offering 3% for a one year deposit – ANZ, People’s Choice Credit Union and Qudos Bank.

As of Monday 21 November, term deposit comparison site, Mozo quotes two institutions offering 3% for one year, including People’s Choice Credit Union and ING, but no sign of ANZ.

The majors are now offering 1.8% to 2.5% on one year term deposit rates. To get a major bank term deposit rate of 3% you’ll need to invest for two to three years. NAB and Westpac are showing up to 3.2% per annum for three years, any longer and the rates move lower.

The banks seem prepared to pay up for ‘stickier deposits’ from retail investors over longer terms.

Institutional investors

Rates on offer for institutional clients have also pulled back. Just a few weeks ago CBA was offering 3 per cent for one year for institutional and middle market clients. However the best major bank rate for institutional clients over a year is now 2.55%.

Term deposit rates for one to three months are typically the benchmark BBSW rate – 1.62% to 1.75%. However Bank of China is showing BBSW plus 50 to 55 basis points equating to 2.12% to 2.25%.

Notice saver accounts can offer better returns. AMP is one of the best options. It pays BBSW plus 70 basis points for 31 days notice. In effect a one month term deposit. Unlike many other notice saver accounts, the rate on offer do not decline once clients put the bank on notice that they wish to withdraw. Others can cut the rate in half, making if difficult for institutions to report.

This has made notice savers not practical, but the AMP structure alleviates that trouble and is clearly better than similar term straight term deposits.

Cash still flowing in

According to APRA, total deposits have increased every year since 2013. As at 30 September 2016, total deposits were $1.99 trillion, up 19.57% over the last four years. Total gross loans and advances grew at a faster rate of 23.87% over the same time.

Clearly the major banks have satisfied their funding needs for the next few months. Those chasing the best rates will need to look to the mutuals. However, before you go swapping financial institutions, have a chat to your local branch manager, they may just match a competitive rate to keep your funds.