Australian banks don’t seem concerned that the bedrock of their liabilities is developing a fatal crack, via The Australian:
Savers are being slugged by ultra-low deposit rates as the nation’s banks work hard on both sides of the balance sheet to prop up their flagging interest margins, while borrowers suffer out-of-cycle rate rises.
Comparison website RateCity says the days of attractive term deposit rates are “long gone”, with the average rate for deposits locked up for 12 months barely moving over the past year.
“Term deposits were once one of the most popular places to park your cash, offering a guaranteed return on investment and protection against a falling cash rate,” RateCity research director Sally Tindall said.
“But those days are long gone, with the RBA almost certain to leave rates on hold when they meet (tomorrow).”
The average term deposit rate in July was about 2.2 per cent — barely above inflation at 2.1 per cent.
A decade ago, the average term deposit rate was 8.25 per cent. Inflation was at 4.4 per cent and the cash rate was at 7.25 per cent, according to Reserve Bank data.
Via APRA here is deposit growth:
Hmmm…time to slash deposit rates? Only if you’re so desperate that you’re willing to rob Peter to Paul. UBS’ George Tharenou captures the dynamic:
Deposit growth ~flat near record low; funding gap declines to still high $443bn Deposit growth rose 0.9% m/m, ticking up to +1.9% y/y (from 1.8%), still near record lows. Thanks to slowing loan growth, the funding gap (the difference between loans and deposits), decreased, for the first time since Jan-18, to a still high $443bn, suggesting that funding costs are likely to remain above historical levels ahead.
In short, elevated wholesale funding costs are the reason for the deposit rates crush. Yet by reducing deposits the banks become more reliant upon wholesale funding. If you’re seeing a feedback loop here then you’re onto it. Chart from Damien Boey at Credit Suisse:
The only other way out of the margin crush is to hike mortgage interest rates as banks are also doing but that only succeeds in shifting the pain to asset quality which will also raise funding costs.
Eventually the RBA will have to cut the cash to relieve the pressure but then deposits will flow out even faster…rinse and repeat.
Welcome to Australia’s little financial crisis.
