‘Sugar hit’: Banks benefit as savings rate rises lag mortgages

Investors are primed for another jump in bank profit margins as the Reserve Bank prepares to jack up interest rates again, with the big four lenders so far choosing to hold back a significant proportion of this year’s rate rises from key savings accounts.

In a trend expected to boost banks’ margins, figures from financial comparison site RateCity show that since the RBA’s decision to push up interest rates in May, the lift in rates on the big four’s online savings and bonus savings products has been significantly lower than that on their home loan interest rates.

RateCity said the Commonwealth Bank, Westpac, National Australia Bank have increased standard variable interest rates on their main online savings accounts by 0.55 percentage points since May, to 0.8 per cent.

However, that 0.55 percentage point increase in savings rates is a fraction of the 1.75 percentage point lift in official rates over this period, an amount all four banks have passed on to mortgage customers in full.

The big four’s rates for existing customers on online savings accounts and bonus accounts have lagged the rise in official rates.Credit:Josh Robenstone

ANZ Bank has lifted its ANZ Online Saver by only 0.55 percentage points, while at the same time lifting rates on its recently launched online account, ANZ Plus Save, by 2.2 percentage points to 2.7 per cent, as it tries to attract customers to the new product.

Rates on the big four’s bonus savings accounts, which pay customers more for meeting criteria such as making regular deposits, have increased by more than online savers. Even so, the increases in bonus rates are still smaller than the rises in mortgage rates since May.

For those prepared to lock their money up for a fixed period, banks are also offering more competitive term deposit specials, while some banks also pay higher rates to specific groups of people, such as younger savers. Banks also matched the RBA’s increase on several key deposit products last month, in a sign competition for funds may be heating up.

All up, however, analysts believe the big four’s current deposit rates are helping to boost net interest margins – which compare bank funding costs with what they charge for loans.

Macquarie analyst Victor German last week said deposit pricing was giving banks a “sugar hit,” at the same time as loan growth in their mortgage businesses slowed.

“In the short term, banks continue to benefit from highly lucrative retail deposit pricing, which will likely provide margin upside in the next six months,” German said in a note.

The gradual increase in deposit rates comes after the big four were flooded with savings during the pandemic, which limited the competition to attract funds from households.

The banks on Monday highlighted the various influences on deposit rates, and pointing to some of their offers.

An ANZ spokeswoman said: “ANZ considers several factors in making decisions around rates, including the impact on customers, the change in the official cash rate, business performance and competitive pressures.”

Meanwhile, Westpac’s consumer and business banking chief executive Chris de Bruin said: “We have increased deposit rates across a range of products this year including our flagship savings account Westpac Life where the majority of customers receive a variable interest rate of 1.85 per cent per annum.”

A CBA spokeswoman pointed to increases in various savings products in recent months, and said the bank wanted to support customers by increasing select deposit rates.

Investors, meanwhile, are weighing up the short-term boost from wider margins against signs of longer-term weakness in the mortgage market, where competition is fierce and growth is slowing.

Principal at fund manager Alphinity, Andrew Martin said deposit pricing trends were positive for net interest margins, as was the fact that households did not appear to have moved large sums to higher-interest products such as term deposits.

“On paper, the half that the banks are in at the moment should be pretty positive. The deposit costs for the banks, in a relative sense, are still pretty good,” Martin said.

Money markets are betting there is a more than 90 per cent chance the Reserve Bank will on Tuesday raise official rates from 1.85 per cent to 2.35 per cent.

ANZ Bank’s head of Australian economics, David Plank, said markets were pricing in a peak in the cash rate of more than 3.8 per cent by the middle of next year, but he did not think the cash rate would go quite as high as that.

“If they’re having to push it up that high, then they are essentially being forced to push the economy sharply weaker in order to get inflation under control,” he said.

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