Bank gains from rate rises ‘all but done’ amid fight for deposits

The benefit to banks from interest rate rises is waning, as lenders compete for funds and consumers shift billions of dollars from low-interest accounts into higher-interest savings accounts and term deposits.

As Reserve Bank governor Philip Lowe said the central bank was closer to a “pause” in its rate rises, analysts said competition between banks to attract household deposits was heating up and more people were moving their cash into higher-interest deposits.

Analysts say the benefit to banks from interest rate rises is diminishing due to stiff competition for loans and deposits.Credit:Paul Rovere

This is pushing up banks’ funding costs, at the same time lenders are also fighting to pinch rivals’ mortgage customers, amid a refinancing boom.

While bank profits have benefited from the sharp rise in rates since May, Credit Suisse analyst Jarrod Martin said the earnings boost that banks received from each rise in interest rates was diminishing.

“You have competition on the asset side of the balance sheet and the liability side of the balance sheet. That’s a bad environment for bank revenue,” he said.

Many ongoing savings rates are still low, but rates on bonus saver accounts have been increasing briskly, and Bank of Queensland last week started offering a rate above 5 per cent on one of its accounts. Martin said a 5 per cent rate was a “key pricing point that consumers will look to chase”, and more money was moving into higher-rate savings accounts or term deposits.

The rise in deposit competition is one reason many analysts believe banks have seen a peak in their net interest margins – funding costs compared with what banks charge for loans. In a recent note, Martin said that although margins may peak at different times for different banks, “the benefits from rising rates for the sector is all but done, in our view”.

Morgan Stanley analyst Richard Wiles also said this week the “tailwinds” that drove a cycle of earnings upgrades for the banks over the past year had now run their course, and it was more likely bank shares would underperform the ASX 200 in 2023. “Mortgage refinancing and discounting have picked up, while deposit pricing benefits are moderating. This increases the likelihood that major bank margins peak earlier and at a lower level,” Wiles said.

After the RBA this week announced its 10th consecutive rate rise, Lowe said on Wednesday a further increase in rates was likely to be needed, but the RBA was moving closer to pausing.

At the time of writing no major banks had yet responded to this week’s rate rise.

Recent research from Wiles said the major banks’ standard online savings rates increased by 0.25 percentage points or less last month, but average rates on “bonus” saver accounts rose by about 0.7 percentage points.

RateCity research director Sally Tindall noted the increase came after the government ramped up the political pressure on banks by ordering an official inquiry into deposit rates, but said some deposits had already started to rise before the probe was called.

‘You have competition on the asset side of the balance sheet and the liability side of the balance sheet. That’s a bad environment for bank revenue.’

“A combination of market pressure and political pressure has led to banks lifting some deposit rates by more than the RBA has prescribed,” Tindall said.

Since the RBA started raising rates last year, the pass-through to savers has been patchy. The most competitive rates typically have strings attached, such as paying high interest only on balances that grow each month.

Disclosures from Commonwealth Bank, ANZ Bank, and Bendigo and Adelaide Bank during last month’s earnings season showed more consumers were moving cash out of transaction accounts, which typically pay close to zero interest.

CBA said its retail deposits that were paying zero interest fell by $4 billion in the latest half, while term deposits jumped $13 billion and savings balances also grew. ANZ said Australian retail transaction account balances fell by $2 billion in the last quarter, while term deposits grew by $6 billion.

Bendigo said its term deposits had increased by $2.1 billion to $21 billion in the December half, while its total “at call” deposits – those that can be withdrawn straight away – had fallen slightly.

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