Lower bank interest? Try shares

Deposit rates cut by full 0.25%

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While all of the major banks so far have kept some of last weeks’ interest rate cut for themselves, some have wasted no time in slugging depositors with the full value of the 0.25% rate cut.

National Australia Bank (ASX: NAB), HSBC, Suncorp Group (ASX: SUN), Rabobank and ME Bank have all reduced their deposit rates by 0.25%, according to CANSTAR.

Other banks have yet to move on their deposit rates, but it’s likely that most will cut to maintain their margins. But the banks face pressure to keep deposit rates fairly high to attract investors and stop them from moving funds out of the banks into other alternative assets like shares, hybrid securities and property.

With the market pricing in another cut to official interest rates next month, that will add even more pressure on the banks to cut deposit rates – but then they risk investors moving their money into shares to take advantage of higher dividend yields. Commonwealth Bank of Australia’s (ASX: CBA) current dividend yield is around 8.4% (before tax), compared to its best deposit rate of 5%. CBA’s yield of 5.9% becomes 8.4% when you include franking credits.

The banks have increased their source funding from depositors over recent years, to avoid the issues they faced during the GFC, when wholesale funding practically dried up. Almost half of banks’ funding comes from deposits now, compared to 30% before the GFC. Investors have poured money into deposits in recent times because they are seen as ‘safer’ than the sharemarket, and much less volatile.

Ratecity analysis shows 13 lenders have reduced their mortgage rates since last week, with Yellow Brick Road Holdings (ASX: YBR), ING Direct, Bank MECU and MyRate the only institutions that passed on the full 0.25% rate cut to borrowers.

Smaller lenders are forced to pass on larger cuts, so they are more competitive than the big four banks, which between them, hold around 90% of the retail mortgage market. Some lenders offer mortgage rates around 1% lower than the major banks’ standard variable rates, although the banks do offer discounts to customers if they take up other products, like credit cards and savings accounts.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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