Banks to slash deposit rates?

Pressure building on banks to cut deposit rates

a woman

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Two years ago, savers could get term deposits paying up to 7%. Now the best rate over three years for $5,000 is 4.6% with IMB Building Society, while average rates offered by the big four banks are slightly lower at around 4.5%.

And those rates could go lower, as banks turn their attention to cutting more costs. With deposits making up an estimated 60% of their funding requirements, lower savings account rates could make a substantial improvement to the banks’ interest margins and ultimately their profits.

Broker CIMB, in a report to clients yesterday suggested that as global debt market funding costs have halved, banks could turn their attention to interest rates paid on savings accounts and term deposits.

The big four banks, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB) have repeatedly cited wholesale funding costs as one of the prime reasons for not being able to full pass on the RBA’s cuts to the official cash rate.

Competition for deposits has so far kept term deposit rates fairly high, but with term debt costs falling, banks have the opportunity to replace higher cost deposit funding with lower cost wholesale funding. That could mean further falls in term deposit rates.

Additionally, in an election year, the banks may come under sustained pressure to pass on in full the RBA’s cuts to mortgage borrowers. RateCity estimates the banks have passed on 1.33% of the RBA’s 1.75% cuts to the cash rate since November 2011.

The Foolish bottom line

New banking rules, which could see some domestic deposits become unattractive to banks, could also see competition lessen in the sector, forcing deposit rates lower. It’s only a matter of time before savers will be forced to look at other asset classes to maintain earnings above the rate of inflation.

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