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3 of the big 4 at record highs

Australia’s big four banks are expected to notch up a combined $27 billion in profits once Westpac (ASX: WBC), NAB (ASX: NAB) and ANZ (ASX: ANZ) declare their earnings in the next two weeks.

According to The Australian “rates on term deposit and online savings accounts have materially fallen over the past 12 months.” This is contrary to the belief held by many analysts that money sitting in bank accounts will likely trickle back into equity and property markets as people react to poor interest rates.

The banks’ low payouts are improving margins and the fear of deposits disappearing seems all but gone. Merrill Lynch analyst, Andrew Hill, says the market would be watching for signs of deposit pressure easing” in the big banks’ annual reports.

It is highly likely however that continued low interest rates will force money to flow from bank accounts and into both property and equities as people go in search of better returns. This has already sent markets higher in the past year. Average rates earned for online saving accounts is now at 3.67%, down from 4.65% a year ago.

Managing director of wholesale broking at Bell Potter, Charlie Aitken, said “Falling term deposit rates are good for banks every way you look at it, with the final positive being its actually good for their share prices in terms of money flowing into them to chase the yield.” Bell Potter data for August showed $546 billion in term deposits.

However lower levels of deposits can pose risks for the banks which are required to hold a certain amount of capital. Retail and business deposits make up around 65% of the banks’ funding costs – The Commonwealth Bank’s (ASX: CBA) level is slightly lower than average, at 63%.

Rating agencies are putting pressure on the banks to lift retail deposits whilst minimising their reliance on wholesale funding. CIMB analyst John Buonaccorsi said, “(There will be) continued strong demand for retail deposits given pressure from ratings agencies to limit wholesale funding reliance and the impending regulations on liquidity coverage and net stable funding.”

Foolish Takeaway

Although it may be true that the “mums and dads” are pushing the banks’ stock prices higher, were not going to tell you they’re a good buy at current levels. Savvy investors know to buy at the troughs and sell at the peaks – currently the bank stocks are peaking. Trading on high multiples coupled with the likelihood of subdued revenue growth in the next few years, there are better options available on the market.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.    

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