By David Chaston
The main banks are not competing hard for retail funding. They don't need to.
And the risks are that term deposit rates will flat-line from here or even decline. Rises are unlikely for some considerable time.
Household bank deposits are growing at about +$11 billion per year and have done so at this rate for the past five years. That is a large, reliable addition to bank funding. And given that bank loans to households are growing at the same +$11 billion per year rate, the pressure is off banks to compete hard for funds - they are coming in just fine at current low interest rate offers.
In fact, 4% offers for terms most depositors will accept (three years or shorter) have almost completely disappeared. Only SBS Bank offers a 4% rate in this term range.
But most depositors prefer much shorter terms. RBNZ data shows we have a remarkable 34% of our money at terms with banks due in three months, we have 31% due in about six months, 23% due in about one year, 5.5% due in 18 months, just 2.8% due in two years and just 1.9% due in three years. The great weight - 88% in fact - is due within one year. That is short (and especially short when you think that we want banks to lend long - 30 years for mortgages, five years for personal loans).
We are very long-term borrowers, but very short-term 'investors'.
Heartland Bank (credit rating BBB) consistently offers the highest term deposit offer rates for terms up to one year.
Chinese bank ICBC (rated A) consistently offers the highest rates for terms longer than one year.
The rate sweet spot seems to be offers for terms in the range from eight to nine months to 18 months.
Interestingly, overall the main banks seem to be as competitive as the challenger banks - each group are offering an average of 3.47% in that range. Among the majors, ANZ (3.50%) and ASB (3.52%) are the leaders, while Kiwibank is the laggard (3.40%).
Generally the challengers are higher but the group is dragged down overall by TSB, which averages just 3.32% in that range.
These are low pre-tax rates and sadly the recent trend is soft - they have been dipping lower recently as the graph below shows.
And the prospects for higher rates aren't too bright either. The RBNZ says it is equally balanced in setting its Official Cash Rate lower as likely as higher.
How low could they go? Well, we are still +20 basis points above rates we had two years ago and rates could easily slip back to that level.
At its core is the fast-growing over 65 demographic that is cash-rich, especially if they down-size their housing, and risk averse. The boomer impact.
And loan demand, a key driver for bank rate competition, isn't strong either. And it may not move up anytime soon with business confidence sinking post-election and staying down. There has been a bit of a boost recently in housing sales (in May), but that is not expected to flow on further and housing activity will be low at least through October. Housing loan demand is the biggie for banks and growth is pretty much falling away (+5.9% now and down from +8.4% a year ago). Business (+5.3%) and rural (+2.5%) loan demand are each pretty tame and also falling away and are unlikely to pick up any time soon.
For higher rates, you will need to assess the offers of institutions with a lower credit rating. Rate offers rise significantly from non-bank institutions with sub-investment grade ("junk") credit ratings.
PIE rates can give a small boost to pre-tax return equivalents.
Using our deposit calculator to figure exactly how much benefit each option is worth you can assess the value of more or less frequent interest payment terms, and the PIE products, comparing two situations side by side.
The latest headline rate offers are in this table.
|for a $25,000 deposit||Rating||3/4 mths||5/6/7 mths||8/9 mths||1 yr||18 mths||2 yrs||3 yrs|
|* = these credit ratings in this review that are not investment grade.|
Rates in this table are the highest offered by each institution for the terms listed. You however will need to check how often interest is credited or paid. That important factor is not filtered in the above table and rates with various interest payment/credit arrangements are mixed here. However, our full tables do disclose the offer basis.
Our unique term deposit calculator can help quantify what each offer will net you.