David Chaston reviews the dramatically different fortunes of bank shareholders and bank TD customers in 2012, and finds one group laughing, the other weeping

By David Chaston

If you are a term deposit investor, here's something to think about.

I assume you are not happy with the returns you are getting from your bank term deposit.

As 2013 starts, a one year bank term deposit returns about 4.2% before tax.

The range is narrow; ANZ and ASB offer 4.1% for a $10,000 one year deposit, BNZ and Westpac offer 4.2%, and Kiwibank offers 4.3%.

Among the second-tier banks, the Co-op Bank is at 4.1%, TSB is at 4.2%, RaboDirect and SBS are at 4.3%.

Newbie Heartland bank is still offering 4.65%, perhaps reflecting the fact that it has only just been registered as a bank after being a building society for the past two years.

The tax that will apply to your interest earnings will reduce those interest earnings by 17.5%, 28% or 30% depending on your overall income level - and the bank will take the IRD part even before you get paid.

That 4.2% could become 2.94% pretty quickly, after tax. (Use this handy tool to work out your actual returns.)

For most people that hurts.

And it doesn't help much that annual CPI inflation is 'only' 0.8% - (we'll get the December CPI rate on Friday, January 18.)

Here's a thought: if you are investing in a bank term deposit, you are probably comfortable with putting your money in that bank. (You have the choice of  Kiwi Bonds, but they only return 2% gross.)

If you are ok with depositing it in a bank, why not consider buying bank shares?

There are three listed in New Zealand, and if you held these shares in 2012 you would not be complaining.

It is impossible to re-create your personal situation here (and I am not an adviser, so I wouldn't do it even if I could). But lets assume you had $10,000 at the beginning of 2012.

If you used that to buy ANZ shares on the NZX, you would have bought about 400 shares at NZ$25.10 each.

One year later, those shares would have been worth NZ$31.50 each. The gain would have been a spectacular 25.5%.

Plus you would have earned $896.00 in dividends over that year (in three payments of $0.66, $0.79 and $0.79 per share).

All up, your $10,040 (plus broker costs) at the start of 2013 would now be worth $12,600 and you would have been paid $896 in dividends (imputation credits and RWTx will apply).

If you had used that $10,000 to buy Westpac shares on the NZX, you would have also bought about 400 shares at NZ$25.20 each.

One year later, those Westpac shares would have been worth NZ$33.20 each, a gain of 31.7%. And Westpac would have paid you $1,000 in gross dividends (in three payments of $0.84, $0.84, and $0.82 per share).

All up, your $10,080 (plus broker costs) at the start would have become $13,280 plus the $1,000 dividend (imputation credits will apply and less tax).

If you had been really brave and used that $10,000 to buy Heartland shares at the beginning of 2012, you would have owned 20,400 of them because they only cost 49c each then.

One year later those shares are worth 69c, a 40% gain, and are valued at NZ$14,076. Heartland did not pay any dividend in 2012.

You could sell down your holding to generate cash, but the gains you realise when you sell will become taxable.

Whatever way you look at it, those gains would have been far greater than the NZ$430 gross a term deposit would have earned you. (The average one year TD rate at the start of 2012 for the main banks was 4.3%.) Heck, the dividends alone from either ANZ or Westpac would have been greater.

And also far greater than choosing a term PIE, which can offer slightly better effective interest rates than regular term deposits.

Buying shares is not a risk free option of course.

If any main bank failed, there is an implied government guarantee for depositors and small depositors would be unlikely to take any haircut from the RBNZ OBR processes. Shareholders would be wiped out, however.

And more likely, the value of the bank shares could fall, and/or the level of dividends could be reduced.

Do you think that will actually happen in 2013?

If we use 2011 as a guide - being the tough year for banks after the GFC pressure worked their way through the economy - ANZ's share price started that year at NZ$26.85 and ended the year at $25.10 for a small loss. It paid dividends of $1.40 per share during that year, or $560 for 400 shares. Westpac's share price started 2011 at $25.13 and ended at $25.21; it paid $2.36 per share in gross dividends, or $944 for 400 shares.

In 2011 you would have taken a bath if you had Heartland shares. They started that year at NZ$0.78 and ended 2011 at just $0.49 each. Even at the beginning of 2013, they are not yet back to the $0.78 level.

There you have it. History is never a reliable guide for the future. Whether bank shares are right for you will be something you will need to decide for yourself. What is your risk tolerance?

In 2012 however bank shares far out-performed bank term deposits.

Bankers 4,280, savers 430.