Banks are quietly content with the flood of deposits heading their way.There was an important sentence or two missing from yesterday’s Westpac warning about financial servicessector growth remaining modest – modest growth is all our banks can handle anyway.
While our senior bankers might suggest their highly-remunerated whiz-bang management talents are prevented from delivering stronger profit growth by dull-witted customers being overly cautious, the reality is that the banks are incapable of doing much more than they’re doing.
The combination of stiffer Basel III capital requirements and the competition for domestic profits means banks are quietly gratefully for subdued credit demand.
The deposit loop is a virtuous cycle for the banks at present, but it has the potential to rapidly turn vicious. Fearful Australians aren’t seeking to borrow much, returning our household savings ratio to something more like our longer-term average, before we started bashing the collective plastic in the 1990s. Instead of wanting to borrow, we’re stuffing increasing amounts of money under the banks’ mattresses.
We’re encouraged to do that by the tasty real interest rates on offer from the banks who are genuinely competing for deposits, but it’s a finely balanced thing – that strong deposit growth is just enabling the banks to meet the limited credit growth without drama in this uncertain world where large amounts of foreign funding are frowned upon.
Should we collectively experience an outbreak of confidence, that fine balance would be lost. If we were more confident about the economic outlook, we’d be less likely to leave money in the vaults – we’d be withdrawing cash to buy shares or property.
The Catch-22 is that we’d also be keener to borrow more, but wouldn’t be able to because we’d be reducing the deposits that would fund the borrowing.
That danger of Australians wanting to both borrow more and deposit less deeply worries the bankers who have the job of finding money to allow their business to operate.
They’re happy for the uncertainty to continue – keep those European crisis headlines coming.
Symptomatic of how serious the competition has become among the banks wanting to borrow our money is the fact that the best online savings rate has risen again after initially falling in the wake of the RBA interest rate cuts.
The new leader in the field is the Westpac brand, RAMS, offering 5.75 per cent, albeit with a couple of catches – a minimum of $200 a month deposited and no withdrawals made.
(Rabo is in second place, offering 5.6 per cent but that’s only a four-month special while NAB’s UBank has 5.51 per cent with a minimum deposit requirement.)
That two of the top three offers are being made by Big Four banks that traditionally could raise deposits more cheaply than smaller institutions tells us something about how keen they are to borrow.
From an investor’s point of view, the subdued environment has its own rewards, as long as you’re not sitting on shares bought at the pre-GFC peak.
At present pricing, banks only have to maintain dividends to make holding bank shares richly rewarding thanks to those fat franked yields.
A little profit growth is always welcome, but let’s not get too enthusiastic – we wouldn’t want to encourage optimism.
Michael Pascoe is a BusinessDay contributing editor.
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