Mortgage rates have shot up but deposit rates are still low. Are banks ripping savers off?

Mortgage rates have risen sharply in the last six months but term deposit rates have not gone up anywhere near as much.

In June the two year fixed term mortgage rates were around 2.49 per cent. Now they have risen to around 4.35 per cent at the main trading banks – an increase of 186 basis points.

But a six month term deposit rate is now earning 1.4 per cent compared to 0.82 per cent – an increase of just 58 basis points.

Economist Cameron Bagrie said the banks had been pretty quick out of the gates with increasing mortgage rates.

“If you look at the one and two year swap rates the movement we have seen is broadly in line with what you would expect. But if you look at the overall picture in regards to the pricing of the asset side of bank balance sheets via lending versus the liability of deposits there’s a bit of a mismatch starting to open up. We are seeing the lending rates move up pretty quickly but the deposit rates are not shifting anywhere near as fast.”

He said that was because banks were incredibly well-funded at the moment meaning that they didn’t need to pay higher interest to attract depositors’ money.

“They have got oodles of cash sitting on their balance sheets, So there is no need to instigate aggressive pricing for deposits – whether that be savings or of the term deposit variety. What is also going on is they are expanding their margins.”

Reserve Bank data shows the net interest margin – the difference between what banks have to pay out to savers and what they earn from borrowers has been on the rise across the banks.

In the June quarter it hit 2.04 per cent but, although it dipped in the September quarter to 1.98 per cent, that was still above the 1.85 per cent they were getting in the September 2020 quarter.

“Some of that is reversing some of the stuff we saw in 2020. But it is pretty obvious what looks like what is going on at the moment there is a margin expansion being played out.”

Bagrie pointed to the fact that banks had reduced their funding cost in the last two years with savers shifting their money from term deposits into savings accounts where the interest payable by the bank is much lower.

As of October, savings in banks had risen to $121 billion from $85.8b two years earlier while term deposits have fallen from $195b to $153.6b.

“Banks have been a big winner of the move away from term deposits towards savings accounts.”

“If you look at the relative difference between what you are getting in a savings account to what they are paying on a one and two year term deposit it is pretty massive. The banks are still accessing very cheap funding.

“We have seen a movement up in those term deposit rates, particularly in the longer term ones, but New Zealanders tend not to jump into those sort of things. They will happily tie up a term deposit for a year but they don’t tend to tie up a lot of money for three, four or five years.”

On top of that banks are able to access very cheap funding through the Reserve Bank’s funding for lending programme which offers banks the ability to borrow money at the official cash rate which is currently just 0.75 per cent.

Bagrie said arguably funding for lending should not have been introduced.

“It’s a crisis management tool when the banking sector has been incredibly well-funded – they haven’t been short of cash – in fact for the last 12 months you could say they have been swimming with cash – we have had a booming property market, the banks have still been having immense amounts of money coming in the door, sitting in their transactional and savings balances.”

So are the banks ripping savers off?

Bagrie said ripping off was a little bit of a harsh term.

“But you look at what is going on here and what we have seen for a long period has been margin compression on the asset side of bank balance sheets, more aggressive pricing of the likes of mortgages – mortgage holders have benefited over a long time and how has that partly been funded? By compressing the returns being offered to depositors on the other side.”

Despite term deposit rates rising a bit so far, Bagrie said, there was little sign of savers rushing back to them.

“What we have started to see broadly is that the bleeding or the rush out of term deposits is starting to slow down but if we look at latest data for September, August numbers term deposit balances are still down on the month prior. But the rate of decline is slowing quite sharply. We will see a turn in the next 12 months,” he predicted.

A spokesman for the BNZ which raised one of its savings account rates yesterday said its home loan pricing was based on a variety of factors, including the OCR, the cost of funding from other sources, cost of capital, and risk.

“Savings and term deposit rates are a factor in this, but their pricing is set on a different basis. Some underlying factors have been volatile recently, for example global swap rates have been bouncing around and there has been some uncertainty around OCR rises.”

He said the market for savings products was very competitive, and despite these challenges it had been steadily increasing savings rates.

“There have been eight term deposit rate increases so far in 2021, and our standard savings account, Rapid Save, is now 0.45 per cent per annum, which is higher than all of our competitors’ on-call savings accounts and higher than most of their bonus saving rates.

“In July, we shook up the savings market by giving all BNZ customers with Rapid Save accounts the full interest rate, including the bonus interest, regardless of whether they increase, maintain, or even decrease their balance.”

A spokeswoman for ANZ New Zealand noted that a two-year home loan fixed rate versus a six-month term deposit rate weren’t comparable terms and were influenced by different pricing factors.

“A better comparison would be on 1 June our 2-year TD [term deposit] rate was 1.10 per cent and it is now 2.50 per cent, an increase of 140 basis points.

“There are a number of factors that make up our pricing decisions, including wholesale swap rates.The biggest movement since June has occurred in longer term swap rates which has been reflected by larger movements in our longer term rates.”

She said the bank constantly assessed its deposit and lending rates to ensure they were fair, competitive and balanced the needs of savers and borrowers.

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