ANZ blinks first

It's 7:45 am. And only one bank, ANZ, has blinked – at least on term deposit rates. The drama created by the Reserve Bank's decision to reduce official rates by half a per cent is not just in home loans – term deposit rates are even more tense.

After the Reserve Bank announced the rate cut no major bank reduced its term deposit rates although they had been pencilling them back in recent weeks in anticipation of an official rate cut.

But as I pointed out yesterday, beware the rate cut dampeners (Beware the rate cut dampeners, May 1).

The term deposit reductions in the last quarter had seen self-managed super fund owners take their money out of banks and head for the sharemarket (including hybrids), and if there are more rate reductions it will accelerate that trend.

If that happens our big banks will have to lift their overseas wholesale borrowing or cut lending, which they are reluctant to do.

I must emphasise that these trends take place over time but much of the term deposit money is in relatively short-term securities because the banks encouraged short-term investment with their high rates. The banks were gambling on lower rates from the Reserve Bank but did not full realise that self-managed funds are very flexible.

We are now seeing a much faster exit by self-managed funds than would have been the case had the banks put more emphasis on long-term deposit rates.

To underline the advantage of having local customers fund a bank, yesterday afternoon Fitch Ratings affirmed Bendigo Bank's long-term issuer default rating at 'A-' with a stable outlook.

That's a high rate for a smaller bank and it's rare for a bank to be upgraded in these times. A key factor in that rating was the fact that the Bendigo Bank loan book "is almost entirely funded by customer deposits," according to Fitch.

Most of the majors rely on around 40 per cent of their money from overseas sources but they are looking to lower it to 20 to 30 per cent.

I will be watching it during the day but as of 7.45 am. Most of the big banks have six-month rates around 5.5 per cent but Bank of Queensland is at 5.85 per cent. Most other smaller banks offer better rates – and remember deposits up to $250,000 are government guaranteed.

The ANZ trimmed its six-month rate from 5.5 to 5.3 per cent.

To get a good one-year rate you gave to either go to the smaller banks or Commonwealth Bank, which is offering 5.5 per cent (the other majors are around 5 per cent). In five-year rates Bendigo is the standout at 6 per cent, but Westpac is not far behind at 5.8 per cent. ANZ trimmed its five-year rate from 5.6 to 5.4 per cent.

The ANZ reductions are not huge and other banks are going to reduce their rates – but again it's a question of how big the self-managed fund exodus has become.

* The Gottliebsen family has small holdings in two Bendigo Community Banks.