Cash call: Judging European-owned banks

A reader query on term deposit choices raises a common issue.

PORTFOLIO POINT: With term deposit rates falling below 5% at some of the major banks, Rabobank is a competitive option for SMSFs.

One Eureka Report reader has asked me to write periodically about the term deposit market. In my superannuation fund, I have a considerable proportion of bank term deposits, so I follow the market and I will be delighted to pass on some of the things I notice.

In particular, this reader asked me about the term deposits at Rabobank. Like other self-managed fund owners, he is not pleased that bank term deposit rates are now falling below 5%. When rates move below that level, they are not as attractive to self-managed funds.

Of course, if you are frightened of a major collapse in the market, then it doesn’t matter all that much what rate is being offered, but if you are looking at term deposits as an integral part of your mix of investments, they are less attractive once interest rates go below 5%.

But as of this morning, Rabobank is offering above 5% for one- and two-year deposits, and 6% for five-year deposits. To gain a 5% return from Commonwealth Bank, you need to take a three-year term deposit; the five-year rate is only 5.1%. The Eureka Report reader who contacted me wants to know whether Rabobank with a Commonwealth government guarantee is safe. On its website, Rabobank is quite open about boasting that it has a government guarantee up to $250,000. Rabobank is one of the better banks in the world because it concentrates on agricultural lending.

There is no bank that better understands the agricultural business than Rabobank; it’s an excellent organisation and the Australian offshoot must be properly capitalised. The bank’s weakness is that it is based in Europe. That means its executives and traders are mixing with those who are working for banks that have lost their shareholders’ funds. These banks are broke and are held together by various mechanisms, including low-cost loans from the European Central Bank. It is possible that Rabobank could be tempted to make stupid trade deals with these broken banks and be caught. It shouldn’t happen, but I would feel a lot safer about Rabobank if it wasn’t based in Europe, where it is forced to mix in bad company. Having said this, the bank does have a Commonwealth government guarantee.

Given the European mess and despite Rabobank’s global standing, I would not invest more than $250,000 (the amount of the guarantee) in its term deposits. It is probably prudent to cap any investment at $200,000 to allow you to roll over interest, should you so desire. I’ll certainly be looking at that action when some of my deposits mature, if the current rate differential is the same.