This is a special alert to Eureka readers using bank deposits. The quick decision by Commonwealth Bank's chief executive Ian Narev to lift term deposits after the Reserve's Bank interest rate cut yesterday had a nasty catch to it. The new higher rates do not cut in until August 19, which means that if you have maturing deposits before then you may need to take them in cash to get the higher rates.
Similarly, be aware of placing money on deposits before August 19. None of the major banks have altered their websites term deposit rates, and they now bristle with traps for inexperienced players. (*See at bottom for August 19 rates.)
When I arrived back from Newfoundland last month, I reported to you a clear stirring in the bank deposit camp, with Bendigo Bank offering higher rates than the official card. But I didn't anticipate the Narev bombshell just minutes after the RBA decisions yesterday, when CBA substantially raised deposit rates. Ian is clearly worried about the European banking situation. Overnight CNN quoted Diane Pierret, a finance professor at the University of Lausanne's business school, saying:
"The European banks are poorly capitalised. They still have bad assets on their balance sheets, like bad loans ... and the risk of contagion from the banks of one country to another country is also high."
Pierret and fellow academics say 29 of the 51 banks would fail an American-style stress test, and they need to raise €123 billion ($138bn) in capital to shore up their finances. There is particular concern about Italy.
I will be talking about investment strategies in current world events in the Saturday Eureka email, but here are a few points:
- Banks will need to reduce costs to maintain profits in an era where they must bid up for local deposits and lower their use of low-cost European money.
- Investors will look for higher yields, and we saw many higher yield stocks cut back after the CBA announcement.
- The CBA's 3.2 per cent a year deposit gives a real no-risk return of 1.7 per cent, assuming an inflation rate of 1.5 per cent.
I am not suggesting a run to bank deposits but, remembering the government guarantee for bank deposits of $250,000 with individual banks, we need to look again at the options.
I will be back Saturday to discuss these matters. It so happens I have an old bank deposit that matures tomorrow. I will tell you what I did on Saturday. And for those battered people who have relied on shorter term interest-bearing securities, this is the first good news for a long time.
*CBA rates from August 19: one-year is 3 per cent, two-year is 3.1 per cent and the three-year is 3.2 per cent (the five-year rate remains at 2.9 per cent). Do not accept anything less from any bank.
Read Robert's full column in this week's Eureka weekend briefing.