Time to find a better deposits deal

PORTFOLIO POINT: UBank and Rabo Bank are currently heading the pack on shorter-term bank term deposit accounts, with Bank SA leading on longer-term accounts.

It’s time for all self-managed superannuation funds and larger private investors to negotiate much more vigorously with their banks over term deposit rates.

Let’s make a rule that if you are looking to maximise your returns you should not place large sums on term deposits that yield less than 5%.

And you should expect much more than that for five-year term deposits.

Because of what is happening overseas, banks are now starting to talk turkey and this article is designed to help you negotiate better deposit rate terms with your bank, particularly if you have a substantial sum to invest.

All the banks are now concerned that a split in the euro could take place. If it happens (and there is no certainty it will), then the major European banks who are big funders of large Australian banks, via wholesale lending, will be badly damaged. There will be far less money available for Australian banks.

That means that our banks must replace some of their overseas deposits with a much greater amount of Australian bank deposits. As you look to take advantage of this, if you’re seeking to deposit money for one year or less, then your starting point is the National Australia Bank’s wholly owned subsidiary UBank. In fact, UBank operates on the same banking licence as the NAB, so it is the same bank. And, of course, bank deposits of up to $250,000 with the NAB and other banks are guaranteed by the Australian government.

You will see that UBank offers at least 5.1% for three, six and nine months and 5.3% for 12 months. It is obviously more convenient to stay with your existing banks, but in some cases the NAB (via UBank) is offering over 0.5% more than the big banks on shorter-term deposits. You can’t afford to ignore that difference for the small amount of inconvenience required to take out a deposit with UBank. Some banks understand this new game and will come close to the party to match the Ubank’s shorter-term offer. If they don’t, then you must take your money away or you will lose your bargaining power next time around. And if you are a NAB customer just laugh at them if they won’t talk turkey.

When it comes to longer-term rates, banks by 2015 will need a bigger proportion of deposits over two to three years because these longer-term deposits will be regarded as ‘sticky’ and require less capital backing. The Dutch-based Rabo Bank has been leading the higher longer-term deposit drive in Australia for some time and I have made comments about Rabo.

Rabo is an excellent bank but it is based in Europe. Most of its Australian business is concentrated on loans to agriculture, which is now a very prosperous part of the economy. But if you want to play safe keep your deposit below $250,000 – you have Australian government guarantee up to that amount. Rabo has a suite of offers but the most attractive are the two to five-year currencies topping out at 5.8% for five years. It will be hard to get your Australian big local bank to match the Rabo rate, but if you dangle it in front of them it will help you negotiate particularly given the Australian government guarantee.

Many Australian depositors would prefer their money in one of the big four banks or a regional like Bendigo and I can understand that. No one can be quite sure what will happen in Europe, although the Rabo is one of the best European banks. When it comes to the big banks, your first port of call should be the Westpac subsidiary Bank SA – like Ubank with NAB, it operates under the Westpac licence.

You will see that Bank SA’s short-term rates don’t match the NAB via UBank but in longer-term rates they are attractive, with all their rates longer than two years at or above 5%, topping out at 5.3% for five years. The parent Westpac rate for five years it 5.2%. Use those Bank SA rates to negotiate a better rate with Westpac, particularly with Bank of Melbourne. But you can also use them when talking to CBA, ANZ. NAB or Bendigo.

Australian term depositors have had a very difficult time in the last six to 12 months, with rates falling sharply. The banks have not passed on the full official rates in their mortgage lending but they certainly lowered their term term deposit rates. The fight back can now start.

I should emphasise that if there is a crisis in Europe almost certainly the official Australian bank rates set by the Reserve Bank will come down sharply. So it is possible that term deposit rates will soften, although the margin between the Reserve Bank rate and term deposit rates will increase.

What has made Australian banks more nervous about Europe is the fact that the Europeans are coming up with solutions that look as though they might solve the situation, but in each case there are holes. And each time they announce a rescue package and then don’t deliver quickly on what they agreed, the position gets worse. It was possible to fix the Greek situation quickly and efficiently 12 to 18 months ago. Now we are dealing with Italian, Spanish and wider problems. European banks are hiding enormous losses with much more to come if the Euro splits. Moreover Germany, via the Bundesbank, is funding the exodus of deposits from banks in Greece, Italy and Spain. Not surprisingly many Germans are very upset and are taking the government to court. Even if the German government wins the court battle and the funds keep flowing to finance fleeing “Club Med” bank depositors, Germany will be hard pressed to maintain the funding of Club Med much beyond the end of 2013.

Meanwhile, in the streets of Spain, the poverty is increasing with middle class people joining the queues for food. In Greece the situation is worse. History tells us that sort of poverty will not last in a country without revolution, and as the protests grow the pressure to split the euro will be intensified.

One of the reasons the Germans and most of the countries in Europe do not want to split the euro is the enormous losses that will be incurred by the banks that have operated on the basis the euro would stay together. And it’s those losses that will mean that the wholesale banking market will contract dramatically. Australia depends on that market for about 40% of its local funding. The Australian banks must replace that overseas money with local money and that’s why they are negotiating on Australian deposit rates.

Given this pressure, as more people shift, bankers will become more flexible with their term deposit rates. There are substantial funds in Australian superannuation in the equity market, and banks will need to entice that money out of equities into term deposits. If there is a split in the euro there will be a scare on equities, so banks will be using a two-way stick to attract the money – fear of equities and higher deposit rates.

I must emphasise that I am not necessarily forecasting a split in the euro. It is possible that the European community will go through this very difficult time and come out of it basically intact, albeit it with a great deal of poverty.

At the Eureka summit Paul Keating said this was an unlikely outcome but it is clearly possible. The Australian banks now regard what Paul Keating told the Eureka summit as at least a 50% chance of taking place, so they have begun to take action on term deposits. Now is the time for Eureka readers to take advantage of this situation.