Westpac still in chase for depositors' funds
A fall in term deposit interest rates over recent months has sparked predictions that fierce competition to attract deposit funds - a key pressure on banks' costs - will fade.
Banks' cost of new wholesale borrowing has also fallen to its lowest since 2009, as global markets take a more optimistic view of the world economy.
But the country's second-largest bank, Westpac, maintains it will seek to increase its ratio of deposits to loans, and says banks are likely to resist relying on the "drug" of cheap wholesale debt.
The chief financial officer of the bank's flagship Australian financial services division, Gary Thursby, acknowledged there had been a fall in the pricing of some consumer deposit products, but said competition remained high, especially for other types of savings products such as online and reward savers.
Westpac is also seeking further growth in its ratio of deposits to loans in response to rules designed to make banks safer in the event of a credit market squeeze.
The average deposit-to-loan ratio among Australian banks is about 70 per cent, and Westpac's ratio had risen to 67.6 per cent at its latest results in November.
Mr Thursby said the bank was "more comfortable than it had been in the past" but it would aim to continue lifting the ratio.
"We would like to keep driving it higher, particularly if we think about the economic and funding conditions that make all the banks pay a lot of attention to it," Mr Thursby said.
"We, like all banks, will continue to support that ratio, and over time growth in that ratio will mean that there will continue to be quite strong competition for customer deposits."
Interest rates on term deposits have eased in recent months, with Reserve Bank numbers showing specials were about 125 basis points above the cash rate, compared with more than 150 basis points last year.
Mr Thursby acknowledged the trend but said competition for deposits remained high and banks were unlikely to resume relying on wholesale debt - as some did before the global financial crisis.
"All the banks I think will avoid getting back on the drug of over-reliance on wholesale funding to fund their lending growth," he said.
Banks are also planning for the risk that households might withdraw billions in deposit funds to invest in a rising sharemarket at the same time as business demand for credit also increases - putting a squeeze on bank funding.
Monthly growth in household deposits slowed to 0.25 per cent in February, compared with the previous month's growth of 0.8 per cent, Australian Prudential Regulation Authority figures showed on Thursday.
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Westpac says the battle for household deposits has not eased and that it will continue to chase consumer savings aggressively, aiming to grow stable deposit funding rather than rely on cheap wholesale debt.
Predictions of easing competition come after a fall in term deposit interest rates in recent months and a drop in banks' wholesale borrowing costs to their lowest level since 2009, suggesting less pressure on banks' funding costs.
Westpac's deposit-to-loan ratio was 67.6% at its November results; the Australian banks' average is about 70%. The ratio matters because higher deposit funding generally makes banks safer and less reliant on potentially expensive or volatile wholesale funding.
Reserve Bank numbers showed term deposit specials are around 125 basis points above the cash rate, down from more than 150 basis points last year. That means some term deposit rates have eased, but competition remains strong—especially for online accounts and reward-saver products.
Westpac's CFO Gary Thursby warned banks will avoid becoming overly reliant on wholesale funding—calling it a 'drug'—because deposits are a more stable source of funding and over-reliance on wholesale markets increases risk, as seen before the global financial crisis.
Banks are preparing for the risk that households might withdraw billions from deposit accounts to invest in a rising sharemarket just as business demand for credit increases, which could squeeze bank funding if deposits fall while lending needs rise.
Australian Prudential Regulation Authority (APRA) figures showed monthly household deposit growth slowed to 0.25% in February, down from 0.8% the previous month, indicating a recent moderation in deposit inflows.
While acknowledging some deposit pricing has eased, Westpac says competition remains high—particularly for online savings accounts and reward-saver products—and it will continue to support and try to lift its deposit-to-loan ratio over time.
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