Who Wants to Be the Teacher’s Pet?

It takes a bit of mettle to run a bank. Even more so, with the findings of the Royal Commission so fresh in people’s minds.

Sure, the pay packet would be nice. And so too the surrounds — plush carpets, hushed tones and the feeling of gravitas as you take in the view from the top floor.

But at some point, you have to make a decision. That is, about where your priorities lie.

With the rate cut last week, all eyes were on the banks to see what they would do. Would they, or wouldn’t they, pass the rate cut on in full.

The ANZ Bank led the charge after the RBA’s announcement. ANZ’s decision to come out so early with their announcement was, depending on your view, either foolhardy or brave.

And that ANZ went with a partial cut of just 0.18% might help clarify which description fits them best.

Soon after, the ANZ felt the Treasurer’s wrath, as both the Commonwealth Bank and National Australia Bank announced they would cut their rates the full 0.25%.

For both the CBA and NAB, it was a pat on the head from the Treasurer. A sign that they were toeing the line.

Not so for the other big two.

ANZ’s early announcement gave the Treasurer and media plenty of time to share their dismay. Westpac, anything but brave, waited until after the main news cycle to announce their decision to pass on 0.2% of the cut. No pat on the head for them.

Of course, what got lost in the main headlines was the timing.

Sure enough, CBA put its announcement out early. However, the rate cut would not take effect until 25 June — almost three-and-a-half weeks after the announcement.

By contrast, ANZ and NAB’s cuts come into effect the best part of two weeks before CBA’s. Combined, the delay is worth an estimated $100 million in the pockets of the Big Four.

It might be small beer for banks in the scheme of things. But that is how banks make their money. A nip here, a tuck there. Forever massaging their margins.

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The real test is yet to come

The real test will come if (and when) the RBA cuts rates again. That is, if the CBA and NAB pass another rate cut on in full.

Nevertheless, ANZ’s chief, Shayne Elliot, got to work selling his bank’s position. It was about balancing demands, he claimed, including both depositors and shareholders.

The fact that ANZ had — as reported in The Australian quoting analysis by RateCity — cut rates on 20 different term deposits prior to the RBA’s meeting, took some of the sting out of his argument.

ANZ’s public relations battles aside, its CEO did have one very valid point. Well, perhaps two, if you include shareholders, but we will leave this for another day.

However, one point he made is clear. Those relying on term deposits are the forgotten people in the interest rate debate.

When the first tranche of the above mentioned CBA floated in 1991, investors had a solid choice.

At that time, CBA traded on a fully-franked yield of around 7%. Also around that time, the official cash rate was running at 8%. Meaning you could generate a reasonable income from either investment.

Fast forward to today, though, and things are very different.

Finding a term deposit with a ‘3’ in front of it has become a thing of the past. Sure, there might be the odd ‘special’.

But more than likely, a term deposit will start in the ‘2s’. And if the RBA cuts rates again, these rates will only head lower.

However, banks need these depositors more than they will ever let on. Term deposits, along with all other depositors (cash trusts, savings accounts, and the like), form a huge part of banks’ funding.

On average, these depositors fund around 70% of CBA’s loan book. Meaning that the CBA only need to fund the other 30%, by issuing bonds and other paper to institutions both here and abroad.

If anything should disrupt this 70%, then one thing is sure, the banks’ cost of funding will only increase.

Institutions who buy Aussie banks’ bonds have plenty of choices where to invest their money. Because of that, they require a competitive rate of return.

However, those who deposit funds with banks domestically don’t enjoy the same spoils. Unfortunately for them, unless they are prepared to head higher up the risk curve, for now, they can only take what is on offer.

All the best,

Matt Hibbard,
Editor, Options Trader

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Money Morning Australia