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Cash savings options less enticing than ever

Nicki Bourlioufas  |  11 May 2020Text size  Decrease  Increase  |  
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Interest rates are at all-time lows on term deposits while interest rates on online savings account are almost zero. Investors are running out of savings options—but there is some good news: experts expect no further cuts to term deposit rates this year.

There are four main savings options for cash investors:

  • online savings accounts
  • term deposits
  • cash management accounts (CMAs)
  • cash management trusts (CMTs) or cash managed funds

The first three have no or lower fees while managed funds may carry fees between cost between 20 to 30 basis points. Interest rates on all such fixed-income investments have tumbled during the coronavirus crisis as central banks ease monetary policy to offset global recession.

The average interest rate on 12-month term deposits fell to 0.9 per cent in April, down from 1.1 per cent in February. Three-year term deposits were paying interest of 0.95 per cent, also down from 1.1 per cent in February.

Those rates seem attractive compared to the paltry interest rate banks are paying on cash management accounts of just 0.5 per cent a year, while online savings accounts rates were 0.2 per cent in April, barely above zero, as the graph below shows.
With bonus interest rates included, online savings accounts paid an average of 1.2 per cent interest a year.

Major banks' retail deposit rates

Major banks' retail deposit rates

*Average of 1-12, 24-, 36- and 60-month terms. **Excludes temporary bonus rates.
Source: Major banks' websites; RBA

According to the RBA's Statement on Monetary Policy last week, the major banks are estimated to have lowered interest rates on term deposits by up to 100 basis points over the past year.

“Banks have passed through a large share of the recent reductions in the cash rate to retail deposit rates. Since May 2019, the major banks are estimated to have lowered the interest rates on at-call retail deposits by an average of 85 to 100 basis points,” the central bank said.

But savers, including retirees who have previously relied on term deposits for income, can breathe a small sigh of relief, with term deposit rates expected to steady in the near term, according to Morningstar banking analyst Nathan Zaia.

“I don’t think the banks will cut deposit rates materially from current levels. Given returns for deposit holders are so low, the banks need to ensure they are attractive enough to retain that stable source of funding.

“There is also competition from smaller lenders that would take the opportunity to pick up the deposits and chase market share,” says Zaia.

“As loan losses mount and earnings continue to fall, it is just as likely the banks increase prices on loans as it is they lower deposit rates further. At this stage, it doesn’t look like either will happen, as the banks take the pain to try and help the economy pull through. It is obviously in the banks’ best interest.”

AMP Capital senior economist Diana Mousina agrees. Without more official interest rate cuts this year or a change in the RBA’s quantitative easing (QE) program, term deposit rates are unlikely to be cut further.

“The main reason behind the fall in the deposit rate is because the RBA cut the cash rate by 0.50 per cent over March (to 0.25 from 0.75 per cent), which allowed the banks to drop lending rates but in turn to also reduce deposit rates.

“Without more interest rate cuts or a change in the RBA’s three-year yield target program, then it’s hard to see term deposit rates being cut further by the big banks for now.”

Dividends hammered too

Along with sharply lower term deposit rates, investors have been hammered by the big bank’s deferring or cutting their dividends.

National Australia Bank (ASX: NAB) recently slashed its dividend payout by a whopping 64 per cent, Macquarie Bank by 50 per cent while ANZ (ASX: ANZ) and Westpac (ASX: WBC) have deferred dividend payments to shareholders. This follows pressure from the Australian Prudential Regulatory Authority (APRA) that the big banks defer dividends given the impact of COVID-19.

Morningstar’s Zaia says Westpac shareholders should expect a big cut in their payout. “Our forecasts are for a materially reduced dividend for the full year; on a 50 per cent dividend payout ratio we estimate a full-year dividend of 50 cents per share,” he said.

ANZ bank too will likely pay out much less but won’t stop dividends entirely. “ANZ shareholders are left in limbo probably until August. We continue to assume a 50 per cent payout ratio on full-year earnings, but equity raisings are required to ease capital strain. We still do not believe the board will cancel dividends entirely and risk losing the support of retail shareholders, especially if peers continue to pay dividends,” said Zaia.

is a Morningstar contributor.

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