Retail deposits are drying up

The value of banks' retail deposits grew by just 0.1 per cent in May - the same month that the Reserve Bank cut the cash rate to two per cent.

Since the financial crisis lenders have been able to rely on growth in deposit flows that has, for the most part, exceeded lending growth. That situation may have changed.

According to the latest Australian Prudential Regulation Authority banking statistics, while deposit balances grew by 0.1 per cent in May compared with the previous month (an annualised rate of 1.2 per cent), housing finance balances grew by 0.5 per cent.

Over the three months to May retail deposit balances grew by 1.8 per cent, while mortgage balances grew by two per cent.

The APRA figures show a number of banks experiencing deposit outflows in recent months. They include AMP Bank, Arab Bank, Bank of Queensland, Citibank, HSBC, MyState Bank, RaboDirect, QT Mutual Bank and Suncorp.

Reserve Bank figures show that the value of term deposits held with banks fell 1.1 per cent to A$515 billion in May, compared with the previous month, and by 3.6 per cent since the start of the year.

Several banks held back part of the cash rate cut in May, saying they were cutting mortgage rates by less than 25 basis points so they could maintain deposit rates.

That strategy appears to have worked, with Commonwealth Bank and National Australia Bank among the handful of banks that grew their deposit books in May.

The possibility that the deposit tap is being turned off raises questions for banks. While some will source more funding from the wholesale market, others may have to sacrifice some margin and compete more aggressively for deposits.

Alternatively, they may adjust their budgets and settle for lower growth on the lending side.