Commonwealth Bank is killing it during a stretch of elevated rates. But CBA profits will be knocked around when the cash rate begins to fall.
Deposits are “key differentiators of profitability” and banks’ ability to manage their deposit mix will be important to their earnings when rates start to fall.
Macquarie Securities has estimated that banks face a 5 to 9 basis point margin headwind from a 1 per cent rate cut, with the smallest impact for NAB and the biggest for Commonwealth Bank.
The banks’ capacity to offset the impact of lower rates will diminish with more rate reductions. Macquarie said banks face an 11 to 24 bps margin headwind if cash rates fall by 2 per cent.
Portfolio differences, such as the mix of transaction accounts, bonus saver accounts and term deposits vary between banks and have a significant impact on earnings. The mix of retail and SME deposits is also important.
The main beneficiary from rising rates was CBA. Macquarie estimated that its deposit mix, which has more transaction accounts than its competitors, contributed around A$1.7 billion to its profit and 2 per cent to its return on equity as rates went up.
CBA generated a 220 bps spread on its at-call deposit book versus peers’ spread of 110 to 160 bps.
Transaction accounts are the big drivers of funding cost differentiation but so is segmentation within categories. Online savings accounts produce higher margins for banks than bonus saver products.
Spreads on online savings accounts widened as banks held back on passing higher rates to base online rates, opting to lift introductory rates on these accounts (which many customers do not get)
“We expect more rate-insensitive savings deposits to experience bigger margin headwinds and online savings spreads to normalise when cash rates fall. This will likely impact CBA more because it has a more significant rate-insensitive savings deposit base,” Macquarie said.
On term deposits, Macquarie said spreads on one-year rates have reverted to pre-COVID levels (around 55 bps above the swap rate), while three to six-month spreads remain well below historical levels (around 85 bps below the swap rate).
“Over the medium term, we expect TD pricing to increase or customers to continue to switch to higher rate longer duration products,” it said.
Business savings deposits are some of the cheapest funding sources for banks, as business customers tend to be less rate sensitive and stickier. While consumer savings accounts currently pay 4 to 5 per cent bonus rates, business savings accounts pay only 1 to 2 per cent and usually do not have bonus rates.
CBA stands out for its low rates on business savings deposits.
“With little room to pass on rate cuts, we expect the major banks to experience margin pressures from business savings once cash rates fall. CBA would be the most affected because its business savings rates are already near the ‘floor’.”
Overall, Macquarie said banks’ ability to manage savings rates lower is limited. Australian banks remain underweight deposits relative to other developed markets such as the United States, the United Kingdom and Canada.
While banks have increased their deposit funding in recent years, their loan to deposit ratios remain well above 100 per cent, suggesting a meaningful ongoing reliance on wholesale funding and, hence, ongoing competition for deposits that are cheaper.