Bank gains from rate rises ‘all but done’ amid fight for deposits

The benefit to banks from interest rate rises is waning, as lenders compete for funds and consumers shift billions of dollars from low-interest accounts into higher-interest savings accounts and term deposits.

As Reserve Bank governor Philip Lowe said the central bank was closer to a “pause” in its rate rises, analysts said competition between banks to attract household deposits was heating up and more people were moving their cash into higher-interest deposits.

This is pushing up banks’ funding costs, at the same time lenders are also fighting to pinch rivals’ mortgage customers, amid a refinancing boom.

While bank profits have benefited from the sharp rise in rates since May, Credit Suisse analyst Jarrod Martin said the earnings boost that banks received from each rise in interest rates was diminishing.

“You have competition on the asset side of the balance sheet and the liability side of the balance sheet. That’s a bad environment for bank revenue,” he said.

Many ongoing savings rates are still low, but rates on bonus saver accounts have been increasing briskly, and Bank of Queensland last week started offering a rate above 5 per cent on one of its accounts. Martin said a 5 per cent rate was a “key pricing point that consumers will look to chase”, and more money was moving into higher-rate savings accounts or term deposits.

The rise in deposit competition is one reason many analysts believe banks have seen a peak in their net interest margins – funding costs compared with what banks charge for loans. In a recent note, Martin said that although margins may peak at different times for different banks, “the benefits from rising rates for the sector is all but done, in our view”.

Morgan Stanley analyst Richard Wiles also said this week the “tailwinds” that drove a cycle of earnings upgrades for the banks over the past year had now run their course, and it was more likely bank shares would underperform the ASX 200 in 2023. “Mortgage refinancing and discounting have picked up, while deposit pricing benefits are moderating. This increases the likelihood that major bank margins peak earlier and at a lower level,” Wiles said.