Slow Pokes

Sydney Morning Herald

Wednesday May 11, 2005

Vita Palestrant

Banks leave savings accounts for last when the Reserve lifts its interest rate, reports Vita Palestrant.

A rise in the official cash rate is good news for the banks and their bottom line. While the increase is quickly passed on to credit cards and home loans, banks tend to dawdle when it comes to deposits.

Although consumers have always suspected as much, research by a financial services research group, Cannex, backs it up.

It looked at its database after the Reserve Bank of Australia (RBA) lifted rates by a quarter of a percentage point in March, to see how quickly institutions responded.

Its findings support anecdotal evidence that borrowers get hit with higher rates before savers see any benefit from the change.

Banks dominate the deposit market, with many transaction accounts paying as little as 0.01 per cent on an average balance of $2000. The official cash rate is 5.5 per cent.

Denis Orrock, the general manager of researcher InfoChoice, says you have to assume the banks are benefiting from such delays: "There's an ability to make more profit if deposits aren't moving in the same direction."

Cannex took historical data going back a decade to see how the majors and regional banks responded and found a "definite hierarchy of response".

The majority of loan products rose within a week or two of the announcent, with rates first passed on to credit cards, then to personal loans and mortgages, and last of all savings products.

Cannex also examined whether the increase went up by the same amount, and found while mortgages generally moved in line with the official rate there were "some exceptions in credit cards, where not all card providers have elected to maintain their rate differentials".

Some banks used the increase to lift their card rates by more - 0.75 per cent - while others moved personal loans by as much as 1.25 per cent.

"We can only assume that some players have either been looking for a reason to improve their margins, or alternatively are taking a preemptive strike in anticipation of further rate rises," Cannex reported.

When the researcher compared the official cash rate with the average home loan over the last decade it found margins "have been all but shattered" since mortgage originators came on the scene with margins shrinking from 3 to 1.45 per cent (see graph above). But it found the opposite was true for credit cards.

Andrew Willink, the managing director of Cannex, says credit card margins have increased from about 8.5 per cent to 11 per cent over this period, but cautions that the large number of cards that have been issued with rewards programs and higher interest rates in recent years have distorted the figures.

Commenting on the "hierarchy of response", Catherine Wolthuizen, the finance policy officer with the Australian Consumers Association, says it's simply a question of what's more profitable for the banks.

When the official cash rate was cut in 2001, credit cards were the last products to benefit.

"The banks were just as slow to pass on the cuts to credit cards when rates fell," Wolthuizen says. "It indicates that they manipulate things to maximise their earnings."

Delaying rates on deposits when the underlying cash rate has increased does provide a positive earning boost, says Willink.

"To put it in dollar terms, a $100 million at 0.25 per cent movement represents $68,500 of opportunity per day's delay. However, it may cost $50,000 in stamps advising the account holders of a rate change and a further $50,000 in brochure changes and advertisements," he adds.

© 2005 Sydney Morning Herald

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