Deposit Review January Background on Term Deposits

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Stanley Asher Sparks
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Deposit Review January 2018 Simon Fletcher Head of Research (+61) 3 9670 8615 simon.fletcher@bondadviser.com.

1 Deposit Review January 2018 Simon Fletcher Head of Research (+61) simon.fletcher@bondadviser.com.au Ethan Xing Credit Analyst (+61) ethan.xing@bondadviser.com.au Term Deposits Following lacklustre economic conditions in 2017, the year of 2018 is hoped to be a break-out year with business activity picking up modestly on the back of several factors, including the US Republic Tax Reform, an easing in the domestic housing market and improving employment conditions (but not wage growth). This has been reflected in the swap curve, which grew an average 0.08% to 1.97% in Jan 2018 (from 1.89% in Dec 2017). With Term Deposit (TD) rates remaining flat over the period, TD spreads over BBSW narrowed with the largest fall being in the 3Y tenor (down to 0.17% from 0.28% in December 2017). The Reserve Bank of Australia (RBA), unsurprisingly, held the cash rate unchanged at, the 18 th consecutive month since the last cut in Aug A benign housing market, weak household spending and a vulnerable mining industry will continue to challenge a rate lift in the short term. Figure 1. Term Deposit Over Relevant BBSW: January 2018 vs December % 0.40% Change in January December 1M 3M 6M 1Y 3Y Average 'Special' Source: RBA, BondAdviser Background on Term Deposits Deposits offer investors a range of benefits over other types of investments: The diverse offering in Australia allows for investment flexibility. Depositors are able to choose their investment term and deposit type, effecting a view on interest rates. Deposits offer certainty of returns. The tenor of deposit and rate on the transaction is unchanged for the duration of the investment. This avoids any market volatility. For amounts up to $250,000, deposits are currently guaranteed by the federal government. As a result, credit risk is minimal. Key negatives to term deposits include: Interest Rate Risk the risk that a subsequent market interest rate is higher than the rate locked-in on the purchased TD. Liquidity risk TDs can only be liquidated early with the issuing institution (i.e. there is no open market) and will usually result in a reduction in the effective interest rate for the term. This also typically required 31 days notice. TDs offer no capital upside, which can occur in fixed-rate bonds and hybrids. Income from TDs is fully taxable at the investor s marginal tax rate (i.e. no franking). 1 Bond Adviser Pty Ltd

2 Swap Curve Uplift not Pressing TD Markets With the domestic economy evidently improving and overseas interest rate rises pressing Australian money markets, it is almost assumed that an RBA cash rate lift will take place as soon as the second half of 2018 or early This stance was further supported by the changes in Australia s interbank borrowing costs as the swap curve drifted upwards over the last two months (Figure 2). Figure 2. Recent Swap Curve Changes 3.40% 3.20% 2.80% 1.40% Source: BondAdviser TD markets have not followed the swap curve increases over the last two months and have remained stable. There was a very minor drop in the 3-month rate in December 2018 (Figure 3). With all banks comfortably meeting the Net Stable Funding Ratio (NSFR), we see this swap rate rise as a route for banks to tweak their short-term funding profiles slightly. Figure 3. Recent Market TD Rates 1.40% 1.20% mth(s) Dec-2017 Jan-2018 Feb-2018 Source: RBA, BondAdviser td 1m td 3m td 6m td 1yr td 3yr TD Special Nov-2017 Dec-2017 Jan-2018 Even though TD markets are relatively insensitive to swap curve movements, there is no doubt that TD offerings (especially in short term) almost always respond to changes in the official cash rate. For example, the last rate cut (from 1.75% to ) in August 2016 prompted the market TD offerings for short- and medium-term tenors fall to 2.10% (by 0.15% and ) respectively. Similarly, a rate hike should push lenders to provide more interest for TD depositors and as the first interest rate increase is expected this year, we believe TD markets may gain a little more popularity in the near future. 2 Bond Adviser Pty Ltd

3 CBA s Increased Short-Term TD Rate As the swap curve widening has not been passed onto the TD markets, the majority of major banks TD offerings, along the established trend, were left on hold awaiting a prospective rate hike. The only positive adjustment among majors was observed from CBA, which grew its short-term rate by (to 2.30% in Jan 2018, figure 4) and WBC, which raised its long-term rate by (to in Jan 2018). Figure 4. CBA Short and Medium-Term Deposit Offerings short-term medium-term Source: Company Reports, BondAdviser CBA s medium-term TD, on the contrary, was lowered by from Nov 2017 to Dec 2017 and stood stable at 2.30% throughout the month of Jan in However, we do note that this is still above its range (2.05%-2.10%) over the last 12 months and is even higher than its long-term rate () over the same period. With the cash rate expected to remain unchanged in the short term and CBA being the largest bank domestically, we believe this cut was a tool for CBA to reshuffle its medium-term funding profile and may place it in a better position to grow loan business. Comparing Term Deposit Rates ANZ s TD offerings remained the least favourable among majors with spreads to BBSW across all tenors lying below 0. However, the bank s Advance Notice Term Deposit continues to provide comparable returns on all horizons to its major peers, but does require 31 days notice prior to withdrawal. Over the month, CBA became the most attractive TD provider for short-term offerings following a increase in that category and shared first place in medium-term offerings (2.30%) with NAB. WBC increased its long-term rate by to during the month, placing itself in a position significantly ahead of its major peers in that category. The regional banks TDs continue to provide extra yield to the majors with BOQ remaining in a favourable position and offering some substantial premia. 3 Bond Adviser Pty Ltd

4 Figure 5. Monthly Change in Short Term TD Rates 0.35% 0.25% 0.15% - Figure 6. Short Term TD Deposit Rates 1.55% 2.30% 2.35% - Figure 7. Monthly Change in Medium Term TD Rates -0.01% -0.02% -0.03% -0.04% -0.06% Figure 9. Monthly Change in Long Term TD Rates 0.25% 0.15% - Figure 11. Monthly Change in Online Saver Rates % % - - ANZ CBA NAB WBC Saver Variable Rate Bonus Interest Figure 8. Medium Term TD Deposit Rates 2.45% 2.30% 2.30% 2.05% 2.10% 1.70% - Figure 10. Long Term TD Deposit Rates 2.30% 2.55% 1.70% - Figure 12. Online Saver Rates 2.55% 2.51% 2.41% 1.90% 1.10% 0.80% 0.80% ANZ CBA NAB WBC Saver Variable Rate Bonus Interest Source: BondAdviser, Company Reports Note: Short Term ~3 Months, Medium Term ~6 Months, Long Term ~12 Months. 4 Bond Adviser Pty Ltd

5 General Disclosures BondAdviser has acted on information provided to it and our research is subject to change based on legal offering documents. This research is for informational purposes only. We note that this security offering is only being made to investors who are not retail clients under the Corporations Act nor located outside Australia. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. The content of this report is not intended to provide financial product advice and must not be relied upon as such. The Content and the Reports are not and shall not be construed as financial product advice. The statements and/or recommendations on this web application, the Content and/or the Reports are our opinions only. We do not express any opinion on the future or expected value of any Security and do not explicitly or implicitly recommend or suggest an investment strategy of any kind. The content and reports provided have been prepared based on available data to which we have access. Neither the accuracy of that data nor the methodology used to produce the report can be guaranteed or warranted. Some of the research used to create the content is based on past performance. Past performance is not an indicator of future performance. We have taken all reasonable steps to ensure that any opinion or recommendation is based on reasonable grounds. The data generated by the research is based on methodology that has limitations; and some of the information in the reports is based on information from third parties. We do not guarantee the currency of the report. If you would like to assess the currency, you should compare the reports with more recent characteristics and performance of the assets mentioned within it. You acknowledge that investment can give rise to substantial risk and a product mentioned in the reports may not be suitable to you. You should obtain independent advice specific to your particular circumstances, make your own enquiries and satisfy yourself before you make any investment decisions or use the report for any purpose. This report provides general information only. There has been no regard whatsoever to your own personal or business needs, your individual circumstances, your own financial position or investment objectives in preparing the information. We do not accept responsibility for any loss or damage, however caused (including through negligence), which you may directly or indirectly suffer in connection with your use of this report, nor do we accept any responsibility for any such loss arising out of your use of, or reliance on, information contained on or accessed through this report Bond Adviser Pty Ltd. All rights reserved. 5 Bond Adviser Pty Ltd

Term Deposits. Deposit Review May Background on Term Deposits

Term Deposits. Deposit Review May Background on Term Deposits Deposit Review May Term Deposits Simon Fletcher Head of Research (+61) 3 9670 8615 simon.fletcher@bondadviser.com.au Ethan Xing Quantitative Analyst (+61) 3 9670 8615 ethan.xing@bondadviser.com.au With