SLIM MARGIN ON RETURNS

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1 Report No. 4 July 2013 SLIM MARGIN ON RETURNS According to data from the Reserve Bank of Australia (RBA), banks share of deposit lending as a source of funding has continued to increase, from slightly less than 40% just prior to the GFC to a current rate of approximately 55% of total bank funding liabilities. Despite this increased bank reliance on household savings, consumers are struggling to achieve a healthy net return in our low interest rate environment. In fact with an average 12 month term deposit rate of 3.94%, the majority of investors are only just breaking even once the effect of inflation is added. Investors on a higher than average tax rate of 38.5% may well be going backwards in real dollar terms! The bad news for holders of term deposits is that this situation may not reverse in the near future; a current rate differential between 12 month and 3 year term deposit rates of just 0.15% would indicate that financial institutions are expecting either further interest rate cuts in the near future followed by a rebound over the medium term - or simply very sluggish growth over the medium term. Marginal Tax Rate Inflation rate Gross before-tax return needed to break even 20.5% 2.5% 3.14% 345% 2.5% 3.82% 38.5% 2.5% 4.07% 46.5% 2.5% 4.67% Source: Canstar. Includes Medicare levy of 1.5% BUT POPULARITY REMAINS Term deposits nevertheless appear to have an enduring popularity among both retirees and those saving for retirement. Within self-managed superannuation funds alone, as an example, cash and term deposits have consistently provided a significant proportion of overall asset base; a proportion that has remained relatively unaffected by economic volatility. By analysing the self-managed super fund statistical reports that are released periodically by the Australian Taxation Office (ATO), it is apparent that in June 2007 cash, debt securities and term deposits represented approximately 25% of SMSF assets; in March 2013 this proportion was just shy of 28%. Superannuation aside, the growth in overall dollar value of term deposits held in Australia has been significant. Reserve Bank of Australia (RBA) statistics of term deposits held at banks show that they have grown from $196 billion in June 2007 to a current value in May 2013 of $545 billion, potentially reflecting investor unease during the recent years of share market volatility. This growth is shown in the chart on the following page. Please note that the growth reflects only term deposits held with banks and excludes term deposits with non-bank institutions. The value of overall deposits with non-bank institutions has remained relatively stable over the corresponding period, growing from $46 billion to $53 billion. As RBA statistics do not distinguish between term deposits and other forms of cash deposit held with non-bank institutions though, we have excluded these figures from the following chart.

2 IT S IMPERATIVE TO GET GREAT VALUE With post-tax and inflation margins so slim in this current environment, it s imperative for investors to get the best value possible from their cash. With term deposits ranging from 1 month to 5 years and advertising a multitude of interest rates, how do you know what s right for you? CANSTAR has taken the hard work out of comparing by researching term deposits on offer from 112 institutions including banks, building societies and credit unions. To determine outstanding value we assess firstly the interest rate on offer, as well as the maturity cost (the maturity cost is the cost of transferring your money to another institution). We also consider a number of features including: Account options Bonus/discounts Early withdrawal costs Interest options Statement options Term options A copy of our methodology is included in this report.

3 INVESTEC AND CUA EXTEND THEIR WINNING STREAK For the second year running, Investec has received the Best Value Australia Term Deposits award. Investec is an international specialist bank and asset manager, offering financial products and services in three principal markets: the UK, South Africa and Australia as well as certain other countries. Investec offer term deposits for a minimum value of $10,000 and offer the following terms of investment: 30 day 60 day 90 day 180 day 270 day 1 year 2 years 3 years 5 years Investec stand out due to their term deposit pricing structure. There are no fees associated with depositing and withdrawing a term deposit upon maturity. Additionally, Investec have consistently offered higher interest rates than their competitors over the deposit periods assessed. When compared to our 10 top-ranked institutions based on price, the term deposit interest rates offered by Investec have averaged 21 basis points higher, with their most competitive rates advertised in the 6 month, 3 year and 5 years terms. With regards to features, Investec offer a full online application process for new and existing customers with a 5 day variation period. The break cost penalty for withdrawing early is 20% of interest where the term deposit has lasted between 80-99% of fixed term, however Investec's Flexi Advantage term deposit allows up to 20% of investment to be withdrawn without penalty, with a maximum of 2 withdrawals. Another option that will appeal to some customers is the ability to maintain dollar, yen, euro and sterling accounts within Australia, provided the minimum investment is $25K. Term deposits with Investec are available online to individuals, joint accounts, trusts, SMSFs and corporates. For an impressive fourth year running, CUA has received the Best Value Australia Term Deposits award for customer-owned institutions. CUA is Australia s largest customer-owned financial institution with more than 400,000 customers. CUA offer term deposits for a minimum value of $5,000 over the following terms of investment: 2 months 3 months 4 months 5 months 6 months 7 11 months 1 year 3 years 3 years CUA offer a number of competitive term deposit interest rates between 6 months and 2 years with an average difference of 12 basis points between CUA and their 10 top-ranked customer-owned counterparts based on price. There are no account keeping fees and interest is calculated daily. In terms of features, CUA offer a full online application process for new and existing customers with a 5 day variation period. They also offer a 14 day grace period after maturity for investors to make a decision with regards to re-investing or withdrawing funds. Investors wishing to withdraw funds early need to apply in writing with no guarantee that their request will be approved. If their application is successful a break cost penalty will apply. CANSTAR congratulate both Investec and CUA for offering the best value to consumers in what is certainly a competitive market.

4 TERM DEPOSIT TIPS AND TRAPS While term deposits are seen as a safe and predictable asset class, there is a more to a term deposit than just the rate. Particularly in a lowrate environment, the real rate that you earn can be eroded by a number of other costs. Here are five key points to be aware of before committing to a term deposit: 1. Early exit costs: Are you able to access the money before the end of your chosen term? No-one plans to be caught up in an emergency but sometimes it does happen and you may need to redraw your investment before the term is up. In this event, your financial institution may charge you a prepayment or early withdrawal fee, which can amount to a significant penalty. 2. Additional accounts In order to take advantage of some term deposits, the financial institution offering the investment may require you to also open a deposit account. If this is the case, check what the costs involved will be. Any ongoing account-keeping fees associated with this additional deposit account will eat into the real rate of interest your term deposit attracts. 3. Automatic renewal Automatic renewal of your investment can be a common pitfall, particularly if you assume that your money will be automatically renewed onto a similar interest rate. To avoid automatic renewal and instead shop around for a good rate, be clear on the financial institution s rules regarding notifying you when the term is due to expire. Better still, make a diary note on your calendar and get in first. 4. Duration The length of term deposit you choose carries inherent risk. For a short-dated term deposit (for example, 3 months 12 months) the risk is that interest rates may fall and you may not be able to renew in the near future for an attractive rate. You can mitigate this risk by choosing a long-dated term deposit (for example, 3 5 years) however the risk then is that interest rates may rise in the near future while your funds are locked away at a lower rate. 5. Real rate of return By their nature term deposits do not attract any capital growth. As such their entire return is in the yield the interest rate that you receive. To calculate your real return, though, you need to subtract the current inflation rate from the interest paid. So for example if inflation were running at 3% and your term deposit was paying 4%, your real rate of return is 1%. That, of course, is before tax! Term deposits can be a great addition to an investment portfolio. It does pay, though, to research your options first. COPYRIGHT CANSTAR Pty Limited ABN , The recipient must not reproduce or transmit to third parties the whole or any part of this work, whether attributed to CANSTAR or not, unless with prior written permission from CANSTAR, which if provided, may be provided on conditions. DISCLAIMER To the extent that any CANSTAR data, ratings or commentary constitutes general advice, this advice has been prepared by CANSTAR Pty Limited ABN AFSL and does not take into account your individual investment objectives, financial circumstances or needs. Information provided does not constitute financial, taxation or other professional advice and should not be relied upon as such. CANSTAR recommends that, before you make any financial decision, you seek professional advice from a suitably qualified adviser. A Product Disclosure Statement relating to the product should also be obtained and considered before making any decision about whether to acquire the product. CANSTAR acknowledges that past performance is not a reliable indicator of future performance. Please refer to CANSTAR s FSG for more information at

5 Company ADCU AMP Bank ANZ Arab Bank Australia Bank of Melbourne Bank of Sydney bankmecu BankSA Bankstown City CU BankVic Bankwest bcu Bendigo Bank Big Sky Building Society BOQ CairnsPenny Savings&Loan Catalyst Money CBA Online Only Circle Credit Co-op Citibank Coastline Credit Union Commonwealth Bank Community CPS Australia Community First CU Companion CU CUA Defence Bank Delphi Bank ECU Australia Encompass Credit Union FCCS Credit Union First Option Credit Union Gateway Credit Union Greater Building Society Heritage Bank Holiday Coast CU Horizon Credit Union HSBC Hume Building Society Hunter United Credit Un Illawarra CU NSW IMB ING DIRECT Intech Credit Union Investec Bank Australia Macarthur Credit Union Macquarie Bank Macquarie Credit Union Term Deposits All information is correct as at June 25th, 2013 We endeavour to include the majority of product providers in the market and to compare the product features most relevant to consumers in our ratings. This is not always possible and it may be that not every product in the market is included in the rating nor every feature compared that is relevant to you your guide to product excellence Investment Terms Latest Rates Click Here 3 months 6 months 1 year 2 years 3 years 5 years Bonus Interest on Rollover Complete Online Application REPORT DATE: JUNE 2013 Auto Rollover Facility Deposit account from the same institution required No No Yes Yes No No Yes Yes No Yes Yes Yes No N/A Yes Yes No No Yes Yes No N/A Yes Yes No No Yes Yes No No Yes Yes No N/A Yes No No Yes Yes Yes No N/A Yes Yes No Yes Yes Yes No Yes No No Yes Yes Yes No No No Yes Yes No Yes Yes Yes No No Yes Yes Report Date: 28/06/2013. All information is correct as at June 25th, 2013 TERM DEPOSITS page 1

6 Company Term Deposits ME Bank MyState nab Newcastle Permanent Northern Beaches CU P&N Bank People's Choice Credit Unio Police Bank Qantas Credit Union Qld Police Credit Union Qld Professional CU QT Mutual Bank Quay Credit Union Queensland Country Credit Queenslanders CU Rabobank Australia RaboDirect Rural Bank Limited Rural Bank ONE SCU Select Credit Union SERVICE ONE Members Ban SGE Credit Union St.George Bank St.George Bank-Vic Summerland CU Suncorp Bank Sutherland Credit Union Teachers Mutual Bank The Capricornian The Mutual The Rock Building Soc TIO Banking Transcomm Credit Union Transport Mutual Credit Uni UBank Unicredit-WA United Community Victoria Teachers Mutual Ba Wagga Mutual Credit Un Westpac All information is correct as at June 25th, 2013 We endeavour to include the majority of product providers in the market and to compare the product features most relevant to consumers in our ratings. This is not always possible and it may be that not every product in the market is included in the rating nor every feature compared that is relevant to you Investment Terms Latest Rates Click Here 3 months 6 months 1 year 2 years 3 years 5 years Bonus Interest on Rollover Complete Online Application REPORT DATE: JUNE 2013 Auto Rollover Facility Deposit account from the same institution required No N/A Yes No No N/A Yes No No N/A Yes Yes No N/A Yes No No No Yes Yes No No Yes Yes No N/A Yes No No Yes Yes Yes No N/A Yes No No N/A Yes No No No Yes Yes No No Yes Yes No N/A Yes No No N/A Yes No No No Yes Yes Yes Yes Yes No No No Yes Yes No No Yes Yes your guide to product excellence Report Date: 28/06/2013. All information is correct as at June 25th, 2013 TERM DEPOSITS page 2

7 METHODOLOGY What is the CANSTAR Term Deposit Award? The CANSTAR Term Deposit Award involves a sophisticated rating methodology, unique to CANSTAR that compares a shortlist of term deposits in Australia, enabling consumers to narrow their search to products that have been independently assessed and ranked. The Award aims to give recognition to the institutions who offer quality term deposit products across rates, terms and product features. How are the CANSTAR Term Deposit Award calculated? Each Term Deposit product reviewed for the CANSTAR Term Deposit Award is awarded points for its comparative pricing and for the array of positive features attached to the product. Points are aggregated to achieve a Pricing score and a Feature score. To arrive at the total score on which to make the awards CANSTAR applies a weighting against the product Pricing and Features. This weighting of Price and Features reflect the relative importance to the consumer of either price or features when looking to purchase the product. This method can be summarised as: TOTAL SCORE = PRICING + FEATURES SCORE Pricing 80% Features 20% Total Interest Based on 26 weeks historical rates at 2 different price points and 6 terms less relevant maturity costs Total Product Features Based on 6 different feature categories Indexed Score Product with the best pricing and features will receive a full score YOUR GUIDE TO PRODUCT EXCELLENCE 1

8 Pricing Score CANSTAR accounts for both current and historical interest rates, terms and maturity costs in the calculation of the PRICING component of the overall score: Pricing 80% Rate 97% Maturity Cost 3% Rate The rate score is calculated by taking the maximum rate from the following term deposit periods (outlined in the tree below) over the span of 26 weeks. An average rate is then taken based from the maximum historical rates and indexed against the best rate from that term. This calculation is made across two term deposit amounts, $10K and $75, weighted 40% and 60% respectively. 2 4 months 15% 5 7 months 40% $10,000 40% 8 13 months 35% 2 years 6% 3 years 2% Rate 5 years 2% 2 4 months 15% 5 7 months 40% $10,000 40% 8 13 months 35% 2 years 6% 3 years 2% 5 years 2% YOUR GUIDE TO PRODUCT EXCELLENCE 2

9 Maturity Cost In addition to current and historical term deposit rates, we also assess maturity costs in the pricing score. Maturity costs included any cost associated with retrieving or transferring your funds at maturity such as the cost for a bank cheque. An institution with low or no charges received the highest maturity cost score. Feature Score More than 40 product features of each term deposit are scored and categorised into six different categories in the following table. Based on the points received in each category, the scores are weighted against each of the category weights provided in the table below for their respective total feature score. The total feature score is then indexed to provide final feature score. Category Category Description Category Weight Account Options Open Account, Maturity Reminder, Maturity Instruct, Variation Period 40% Bonus/Discounts Rollover Bonus, Free bank cheque, Free direct credit 15% Early Withdrawals Prepayment Interest Penalty 10% Interest Options Interest penalties, Interest payment options 10% Statement Options 3 rd party reporting, Tax reporting 10% Term Options Account Facilities, Deposit amounts, Rollover facilities 15% How many products and financial institutions are analysed? In order to calculate the Award, CANSTAR analysed 91 financial institutions in Australia. Does CANSTAR rate all products available in the market? We endeavour to include the majority of product providers in the market and to compare the product features most relevant to consumers in our ratings. However this process is not always possible and it may be that not every product in the market is included in the rating nor every feature compared that is relevant to you. YOUR GUIDE TO PRODUCT EXCELLENCE 3

10 How often are products reviewed for Award purposes? All ratings are fully recalulated every twelve months, based on the latest submissions from each institution. CANSTAR also monitors changes on an ongoing basis. Does CANSTAR rate other product areas? CANSTAR researches, compares and rates the suite of banking and insurance products listed below. These awards use similar methodologies to guarantee quality, consistency and transparency. Results are freely available to consumers who use the Award as a guide to product excellence. The use of similar Award logos also builds consumer recognition of quality products across all categories. Please access the CANSTAR website at if you would like to view the latest Award reports of interest. Agribusiness Business banking Business life insurance Car insurance CFD trading Credit cards Deposit accounts Direct life insurance Health insurance Home & Contents Home loans Life Insurance Low-doc home loans Margin lending Online Banking Online Share Trading Package banking Personal loans Reward programs Term Deposit DISCLAIMER: To the extent that any CANSTAR data, ratings or commentary constitutes general advice, this advice has been prepared by CANSTAR Pty Ltd ABN AFSL and does not take into account your individual investment objectives, financial circumstances or needs. Information provided does not constitute financial, taxation or other professional advice and should not be relied upon as such. CANSTAR recommends that, before you make any financial decision, you seek professional advice from a suitably qualified adviser. A Product Disclosure Statement relating to the product should also be obtained and considered before making any decision about whether to acquire the product. CANSTAR acknowledges that past performance is not a reliable indicator of future performance. Please refer to CANSTAR s FSG for more information at All information contained herein shall not be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any purpose, in whole or in part, in any form or manner or by means whatsoever, by any person without CANSTAR s prior consent. All information obtained by CANSTAR from external sources is believed to be accurate and reliable. Under no circumstances shall CANSTAR have any liability to any person or entity due to error (negligence or otherwise) or other circumstances or contingency within or outside the control of CANSTAR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication, or delivery of any such information. Copyright 2012 CANSTAR Pty Ltd ABN YOUR GUIDE TO PRODUCT EXCELLENCE 4