Term Deposits. Figure 1. Term Deposit Spread Over Relevant BBSW: April v March Month Spread. Background on Term Deposits

Size: px

Start display at page:

Download "Term Deposits. Figure 1. Term Deposit Spread Over Relevant BBSW: April v March Month Spread. Background on Term Deposits"

Blaze Copeland
6 years ago
Views:

Deposit Review April 2017 Term Deposits Jack Pobjoy Credit Analyst (+61) 3 9670 8615 jack.pobjoy@bondadviser.com.

1 Deposit Review April 2017 Term Deposits Jack Pobjoy Credit Analyst (+61) jack.pobjoy@bondadviser.com.au Harini Warrier Credit Analyst (+61) harini.warrier@bondadviser.com.au Following a few uneventful months, the underlying benchmark curve shifted downwards slightly which in turn resulted in increased spreads for Term Deposit (TD) products. The RBA cash rate has remained on hold for 9 consecutive months with no clear direction for any meaningful move in TD offer rates. There are signals of improvement in the economy such as increased inflation, better terms of trade and stronger GDP growth forecasts (from both the RBA and International Monetary Fund (IMF)) but this is being offset by an underutilised labour market and overheated property market. As a result, it is difficult to pinpoint where the cash rate and short end of the benchmark curve will land until more economic data comes to light. Figure 1. Term Deposit Over Relevant BBSW: April v March % 0.70% Month 3 Month 6 Month 1 Year 3 Year Average 'Special' Change in April March Source: BondAdviser, RBA 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. This allows the investors to effectively express their view on interest rates. Deposits offer certainty of returns. The type of deposit and level of base rate on the transaction date remains unchanged during the duration of the investment. This allows the investor to avoid market volatility. For amounts up to $250,000, deposits are guaranteed by the federal government. As a result, credit risk is minimal. Key negatives to term deposits include: 1 Bond Adviser Pty Ltd Interest Rate Risk the risk that a TD purchased and subsequently locked in is lower than the future market interest rate on offer. 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 typically involves 31 days notice. TDs offer no capital upside as seen in other fixed income products such as bonds and hybrids. Income from TDs is fully taxable at the investor s marginal tax rate (i.e. no franking).

2 The Term in Term Deposit While outright yields are important when investing in TD products, it is also important to consider term which is the additional yield pick-up for extending the maturity of the TD. While historically there was a clear relationship where every step up in tenor translated a greater increase in yield, this relationship collapsed post the Global Financial Crisis (GFC). This has primarily been driven by an increase in the perceived credit risk of banks and a reset in expectations regarding the lower for longer interest rate environment. Interestingly during 2008, the difference between the average 12- month TD rate and average 6-month TD rate for the 5 largest banks reached negative territory highlighting heightened short-term risk at the time (i.e. 6-month TD rates were higher relative to 12- month TD rates). Figure 2. Historical Term Premium for TD Products 5.00% 4.00% M-6M 6M-12M Source: RBA, BondAdviser Fast-forward to today and cash investors are now getting a greater pick up in yield moving from a 1- month TD rate to a 6-month TD rate () relative to moving from a 6-month TD rate to a 12- month TD rate (0.25%) according to data compiled by the RBA. This is reflected in the individual TD rates of the major banks where this is a greater difference in yield between their shorter-term rates in comparison to their longer-term rates. This implies incremental value in TD products can be found within shorter TD products. Figure 3. Major Bank Term Premiums for TD Products 0.70% 0.25% 0.25% 1M-6M 6M-12M Source: RBA, BondAdviser *Note: Westpac s Special Offer Rate excluded. 2 Bond Adviser Pty Ltd

3 Market Commentary Westpac Offers Limited Time Medium Term TD After a lull in the term deposit market in recent months, Westpac (WBC) has hit the ground running in May offering cash investors a medium term special offer rate. New term deposits opened with the bank between 1 st of May - 12 th of May will be able to lock in a 6-month rate of p.a. for amounts ranging from $5,000 to $5,000,000 (increase of ). It is important to note this attractive gain came at the expense of WBC s longer term rate which experienced a 0.25% cut to 2.35% p.a. on par with CBA and is now less than NAB which offers long term rate of 2.40% p.a. (12 months). As a result, the special offer allows TD investors to pick-up an additional 0.15% yield while also reducing the term by 6 months. We expect this offer to return to 2.10% p.a. post the closing date and it highlights the major banks are still reshuffling their funding profiles in line with the transitioning regulatory landscape. Figure 4. Westpac Special Offer Rate is Superior to its 1-Year TD Rate 2.70% 2.60% 2.60% 2.60% 2.40% 2.35% 2.30% 2.20% 2.10% 2.20% 2.10% 2.10% Jan-17 Feb-17 Mar-17 Apr-17 Medium Term (6 Months) Long Term (12 Months) Source: BondAdviser, Company Reports *Note: Medium Term Offer indicated by Apr-17 ( p.a.) is only available between the 1 st of May 2017 and 12 th of May A relatively smaller move (but a move nonetheless) was CBA s decision to increase its long-term TD rate by to 2.35% p.a. However, as previously mentioned NAB has the superior offering in this category among the major banks. Interestingly, ANZ has revised its Advance Notice TD rates downwards. Its medium-term TD rate was cut to 2.10% p.a. (on par with short term rate) while its long-term TD rate was cut by 0.15% to 2.40% in line with the other major banks. As a result, investors gain no additional yield between a term of 3 months and a term of 6 months for this product. Comparing Term Deposit Rates Overall, ANZ has the lowest term deposit rates across all tenors and continues to offer negative spreads. However, we note ANZ has introduced Advance Notice Term deposits which are much closer to peer levels (short-term 2.10% p.a., medium term 2.10% p.a. and long term 2.40% p.a.). The primary difference between this product and the ANZ s standard term deposit is the investor must give ANZ 31 days notice if they wish to withdraw money prior to maturity. Following the special offer rate by WBC, it now leads the medium-term category () albeit we expect this to be short lived. However, WBC has foregone its leading position in the long-term category with its 0.25% cut and now NAB offers the best rate over 12 months at 2.40% p.a. In terms of the regional banks, BOQ continues to offer an attractive premium to most major bank rates across all categories. 3 Bond Adviser Pty Ltd

4 Figure 5. Monthly Change in Short Term TD Rates 0.80% Figure 6. Short Term TD Deposit Rates 1.65% 2.05% 2.10% 2.05% 2.05% 2.25% - Figure 7. Monthly Change in Medium Term TD Rates Figure 8. Medium Term TD Deposit Rates 1.70% 2.10% 2.20% 2.25% 2.45% - Figure 9. Monthly Change in Long Term TD Rates 0.15% % % % Figure 10. Long Term TD Deposit Rates 2.35% 2.40% 2.35% 2.40% 2.45% 1.80% - Figure 11. Monthly Change in Online Saver Rates 0.06% 0.04% 0.03% 0.02% 0.01% Saver Variable Rate Bonus Interest Figure 12. Online Saver Rates 2.55% 2.55% 2.51% 1.90% 1.15% 1.05% 1.20% 1.05% 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. Figure 1. Term Deposit Spread over Relevant BBSW: November v October. 3 Month Spread. Background on Term Deposits

Term Deposits. Figure 1. Term Deposit Spread over Relevant BBSW: November v October. 3 Month Spread. Background on Term Deposits Deposit Review November 2016 Term Deposits Jack Pobjoy Credit Analyst (+61) 3 9670 8615 jack.pobjoy@bondadviser.com.au While global interest rate volatility continues, term deposit (TD s) rate spreads