Deposits remain major focus for the banks regardless of elevated funding costs

The Australian Prudential Regulation Authority (APRA) released its latest Banking Statistics report in April showing that the overall household deposit growth trend has slowed down in 2013. According to APRA data, the total household deposits growth rate for the first four months of 2013 was 0.94% ($588.6bn in January 2013 compared to $594.2bn in April 2013).

A few deposit-taking institutions experienced significant outflows as households search for higher returns than existing at-call and term deposit accounts. From January until April 2013, the household deposit book of Macquarie Bank was reduced by 19.4% (from $7.4bn to $6.0bn). Investec Bank and Beirut Hellenic Bank followed the trend, both falling 7.1%, while RaboDirect Australia saw a 6.3% decline to $3.2bn.

The four major banks reported a slight increase in their household deposit books compared to the last quarter of 2012: Commonwealth Bank and Westpac deposits rose by 1.1% (from $169.2bn to $171.1bn) and 1.0% (from $134.4bn to $135.8bn) respectively, while National Australia Bank increased 0.8% (from $86.0bn to $86.6bn) and ANZ Banking Group up by 0.7% (from $88.3bn to $89.0bn).

By comparison, in the last quarter of 2012, Commonwealth Bank’s deposit book increased by 11.9%; Westpac Banking Corporation was up 3.6%; National Australia Bank grew 1.9% and ANZ Banking Group deposits improved 3.0%.

According to RBA data, since the GFC the funding composition of Australian major banks has shifted dramatically. The share of household deposits has increased from 40% in 2008 to 55% in 2013. In the past two years major bank net deposit flows exceed net credit flows, largely at the expense of short term wholesale funding and funding new loans with new deposits on a dollar for dollar basis (Refer to Figure 1).

Figure 1

Retail deposits continue to be the main focus for all major banks notwithstanding the recent rise in the cost of deposit funding versus wholesale bond issues. ANZ Banking Group reported the gap between its cost of deposit funding and wholesale margins increased by 50 bps. The reason being a steady decline in wholesale funding margins not matching increased deposit rates in the six months to March 2013. According to National Australia Bank data, the average cost of new wholesale issuance declined by more than 80 bps from its peak in early 2012 to around 100bps over the bank bill swap rate by the end of March 2013.This further illustrates the rapid tightening of banks wholesale funding margins in recent months. Westpac Banking Corporation cited that 59% of its funding book is made up of customer deposits. This was virtually unchanged since the 2H12 with just a small reduction in the proportion of long-term offshore wholesale funding to counterbalance the slight increase in its deposits.

Overall, while deposit funding marginal growth slowed down over the first four months of 2013, the relative cost of deposit funding increased. However, retail funding continues to remain the banks’ main focus, despite the major banks’ acknowledgement of an increasing margin being paid for household deposits (Refer to Table 1 and Figure 2).

Table 1

Figure 2