The ceasefire between the banks in the war for deposits is still holding at this stage but it may not be long before we see it break out in earnest.
The revelation that Macquarie Bank (ASX: MQG) now has more than $200 billion in retail and business deposits for the first time in October may be the trigger that gets this war going.
In competitive terms Macquarie has been eating the other bank’s lunch by scooping up deposits from other bank customers who are fed up with enduring lower interest rates and highly conditional deposit accounts that require them to jump through many hoops to get a meaningful interest rate.
Competition on Hold
While competing head on with Macquarie might seem like a logical thing to do, the big banks such as Westpac (ASX: WBC) and Commonwealth (ASX: CBA) are very reluctant to do so.
The reason is that it is much easier for a smaller bank to play attack in a deposit war than it is for a bigger bank to play defence.
The reason is a key metric for bank profitability known as the net interest margin - in simple terms, the gap the bank keeps between what it pays for its deposits and what it gets back from its loans.
The one thing a big bank chief executive does not want to do is report of falling net interest margin which could lead to the share price falling and a very negative reaction from brokers, analysts and investors.
So, for now at least, the big banks are enduring the pain of seeing Macquarie steal some of their better and wealthier customers.
Compliant Customer Base
That is not to say that there is not intense competition for deposits—there is—it is just that the banks want to compete quietly without changing their overall offers.
They don’t want to disturb their compliant customers who don’t complain about the lower rates and difficult account conditions—a sort of sanguine rump of depositors who are not highly motivated to change.
Those who do actually contact their banks to see if they can get a better rate are a different matter and there are reports that the big banks are offering an extra interest margin to some of their customers to prevent them defecting to Macquarie or elsewhere.
By doing this the banks are shielding the vast bulk of their compliant deposit base from getting paid more interest but are still fighting to keep lucrative customers—particularly wealthier ones who may also be attracted to Macquarie’s offer of high interest rates all the way up to $1 million deposits.
Cleverly, Macquarie will only offer this interest on $1 million deposits after four months and initially the limit is $250,000, a condition that particularly helps their appeal for high-net-worth customers and enforces some loyalty.
Will Complaints Start to Grow?
As news of this behaviour spreads, though, more of the motivated customers will start to complain and demand better interest rates, chipping away at the net interest margin over time.
It’s a little like the situation with home loans in which customers might be able to negotiate a lower interest rate if they try but most won’t bother and the bank can make up their own mind whether they bother trying to compete or not.
What is undeniable is that Macquarie is really throwing the cat among the pigeons with its deposit growth and this can only be good for bank customers, although it will be less welcome for bank shareholders.
Proof of a Winning Strategy
The proof is in the pudding with Macquarie now representing more than 6.5% of the deposit market and it is growing quickly—more than doubling its deposit base in four years.
Deposits from households have grown even faster, more than tripling over the same period, and business deposits have grown by more than 25% over the past year.
Macquarie also has fewer conditions on its deposits which means that it pays interest on an amazing 97% of its accounts – well above the other banks – so its customers should be happier and more loyal as well.
