The banks are entering a new price war, one that is very good news for savers and people who rely on interest to meet their monthly bills.
As banks come under pressure to find new sources of cash to fund their lending, so they are increasing their deposit interest rates to attract new clients and grow market share.
South Africa’s lending rates are starting to soar. This week we saw the fastest growth in private credit extension in 17 years. Debt is close to 70% of household income. Banks are coming under increasing pressure to find the money to lend to borrowers. On the flip side they are also entering interest-rate wars to attract borrowers, resulting in the lowest mortgage rates, relative to prime, the country has ever seen. So they now need to find cheaper ways of raising cash.
“Banks are only now feeling the divergence between savings and lending and are starting to look for new forms of funding,” says Standard Bank senior economist Elna Moolman.
The cheapest form of funding is from the bank’s own deposit book — in other words from clients who put cash on deposit. What banks pay on a fixed deposit is several percentage points lower than what they will be paying to borrow from the Reserve Bank or another bank.
According to Saks Ntombela, MD of Nedbank’s retail, transactional and investment products, Nedbank is on a concerted drive to attract more retail deposits at rates far cheaper than wholesale funding. For example, Nedbank currently offers 6,25% on a one-month fixed deposit and 7,87% for a one-year fixed deposit on any amount more than R1 000. Nedbank’s one-year rate is in line with the market, but clients earn interest from R1 000. The other banks require clients to have more than R10 000 to qualify for this interest rate. “We want to increase our deposit-book size and increase our market share,” says Ntombela.
Virgin Money is about to start an aggressive marketing campaign to encourage people to save with it by highlighting their interest rates, which pay 5% from the first R1 a customer deposits.
Gavin Muller, credit products director at Virgin Money, explains that in a rising interest-rate environment it becomes difficult for lenders to increase the interest rates they charge on loans to the same extent that interest rates are increasing. For example, although we have seen a total interest rate increase of 100 basis points in recent weeks, none of the banks has increased the interest rates they charge on outstanding balances on credit cards. This is putting a margin squeeze on the banks.
Currently, Virgin Money borrows money from other banks at the interbank rate that is about 8,6% and tracks the Reserve Bank’s repo rate, so this rate will keep climbing as interest rates rise.
It would be far cheaper for Virgin Money to raise money through its own deposits, which costs it 5%, a saving of 3,6%. “We have taken a view to use [deposit] interest rates to offset margin squeeze. Although we have not yet made the decision, we could consider increasing our [deposit] interest rate.”
Muller says the decision on whether to increase from the current 5% interest rate on deposits will be determined by further rate hikes and the pressure it puts on its lending margins. He says that, by growing its customer base through savings, Virgin Money also has the benefit of attracting lower-risk customers who act more prudently.
Muller says current banking practice favours customers who can afford to hold large amounts on deposit.
“The biggest weakness of many other banks’ savings rates is that they ratchet up based on the balance.” This means that people saving less than R10 000 do not receive a decent interest rate. “This precludes the average person from saving,” argues Muller.
According to Ntombela, Nedbank’s deposit book doesn’t even come close to funding the lending requirements, which is why the bank often has to borrow from other banks and the Reserve Bank.
Banks have recently begun using securitisation of their mortgage books to raise funding, but ideally they would like the deposits to cover a higher percentage of their lending book.
But the savings market in South Africa is limited. Moolman says South Africans do not have a culture of savings and even higher interest rates are not going to entice further savings.
This means that the banks are chasing the same pool of available deposits and, if as a bank you do not have the lion’s share of the deposit market, you will have to keep paying other banks in order to borrow from them. So it would make sense for a bank to rather hike up its own deposit rates and increase market share. According to Ntombela, Nedbank’s strategy is working and it is attracting more deposits with its aggressive campaign.
Moreover, Nedbank has identified that, while meeting liquidity requirements, its savings accounts are also a good way of attracting new clients to Nedbank, which it hopes to convert to its full range of banking products. Using savings as a way to attract customers seems a lot more responsible than enticing them with easily available debt.