Welcome to Firstlinks Edition 478

(This edition is shipping later than usual due to US hosting company maintenance. Normal schedule will resume next week).

If you’re wondering if bankers are really mean enough to withhold interest rate hikes on deposit accounts to make more profits, the answer is yes. I’ve sat on the pricing committees of three banks and now is the time to restore bank margins. I can quote John Maynard Keynes because I was a “banker” for 20 years, and some of our pricing decisions were embarrassing, even unpleasant, and took advantage of what we called “retail inertia” (the decisions rather that people were bad).

“Capitalism is the extraordinary belief that the wickedest of men, for the worst reasons, will somehow work for the good of all of us.”

The vast majority of depositors either don’t know how much their accounts are earning or can’t afford to switch and hundreds of billions of dollars are being saved regardless of the rate paid. Bankers take advantage of this and (as we used to say) “milked” basic transactions and savings accounts. In 2021, when spot and forward rates fell to near zero, there was nowhere to go on deposit accounts because rates couldn’t go negative. At the same time, competition in the mortgage market has intensified and these factors have led to lower margins which banks will now recoup.

On the lending side, the five largest banks took little time on Tuesday this week to pass on the 0.25% rise in cash rates to their variable rate mortgages. These major pricing decisions are always approved at the CEO level, but the pricing committees were ready to push the button with pre-approval for whatever the Reserve Bank decided.

Depending on competition and success in withholding deposit rate increases, large banks should be able to achieve margin improvement of approximately 0.1% for every 0.5% increase in deposit rate. Treasury. Equity investors flocked to bank stocks this week, not only on expected margin improvements, but also on confidence that bad debts will not rise in a recession.

The interest rate on my SMSF’s transaction account, which holds more money than ever, confirms that I need to find another home. According to the conversations during my presentation at the Australian Association of Shareholders a few weeks ago, many SMSF administrators are in the same boat, holding a lot of money. Everyone should check their rates.

The Reserve Bank cash rate is now 2.6%, but my bank pays nothing for balances under $10,000, and 0.7% to 0.8% for amounts under $100,000 $.

Sure, banks will say there are alternatives, but they often come with well-designed hurdles to keep their costs down. Take the CBA goalscorer account, which pays a decent 2.1% on all balances. However, almost everything depends on the behavior of the depositor and obtaining a “bonus”:

“Earn a variable bonus interest rate when you increase your savings balance each calendar month (excluding interest and bank initiated transactions)… The standard variable interest rate of 0.15% per annum will apply if you do not meet the bonus interest conditions.”

Make a single withdrawal that reduces the monthly balance and that’s the 2%. Even with NAB’s iSaver. It starts out great with an “introductory” 2.3% for four months, but remember that 2.3% for four months is only 0.76% per year. Then the reality starts when the “bonus” is lost:

“Base variable rate of 0.85% per year + fixed margin of 1.45% per year for 4 months. Beyond 4 months, the base variable rate of 0.85% per year will apply.”

NAB said its deposit rates are “in the study– yes, with a plan not to do much – and no rates were increased along with the loan rate announcements.

Macquarie Bank moves further into the retail space with a new savings account and a 3.7% “home rate” for four months, but only on the first $250,000. Then it reverts to 2.75% or 2.35% up to $500,000 and 1.5% over $1 million. It is of course only available for new customers. Banks do not reward loyalty.

ING Bank is expected to grab headlines with a new savings rate this week at around 4%, but there will be rules including making at least five card transactions per month and depositing $1,000 each month.

None of this happens by accident, and it’s no way to encourage people to save more, no matter how it’s presented. It’s designed to attract new deposits without paying existing savers, then making sure those new customers don’t cost too much. For savers, it takes time to transfer money every few months or monitor whether their account will earn a “bonus”.

Of course, some smaller banks are more reliant on the retail market and depositors are protected by the Financial Claims Scheme guaranteeing $250,000 per person per institution. Unfortunately, banks like Judo and My state are more competitive in term deposits (like a decent 3.6% for 12 months), which reduces liquidity if the money is needed quickly for another investment. There is also the pain of going through an account opening process with all the IDs and documents.

According to the newsletter banking daythe four majors are deliberately losing ground on deposits to preserve their margins, as evidenced by their share in household deposits.

Banking Day says:

“In August, two of the major banks – Westpac and ANZ – suffered a net outflow of deposits as savers sought better deals at other institutions. According to APRA data, Westpac’s total deposit base s contracted by more than A$3 billion in August while ANZ lost more than $2 billion in deposits.”

More than at any time in at least 10 years, savers should be making an active decision about their cash flow. Don’t wait for your bank to meet the market, and the incentive to move will only increase. Although the Reserve Bank has slowed the pace of rate hikes this week, the spot futures rate for mid-2023 is still around 3.6%.

In this week’s edition…

The majority of Firstlinks readers do not intend to apply for the Old Age Pension, as our research shows a high proportion of self-funded pensioners in our audience. The pension is not a level of retirement income to aspire to. However, most Australians will receive full or partial pensions for many decades to come, and many older pensioners fear they will ‘run out of money’.

What if, when a couple became eligible for the old age pension, the government offered the choice between $1 million or the current pension rate? Seems an easy decision – to become an instant millionaire. Still, that’s close to a mathematical decision based on demographics, because the full pension for a couple is over $40,000 a year forever, plus many other benefits and concessions. For a couple who also own their own home and can access the equity in it, they overestimate the fear of “running out of money”.

Kaye Fallick is more concerned about the lack of education, as many retirees are not given the financial skills and access to advice needed to take advantage of retirement and retirement opportunities. She asks what happened to all the diets of the last 20 years that were supposed to help.

In the same order of ideas, Tim Howard of the BT financial group consults with his advisors to find the most common topics of discussion with clients over the past few months. These five elements show the benefits of advice and why retirees need to know what is available. In the context of the first article above, it’s good to see access to home equity on the list. Is it finally coming out of the shadows as a retirement income vehicle?

Then two articles from top fund managers on how they identify companies and build their portfolios.

Marcus Burns and Matthew Booker of Spheria watch how bubbles develop, especially in smaller listed companies, and how to avoid those overvalued companies whose stock prices are more about hype than profits. And Barrow Hanley’s Brad Kinkelaar describes why value investing has gained ground over the past year and the sectors in which it invests.

Central bankers and investors are hoping that high energy prices will be transitory, but what is happening in Europe and the aftermath of a cold winter shows that reliance on Russia for gas was a terrible mistake. Michael Collins explains why energy prices will stay high for longer.

And still on global geopolitics, John West looks at Australia’s most important trading partner, China, and examines the power of its political elite. China will only hold the 20th National Congress of the Communist Party in a few weeks, on October 16, but not everyone will be happy to extend Xi’s term.

This week’s whitepaper is from Cromwell Property Groupexplaining how ESG principles can guide investment decisions in commercial real estate, particularly in a reuse-adapt-develop framework.

Finally, the optus hack is a warning about online security, and we all need to focus more on password management and two-factor authentication (2FA). However, a security specialist sent me this graphic explaining how a fraudster who acquires personal data can cause the “second factor” (like receiving a code on one phone) to be sent to another telephone. This is why access to personal data is particularly worrying.

Graham’s Hand

A full PDF version of this week’s newsletter articles will be uploaded to this editorial on our website by noon.

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