Monday March 14, 2011,By SHARIDAN M. ALI ,firstname.lastname@example.org
They provide banks with cheaper source of fundsPETALING JAYA: Banks are engaged in a war for deposits, especially for current accounts, in their drive to build up low-cost deposits as a means of cheaper funding.
“Demand deposits (current account), which were relatively much cheaper than fixed and savings deposits, had been marking a strong year-on-year (y-o-y) growth of about 11% from 2008 to 2010,” RAM Ratings head of financial institution ratings Promod Dass told StarBiz.
“This clearly indicates the drive among banks to build up low-cost deposits for access to cheaper cost of funds. This active strategy of promoting current accounts usually involves corporate clients who utilise the service for their businesses,” he said.
According to Dass, this was in line with the increasing overnight policy rate (OPR) where the average deposit rate had risen since 2009.
“Comparing the composition of deposits between December 2007 and December 2010, the proportion of fixed deposits has declined to 44% from about 48%, with y-o-y growth rates hovering around 6% to 7% since 2007,” he said.
Traditionally, a basic current account does not render any interest earnings as opposed to the general 0.25% or higher rates for a basic savings account, depending on the account balance.
But, banks now are aggressively promoting tailor-made current accounts with enticing attractions such as the introduction of interest rates ranging from as high as 2.5% to 0.8% annually depending on the account balance amount.
An analyst said that banks that had higher levels of current and savings accounts (CASA) would usually have a bigger advantage in a rising interest rate environment.
“The banks will have access to a cheaper source of funds, as CASA has lower interest rates compared with the rates they charge for loans rendered to customers,” he said.
However, OCBC Bank (Malaysia) Bhd said that its deposits growth strategy was not reactive to funding requirements; it was also to expand the bank's presence in the wealth management landscape.
“Besides the recent global events, accumulation of deposits has always been a cornerstone of the wealth management business at OCBC, as we compete for more of the customer's share of wallet,” said Ong Shi Jie, the bank's head of wealth management.
“With a higher level of aggregation of deposits with one banking relationship, we are able to better assess the customers' overall financial needs and abilities and, hence, serve their needs better,” she said.
Nevertheless, Ong said that current and savings accounts deposits represented inexpensive sources of financing where these deposits were lent out and became income-producing assets.
“The second source of funding is wholesale, which refers to funding other than core demand deposits. This may be secured in the debt markets, for example, through interbank borrowings or money markets.
“If core deposits are such a cheap source of financing, one may ask why anyone would want to even consider wholesale funding,” she said.
(Wholesale funding represents a way for banks to expand or satisfy their funding needs.)
“At times, banks may have trouble attracting new deposits such as during a low interest rate environment, when customers do not find the low rates attractive. In such instances, they may look to wholesale funding,” Ong said.
But, in recent times the US subprime crisis and credit crunch have highlighted the importance of internal sources via customers' deposits rather than just wholesale funding.
“During the credit crunch, wholesale funding in the United States dried up as many banks were perceived to be of high credit risk.
“Recently, the banking industry in Malaysia has responded to this new reality. Increasingly, the acquisition of deposits has become desirable and, thus, more competitive.
“In addition, there is now pressure on banks to maintain or grow the retail funding base because this is viewed as a more stable source of funding during times of crisis. This has played a significant role in encouraging increased competition in this area,” Ong said.
Dass said the trend of the average lending rates (ALR) and deposit rates revealed how the competitive lending environment and rising interest rates had taken a toll on interest margins, especially since 2009.
“This observation can be illustrated by the differential between the ALR and the one-month fixed deposit rate, which has fallen from 2.83% at end-December 2009 to 2.34% at end-December 2010.
“RAM Ratings expects another 50 to 75 basis point increase in the OPR in 2011. In tandem with increasing competition for both loans and deposits, this downward pressure on interest margins would continue in 2011,” he said.
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