Watchdog findings fail to dent big banks’ deposit power
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Australia’s banking giants are likely to keep their power to influence prices in the $1.4 trillion market for household deposits despite the competition watchdog’s attempts to call for change, although there will be marginal improvements for consumers, according to some analysts.
Last Friday, the Australian Competition and Consumer Commission (ACCC) released the final report for its inquiry into the retail deposits market, flagging the need for greater transparency on deposit interest rates and for banks to make it easier for customers to switch accounts, among other recommendations.
Analysts say the ACCC’s inquiry will bring some benefits to customers.Credit: Paul Rovere
The report came amid concern that the Reserve Bank’s interest rate increases, which have largely been passed through to higher mortgage repayments, have not been fully reflected in the interest rates paid on deposits or have been difficult for customers to benefit from because of terms and conditions associated with receiving maximum or “bonus” rates.
Morgan Stanley banking analyst Richard Wiles said the ACCC’s recommendations could have some impact on deposit competition, but that the ongoing use of conditional and introductory rates would probably allow banks with strong franchises to retain their “pricing power”. Pricing power refers to a company’s capacity to set prices in a market, rather than have them set by competition.
“The recommendations could have an incremental impact on the cost of deposits if they change customer behaviour,” he said, citing research that highlighted low engagement and customer inertia in the deposit market.
However, Wiles said the ACCC’s report confirmed there was less competition in the retail deposit market than in the mortgage market and that the impact on banks’ overall pricing power would be limited.
UBS head of bank research John Storey said the inquiry’s findings would likely have little impact on the banks’ pricing power.
“Retail deposits are one source of funding for the banks, but they have other avenues,” he said. “Increased transparency might lead to the banks facing a tiny increase in deposit costs, but it’s mostly market forces which determine rates.”
Opal Capital chief investment officer Omkar Joshi said it was still too early to determine the impact of the inquiry on competition in the sector, but scrutiny of the banks would undoubtedly increase.
“The inquiry does mean banking players will be more careful and focused on their conduct,” he said. “More or less, there were no hard-hitting findings but it will be beneficial for customers.”
Federal Treasurer Jim Chalmers will task the Treasury with examining issues raised in the ACCC’s report.Credit: Alex Ellinghausen
JP Morgan analyst Andrew Triggs said the likelihood of any reforms based on the ACCC’s inquiry would come down to a cost-benefit analysis.
“As expected, the inquiry has found that the market for deposits is opaque, and that banks use strategic pricing which creates complexity and makes it difficult for consumers to compare products,” he said. “Some of the recommendations could be quite costly to implement, especially for smaller players.”
Federal Treasurer Jim Chalmers will task the Treasury with examining issues raised in the ACCC’s report in more detail, with a government response to be released in 2024.
Triggs said he expected Westpac and Commonwealth Bank to be most impacted by the inquiry, given 45 per cent of their group deposits came from Australian retail customers, compared with ANZ, which relies more heavily on international deposits, and NAB, which is more reliant on business deposits.
The ACCC report issued several recommendations, including for banks to be required to tell customers when changing their interest rates, prompting customers to consider switching to a better rate, and for banks to alert their customers if they are about to lose entitlements to their bonus interest.
The big four banks were contacted but declined to comment, instead pointing to the Australian Banking Association’s (ABA) response to the inquiry.
The ABA said it would participate in Treasury’s consultation in 2024 to consider the recommendations in more detail and cited data from the Reserve Bank which showed Australian banks had passed on a greater proportion of central bank rate hikes to depositors than banks in countries such as the UK, Canada and US.
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