Cash Savings Rates Sliced Razor Thin

The banks are back in the spotlight. These past few weeks you can’t even peek at the business and finance sections without another ‘breaking’ news story on global banks dominating the headlines.

Some banks appear financially wobbly; others stand accused of incompetence and outright deceit. None of them wants more regulation or ‘harsher rules’ limiting their operations…or their record profits. And now Australia’s big banks are taking another slice from the meagre returns of your term deposits.

More on those razor thin cash returns in a moment.

But first a look at Europe, where the banks have recently undergone a fresh round of stress tests. Not that these were as stressful as the European Central Bank (ECB) would have you believe. Conveniently, the ECB forgot to include even the possibility of deflation in their tests.

That shouldn’t come as a surprise. Deflation is an abomination to central bankers and politicians around the world. If the money in your wallet gains value, the reasoning goes, you’ll be less prone to spend and more likely to save. And, far worse, you’ll be less prone to borrow money today to spend on something you really can’t afford until tomorrow…or next year. Not to mention that the trillions of dollars in national debts would get bigger with deflation, instead of being…err…inflated away.

Rather than face the very real spectre of deflation in Europe, the stress testers heard no evil, saw no evil, and spoke no evil. And happily assumed a 1% inflation rate. Never mind that the latest inflation figures coming in from the Eurozone are only 0.3% — and may well fall from there. You probably wish your teachers had been equally lenient in devising your end of year exams. Yet even with that omission — and a number of other hiccups I won’t get into here — 25 of the 130 tested banks failed.


15% commissions for deceptive advice

Then there’s the ‘latest’ news involving ANZ, Timbercorp, and a host of uninformed investors. I put the word latest in quotes because this news dates back to 2009. The fact that it’s only now being rehashed demonstrates the glacial pace of Australia’s financial legal system.

In a nutshell, ANZ’s shylocks are pursuing those people who their own financial planners talked into investing in the failed Managed Forestry Investment Scheme in the first place. After posting a record $7.3 billion profit for the year, the bank is out to take back what it’s ‘rightfully’ owed. Plus interest…and penalties.

Now I’m not saying this is a black and white story. Before you invest a single dollar of your hard earned money, it is your responsibility to know where that dollar is going. Yet, just as you’re likely to believe the medical advice your doctor gives you, you’re certainly inclined to believe the investment advice of your financial planner. That’s what they’re there for, right? To help you.

Or not.

This, from The Sydney Morning Herald (my emphasis):

Financial advisers were paid exorbitant commissions to encourage investment in tree and fruit planting projects. Some of the people being sold these products were promised tax breaks for participating, some were tricked into signing blank forms. Often the trees were never planted but the financial advisers were always paid. What makes Timbercorp concerning is that it would never have been able to ruin so many lives if the ANZ bank hadn’t kept pouring money into it.


Passing the buck

Then there’s the Financial System Inquiry into bank capital levels. The expectation is that the Inquiry will recommend higher capital levels for the big four banks. That’s to ensure that tax payers won’t need to step in to bail them out if economic and financial markets take a major hit — as in the GFC.

I can’t tell you what the right safety margin is. But I can say that it is reasonable to expect the banks to maintain enough cash on hand to ride out any unexpected storms without turning to you and me for help. The banks, of course, disagree.

From Business Day: ‘Commonwealth Bank chief executive Ian Narev has urged policymakers not to rush into implementing tougher bank capital rules… “It’s important for us to continue to find the right balance between growth and safety.”

Let me ask you something. If Ian gets to determine the right balance between growth and safety, which direction do you suppose he’s going to lean towards? If you answered ‘safety’, you might also still be able to find some ANZ financial planners spruiking discounted deals on Timbercorp.

Not that bank executives have much to worry about. If the banks are forced to hold higher capital reserves, they’ll pass the buck on to their customers and shareholders. Or, in this case, they’ll take the buck from their customers and shareholders.

As Business Day reported, ‘…ANZ chief executive Mike Smith… said the bank would consider passing on higher costs to borrowers. Westpac’s Gail Kelly also warned any extra impost would flow through the economy, and shareholders might have to accept lower returns.’

Term deposits a speck above inflation
Do you remember when you could earn a decent rate of return on your cash savings?

Back in 1990 inflation was running at 7.3%. That’s a lot higher than the 2.73% Australia recorded for the first nine months of 2014. But, according to Trading Economics, the deposit interest rate in 1990 was 13.5%. That means you were getting 6.2% in real returns from your cash savings.

Now I’ll admit this is a highly selective comparison. In 1990 monetary policy was deliberately tight…meaning real interest rates were high. Today that’s a distant memory. And if you’re hoping the trend may finally be reversing, I’ll have to disappoint you.

From The Age:

Australia’s big banks are quietly making significant cuts to the interest rates paid on term deposits… The cuts are likely to affect pensioners and self-funded retirees in particular, as rate reductions erode from their retirement savings… All the major banks are now paying less than 3 per cent on a term deposit over the popular term of three months.’

Less than 3% from you term deposit with an inflation rate running above 2.7%. That means with $100,000 in a three month term deposit, you could expect a real return of less than $300 by the end of the year. That’ll get you about six cartons of Corona.

It’s no wonder we’re hearing from so many Guild members seeking a reliable income stream from their investments.

In today’s low interest rate environment, having the right mix of high yielding stocks in your portfolio is more important than ever. But at the Guild we’re not satisfied with just any dividend paying stocks. The companies still need to pass our stringent list of critical criteria. Importantly, we’re also looking for capital growth alongside healthy dividends.

That’s why Meagan recently added a new stock pick to the Guild’s World Dominators portfolio. This retail oriented company pays a 1.9% dividend, PLUS a special dividend yield that’s averaged 7.4% annually for the last six years. Now as mentioned, we’re not satisfied with dividends alone. Without solid fundamentals a company paying high dividends is likely to see its share price suffer over time. And at the Guild we’re also looking to make the most from capital gains. So how has Meagan’s recent recommendation performed?

Taking foreign exchange rates into account, it’s up 6.4% since 3 November!

Take that, banks!


Bernd Struben
Chairman, Albert Park Investors Guild

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Bernd Struben is a contribution Editor of Markets & Money. He holds a degree in Economics and is a published novelist. Bernd’s career spans multiple countries on four continents. With his diverse background, he brings unique business insight and a libertarian twist to his columns and analysis in Markets & Money.

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