Pre-crisis margins reign

LOW INTEREST rates mean New Zealand is no heaven for term depositors, but the margins being offered over the official cash rate (OCR) are reminiscent of the heavenly times before the global financial crisis.

Financial products research agency Canstar says crisis-weary people continue to pour cash into term deposits at the banks.

The total dollar value held in term deposits by investors has increased by $9.13 billion during the past 12 months to around $109b.

But while this growth in value has not been matched with a growth in interest paid, the margin over the OCR has grown, Canstar says.

‘‘While interest rates being offered to investors have declined over the past 12 months, they still represent a healthy margin above the Reserve Bank of New Zealand official cash rate of just 2.5 per cent,’’ said Canstar’s New Zealand general manager Derek Bonnar.

‘‘It may be of little comfort to retirees who are sourcing their income from cash holdings,’’ he said but ‘‘the current interest rate margin of approximately 2 per cent is far higher than the margin offered prior to the global financial crisis.’’

That showed financial institutions were working harder to attract the investor dollar than they were before the global financial crisis.

That’s driven by liquidity requirements from the Reserve Bank designed to ensure that banks are able to cope with disruption in the international markets when access to foreign money becomes harder.

That drove greater competition in the term deposit market, which was welcome as interest rates plunged in response to the weakening economy.

‘‘So if investors think that interest rates are low now – imagine what they may have been if the banks’ demand for retail deposits hadn’t increased,’’ Bonnar said.

There is some doubt about whether those margins are going to be sustained because to continue profitability growth, the banks need to find ways of reducing their costs, and the term deposit margins are high compared to other forms of funding.

UBS’ head of investment banking Nicholas Ross said the margins that banks are paying now on the wholesale market have fallen considerably so transactions are at much narrower margins than 12 months ago.

‘‘There is not as much pressure on the banks to offer very, very competitive term deposit rates,’’ Ross said.

The banks have now packed on a good deal of term deposit money, so there is less pressure to continue paying term depositors so well.

Canstar’s analysis comes as the research agency names its champion term deposit offerer. Canstar specialises in rating and ranking financial products using complex formulas involving not just the financial cost or return for consumers, but also the features and usability of products.

It awarded Westpac with the mantle of best term deposit offerer, despite it not having the best interest rates on the market.

The kinds of features Bonnar believes some investors lose sight of in the bid to maximise their financial return includes the level of withdrawal penalties, rollover conditions, the security of the offerer and the ability to transact online.

‘‘Choosing the wrong product, just for the sake of a small amount of extra interest, can end up costing you a lot,’’ Bonnar said. AT THIS time of year, and indeed at any reporting season, we are bombarded with analysts’ views of whether certain stocks are rated a Buy, Sell or Hold.

These ratings are often accompanied by a target price, which is the price the analyst expects the shares to be trading at in 12 months.

Sometimes, instead of a Buy or Sell rating, an analyst will suggest a stock should be underweight or overweight, which is that analyst’s view of how investors should position the stock in their portfolios compared with the stock’s index weighting.

When you think about it, it is a big ask for an analyst not only to decide whether investors (who are all unique, with different risk profiles and investment objectives) should own a stock, and how much of the stock they should own relative to other stocks, but also to estimate how much the stock is going to be worth in a year.

History has shown that while analysts do exhibit skill in forecasting earnings, they have not shown an ability to consistently forecast target prices.

This is quite understandable. While future earnings can reasonably be forecast, when it comes to share prices, all sorts of exogenous factors, such as the economy, interest rates and the prevailing mood of the market, can play havoc with stock prices.

Knowing how difficult it is for any analyst to get the inside running on any stock, it is amazing that the market pays so Carmel Fisher is managing director of Fisher Funds, an investment manager and KiwiSaver provider.