Date December 1, 2015
Clancy Yeates

Three of the country's big banks quietly cut interest rates for online savings accounts last month, as lenders try to limit a crunch on their profit margins being caused by stiff competition and soft economic conditions.

National Australia Bank, ANZ Bank and Westpac all reduced rates for popular online savings accounts in November, the same month in which customers also started paying higher mortgage rates

ANZ Bank cut the base rate on its online saver account by 0.2 percentage points to 1.8 per cent, while NAB reduced its iSaver base rate by 0.1 percentage point, also to 1.8 per cent, interest rate comparison website Mozo said.

As well as cutting base rates – the long-term rates paid to customers outside "bonus" or limited-time promotional offers – lenders also cut their limited-time "introductory" rates used to lure new customers.

NAB reduced its four-month introductory rate to 2.5 per cent, while Westpac cut the three-month introductory rate on its eSaver account by 0.21 percentage points to 3.1 per cent.

The cuts to what were already very low interest rates for savers come after the big four raised their home loan rates by between 0.15 percentage points to 0.2 percentage points in November, blaming the decision on regulatory changes that will make lending less profitable.

Morningstar's head of Australian banking research, David Ellis, said banks were also using deposits – as well as home loans – to try to offset pressure on their profit margins.

"What you're seeing is just more fine-tuning of their pricing," he said. "Of course they will take every opportunity to maintain their margin."

The major banks' average net interest margins – the difference between what banks pay for their funding and what they charge for loans – have been crunched to a record low of 2.02 per cent, PwC figures show.

This has occurred because very low interest rates are allowing large numbers of customers to pay off their debts quickly, forcing the banks to compete aggressively for new business by offering deep discounts.

Mozo director of marketing and communications Kirsty Lamont said online savings accounts were the "flagship" at-call savings product offered by banks, but bank attempts to protect their profit margins meant these rates were no longer as attractive as in the past.

Banks have cut online savers by more than the 0.5 percentage point reduction in the cash rate set by the Reserve Bank over the past year.

Mozo figures show the banks banks' online savings accounts' base rates have fallen by 0.7 percentage points in the past year to 1.8 per cent, while introductory rates have fallen by 0.82 percentage points to 2.83 per cent.

The average ongoing bonus rate – which refers to the rate customers receive if they meet conditions such as depositing a certain amount each month – has also fallen 0.8 percentage points to an average of 2.77 per cent.

Term deposit interest rates had already been cut, and she said online savings accounts rates were now catching up.

"What little appetite there was for deposits seems to have dried up completely," Ms Lamont said.

The Reserve Bank's Financial Stability Review in October also said competition for deposit funding had eased, noting banks had been able to reduce their deposit rates by more than the cash rate this year.

Bell Potter analyst TS Lim said another reason for banks to reduce their deposit rates was an increase in the cost of wholesale funding in recent months.


"It's just managing the margin. Wholesale funding costs continue to edge up slightly, so they are just trimming their retail deposits," Mr Lim said.