As part of his Official Cash Rate (OCR) salvo last month, New Zealand’s Reserve Bank Governor – Adrian Orr – came out with a tough critique of the banks for failing to pass previous rate increases on to savers in the form of higher returns.
His comments were that the banks dragging their feet on this had only served to boost bank profits, while preventing your average saver from enjoying the benefit of a higher OCR.
And he’s right.
But that’s just one part of the problem facing savers in New Zealand.
The other part is that the rate of return on simple savings accounts in New Zealand doesn’t keep pace with inflation. Not even close.
In reality, if you’ve got cash in the bank, you’re only marginally better off than you would be having it stashed in the back of your freezer or under a mattress. Either way, its value is going backwards, along with your purchasing power and your wealth.
As context – Reserve Bank (RBNZ) data shows that Kiwi households earn, on average, a measly 2.50% p.a. on the $228 billion of money they have held with the banks (between transaction accounts, savings accounts, and term deposits).
So it’s no wonder the RBNZ’s latest Monetary Policy Statement said:
“…deposit rate increases continue to lag the increases in wholesale and mortgage rates resulting in a further widening of bank margins between lending and deposit rates.”
Banks’ net interest margin (which delivers most of their profit) has skyrocketed off the back of rate increases.
And thanks to the oligopoly that exists in New Zealand’s banking sector – and the fact there’s so little to differentiate between each lender and how they operate – all the banks have reaped the benefits.
ASB recently reported its margin had risen by 15%, from 2.19% to 2.52%. Kiwibank’s rose by 19% year-on-year (from 2.04% to 2.42%). All the other retail banks will report similar results.
Wouldn’t it be nice if every other business in New Zealand could lift their sales margin by 15% or more? But of course, it’s not that easy for most of us.
And while banks are laughing all the way to the – well – bank, savers are stuck earning stingy returns on their hard-earned dollars.
To give you the numbers:
- Kiwi have $46 billion sitting in transaction accounts earning 0% p.a.
- And $77 billion sitting in savings accounts earning an average of 2.50% p.a. (as at 31 December 2022).
- And then a whopping $105 billion in bank term investments, earning an average of 3.60% p.a. (also as at 31 December 2022). The good news is that term deposit rates are moving up, and the latest OCR increase to 4.75% will see them move more.
Let’s be clear that the banks know they’re onto a good thing here.
Kiwibank CEO, Steve Jurkovich, recently said:
…I still think all of [the banks] are making sure we do everything we can to hold on to those deposits.
You bet they are! It’s cheap (and lucrative) money.
But if you’re one of the millions of Kiwi with money in the bank, things aren’t so rosy. That’s because, with inflation currently running at just over 7%, your savings are going backwards in real terms.
What’s the alternative?
Asset classes like managed funds, fixed interest securities and shares are probably among the first options to spring to mind – each of which has a different risk profile, and may or may not deliver a positive return on your investment over time.
But Squirrel also offers a bunch of options for Kiwi looking to make better returns on their savings:
- Squirrel Call Account: currently paying 4.00% p.a.
- Squirrel Term Investments: currently paying around 7.00%
- Squirrel Monthly Income Fund: offering returns of 5.83% over the last year
Where do funds go? Well, money in the Squirrel Call Account is held on trust at a major New Zealand trading bank. Meanwhile – not dissimilar to the banks – our term investments (both direct and via Squirrel’s Monthly Income Fund) are generally backed by registered first mortgages over New Zealand residential property.
To help manage risk, Squirrel operates Reserve Funds for each term investment class to further protect investors – and in fact, Squirrel investors have never lost a cent (and we intend to keep it that way).
Once you’ve taken out tax on interest, it’s true that even these rates underperform the rate of inflation at the moment. But when you consider the performance of New Zealand’s banking oligopoly, they’re pretty compelling alternatives.
You can find out more about Squirrel investment options here.