I had some trouble reading an article on the front page of the business section of The Star dated today. The headline “Battle for deposits” roars to tell the world that Malaysian banks are in the battlefield sword in hand fighting for deposits, especially for current accounts.[1] I find the whole idea somehow unconvincing. I could not quite finger it but there was something definitely missing from the picture. I wanted to roar back and so I gave it a thought. And I think I have got it.
The article reasons that with the overnight policy rate increasing, these deposits offer cheap source of financing for banks. It sounds fine until one asks, why are the owners of funds putting their cash in low yielding accounts? Hmm…
That is a far more interesting issue at hand than the alleged battle for deposits. I will come back to this.
But first, I did some calculation after mining the relevant data from BNM just to satisfy this weird curiosity of mine. Compare the graphics produced by The Star…
…with this longer period time series that I produced using the same data:
As you can see, the rate 11% is rather typical for the past 10 years for deposits in current accounts. Annual growth rate between 2001 and 2010 is close to 13%. So I am wondering if the proof of 11% offered is any proof at all.
Maybe, there is a battle for deposits. Maybe, there is less wealth around and so these banks have to work harder than usual, thus the battle for deposits. Maybe but I am skeptical of it. Even if it is true, like I said, there is a more interesting issue at hand.
Another point that does not run parallel with the deposits war story is the drop in savings deposit growth rate. The average annual growth rate for savings deposits is 8%. If 11% annual growth rate of deposits in current accounts that is really around average paints the picture of a battle, what about 3% rate for savings that is well below average?
I have a more interesting and a likely more consistent story to tell.
I think the whole issue is a symptom of economic recovery. It might be an affirmation of economic recovery.
The continuing growth of deposits in current accounts suggests that there are more transactions going on. The drop in savings deposit suggests that individuals and companies might be using the money or putting it somewhere else with better returns rather than keeping it relatively idle. Companies might have purchased more supplies for sales or invested more, while individuals might have gone spending somewhere. More spending, less saving.
What adds to the plausibility of the story is that in 2008, growth rate of deposits in current accounts slowed. The recent financial crisis began in 2007 while the full realization that we were in trouble only became clear in 2008. That hit confidence and many began to hoard money. That meant harder business environment and less transactions. Since current accounts are typically used for business transactions, deposits in current accounts should not grow too big, or should even shrink. Look at the growth rate in 2008: 6% compared to 23% the year before and 11% the year after.
Here are a few things that may strengthen the story further. One, increasing sales and investment figures for companies. Two, increasing private consumption for individuals. Three, higher velocity of money.
Anybody wants to check that? I am going to bed.
[1] — PETALING JAYA: Banks are engaged in a war for deposits, especially for current accounts, in their drive to build up low-cost deposits as a means of cheaper funding.
“Demand deposits (current account), which were relatively much cheaper than fixed and savings deposits, had been marking a strong year-on-year (y-o-y) growth of about 11% from 2008 to 2010,” RAM Ratings head of financial institution ratings Promod Dass told StarBiz.
”This clearly indicates the drive among banks to build up low-cost deposits for access to cheaper cost of funds. This active strategy of promoting current accounts usually involves corporate clients who utilise the service for their businesses,” he said.
According to Dass, this was in line with the increasing overnight policy rate (OPR) where the average deposit rate had risen since 2009. [Battle for deposits. Sharidan M. Ali. The Star. March 14 2011]
