Is the drop in M'sia's bank deposit growth worrying?

And there is some bite to the bark. The tightness of household wallets may be translating to the banking sector and has now caught the attention of the investment fraternity – growth in bank deposits.

The growth rate of bank deposits from individuals was 5.6 per cent in August, the lowest rate in years. The growth of such deposits from the man in the street has been trending downwards for about two years now, and is beginning to be a concern among analysts who track banks.

Deposits from individuals are the largest segment in the banking sector, accounting for 36 per cent of deposits compared with businesses that make up 34 per cent of deposits.

For households, the biggest expenditure is the roof over their heads. As the cost of homes rise, households need to plonk down a larger deposit and that will come from the savings they have with banks. Loans for mortgages are still holding steady, which suggests that owning a home is a priority, and that’s where a lot of the money is heading.

 

Feeling the pinch?

But credit growth in other areas such as for the purchase of cars and personal use is falling. Could this be the result of the pinch people are feeling as living costs rise?

The slowdown in deposit growth is spilling over to CASA (current account, savings account), which rose 5.1 per cent in August. CASA is the cheapest form of funding for banks and the concern is that as loan growth is much higher than its cheapest form of funding, banks may need to dip into their more expensive forms of cash to fund loan growth.

This will affect margins and we are already seeing a number of banks starting with their campaigns to draw in deposits.

The slowing growth of deposits could also affect banks in other areas. For one, although there is enough money in the system, a slower deposit growth can translate into a slower lending growth.

Banks can lend more than what they have sitting in deposits, but few want to see the loan-to-deposit ratio cross the 100 per cent mark like what it had done prior to the Asian financial crisis. They already have to contend with a high household debt-to-gross domestic product ratio, and that makes the situation more dicey than before.

As it stands, loan growth is also slower than the projections made earlier in the year, which some say can be attributed to the slowing deposit growth.

Another problem is the negative real returns on deposits.

With inflation higher than the 12-month fixed-deposit rate for much of this year, the hike in petrol prices is not going to help real returns on deposits. Coupled with the impending goods and services tax being inflationary, many are expecting inflation next year to be higher than the 3.3 per cent seen in August.

If there are hardly any real returns on deposits, then people might just find higher-yielding assets to park their money in, and bank deposits will not be one of them. Maybe money will flow into unit trusts and the stock market with the hope of higher returns.

 

Rate-rise risk

What will it take to reverse this trend?

Raising interest rates will do just that, but the risk of doing that and keeping things as they are might just be the same.

If lower deposits affect lending without the banks taking more risks, then the economy will suffer. Banks that finance loans with higher-priced deposits can expect profit margins to be compressed further, with one report saying that the compression in net interest margins has been quite remarkable for banks this year.

Raising interest rates might draw in deposits, but higher rates normally can be punitive to economic growth.

So, all eyes will be focused on the budget to see what is in store to lower the cost of living, as the search for answers continues.