Sunday, 3 October 2010

UBank losing its gloss

On 31st October 2009 I posted an article on Ochre Archives explaining how in rising rate economic climates financial institutions have a tendency of releasing new variable rate savings based products offering rates that are at the time of release competitive, whilst at the same time either capping or slowing the rate of rises on existing savings based products. In this way they are able to attract ‘new’ money (to the new higher rate accounts) but at the same time broaden the overall margin between lending rates (interest rates on variable rate loans almost always increase in line with market movements) and deposit rates leading to even greater profitability. I also explained how we had moved our main deposit funds to UBank which is part of the National Australia Bank (nab) group in an attempt to keep pace with changes.

When we opened our UBank USaver account they were offering two types of USaver accounts. The ‘standard’ one was for those who did not want or need a regular savings program and the second was for those who were prepared to commit to a regular savings plan. UBank offered a premium of about 0.1 % above the rate payable on the standard product to those who selected the regular savings option.

This morning I decided to have a close look at what UBank/nab had been ‘up to’ since we transferred funds to them in the context of the above and subsequent movements in the ‘official cash rate’ approved and determined by the Reserve Bank of Australia (RBA) Board.

On the ‘rate changes’ front from early December 2009 to end June 2010 the following has occurred:
  • The RBA made 4 upward / increase rate adjustments totalling 1.0 % in the official cash rate taking the total rate to 4.5 %
  • UBank (nab) made 5 upward adjustments totalling 0.55 % (55 % of the increase in the RBA adjustments) in the UBank standard USaver account rate making the current total rate 6.01 %
  • UBank (nab) has broadened the margin premium for the regular savings USaver account by about 0.4 % to take the total rate to 6.51 %. Thus the rate on this product has risen roughly in line with the RBA official cash rate.

Thus based on the above anyone who has a standard USaver account has been ‘left behind’ the rise in official cash rates announced by the RBA to the tune of 0.45 % which roughly equates to a $45 opportunity loss for every $10,000 invested over a 12 month period. What I'd suggested normally happens in rising rate environments has been confirmed.

I’ve observed a couple of other changes in the UBank experience and general offering:
  1. The complexity of what UBank does has increased. When you call the main switch number you now get an auto message offering superannuation product offerings
  2. The nab has re-enforced the ‘right of set-off’ clause with UBank deposits. Essentially and simplistically what this means is that the Bank has the legal right to report in its figures to the regulators the net balances (loans less deposit funds) of ‘same customer’ arrangements. The advantages to the banks are that in some circumstances they can reduce the amount of capital shareholders need to provide to support the balance sheet gearing and they can also physically transfer funds from a customer’s deposit account to the same customer’s loan account/s clear or reduce loans should they choose to do so. The advantage to some customers is that they can opt to only pay interest on the net loan, rather than pay interest on the gross loan balance and receive credit interest on the deposit account/s. Because of the right of set-off clause some customers choose have their deposit funds in a different financial institution to the one they get loans from.

The moral of the above story with variable deposit rate products is basically that as far as the financial services industry goes (or at least some of the players) the saying “If you are on a good thing stick to it” does not apply and we need to regularly check to see that we are being offered competitive deals.

For those who love micro detail below is what has happened with RBA official cash and UBank standard USaver account rate movements during the period I have referred to above.

2-Dec-09 RBA increased the official cash rate by 0.25 % to 3.75 %
9-Dec-09 NAB increased the UBank standard USaver account rate by 0.05 % to 5.51 %
22-Jan-10 NAB increased the UBank standard USaver account rate by 0.11 % to 5.62 %
3-Mar-10 RBA increased the official cash rate by 0.25 % to 4 %
12-Mar-10 NAB increased the UBank standard USaver account rate by 0.13 % to 5.75 %
19-Mar-10 NAB increased the UBank standard USaver account rate by 0.1 % to 5.85 %
7-Apr-10 RBA increased the official cash rate by 0.25 % to 4.25 %
5-May-10 RBA increased the official cash rate by 0.25 % to 4.5 %
24-Jun-10 NAB increased the UBank standard USaver account rate by 0.16 % to 6.01 %

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