Bank giant fights back against ING

SYDNEY - Australia's largest savings bank, Commonwealth, has raised the interest it pays on deposits and cut fees to keep pace with foreign rivals such as ING, which is opening 1000 internet accounts a day.

Commonwealth Bank of Australia has lifted the rate it pays on deposits to 5.4 per cent, matching the Netherlands' ING.

It has snared A$15 billion ($16.3 billion), or 6 per cent, of Australia's savings in six years.

"We need to compete aggressively in the online savings market," said Geoff Austin, Commonwealth's head of retail products, on a June 6 conference call. "One of the things we're looking for is to stem our market share loss in deposits."

ING and the UK's HBOS are gaining business as Australian banks face a slowdown in home lending and a decline in interest margins. Commonwealth has seen its leading share of Australia's A$253 billion retail savings market slip 0.8 per cent to 30 per cent in the year ended April 30.

ING Direct, which has no branches, had 996,000 customers in Australia at the end of 2004, up from 719,000 a year earlier. Its profit rose 16 per cent last year to A$90.5 million.

"We borrow at 5.4 per cent, lend at higher mortgage rates and make our profit on the gap," said Vaughn Richtor, 49, who heads ING Direct in Australia. "We can make a profit on a smaller gap than most competitors because we're a branchless, online bank and our costs are much lower."

BankWest, HBOS's Australian unit, started paying 6 per cent on deposits in October. It increased its share of household deposits by 0.8 per cent in the 12 months ended April 30 and ING's share rose 0.6 per cent, making them the market's two best performers.

"Analysts have been sceptical about the ability of the big domestic banks to maintain their dominance as they faced squeezed margins from competitors in both deposits and loans," said James Holt, who oversees A$5.4 billion at Zurich Financial Services in Sydney.

Defending its lead in the household-savings market will crimp Commonwealth's earnings, wrote Merrill Lynch analyst Hamish Carlisle in a June 6 research report.

Commonwealth's net interest margin, which measures the profitability of lending, fell 16 basis points to 2.44 per cent in the second half of 2004. It may drop at an annual pace of as much as 20 basis points a year for the next three years as deposit revenue declines, Carlisle estimates.

Every 1 per cent of low-yielding account balances that switch to Commonwealth's higher interest-paying savings product may cut 2007 earnings-per-share by 1 per cent, Carlisle wrote in his report.

"We believe this change in deposit mix will constitute the largest drag to net interest margins for the banking sector over the next three years," Carlisle said. He cut his rating on Commonwealth Bank to "sell" from "neutral" on June 14.

Commonwealth shares closed down 20Ac at A$37.55 in Sydney. It's the best-performing Australian bank stock this year, rising 18 per cent, compared with a 7.9 per cent gain in the eight-member S&P/ASX 200 Banks Index.

ING Direct, which also operates in the US, the UK and Canada, has boosted deposits in Australia to more than A$15 billion from A$150 million at the end of 1999.

BankWest has snared A$2 billion of deposits in six months.

"The deposit market has certainly been a battle ground," Chris Whitehead, BankWest's retail chief executive, said. "Customers weren't getting a good enough deal."

That's changing as Westpac Banking, the nation's No 4 bank, started a fee-free, phone and internet savings account in December paying 5.25 per cent interest. ANZ Bank, the third-largest lender, has had a similar product paying 5.45 per cent since March.

- BLOOMBERG