Thursday, May 21, 2009

Bank deposits drop to 0.001% pa

HSBC announced that the savings rates on Hong Kong dollar deposits would be cut from 0.01% pa to 0.001% pa. That's not a typo - a $1000 deposit will pay $0.01 in annual interest.

The reason for the reduction? Too much money flowing into the banks. For most of us that would be a nice problem to have. But not if you are a bank who has to pay interest to your customers on the money (as well as the cost of administering the account).

The surge in bank deposits and the consequentially ultra low (almost non-existent) interest rates on deposits explains:

1. why the banks are tripping over themselves to make mortgage loans at very low rates (1 month HIBOR + 0.7% currently works out at 0.95% pa on a home loan);

2. why money is flowing into the stock market (the HK Tracker fund currently yields around 3.8%);

3. why the residential property market has bounced back so strongly since the beginning of this year (and why I was unable to find any motivated sellers);

4. why HK$ bonds have such low yields (blue chip HK listed companies bonds with 5-6 year maturities will pay around 2-2.4% - if you are lucky).

In this sort of environment, it is really easy to make a case for putting every spare dollar into equities - on condition that you are prepared to hold for a period of several years if necessary.

As a humorous aside, legislator Chan Kam-lam described the reduction as "outrageous" and urged banks to "take their social responsibilities seriously". All I can say is that this clown has absolutely no clue about anything to do with banking (or any business) and demonstrates why democracy would be bad for Hong Kong.

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