It has taken two years for the Bank of Scotland, trading under the alphabet soup name of HBOS, to bed down its sometimes troublesome Australian subsidiary, BankWest, but recent events in the market flag the launch of what some observers see as a classic ‘
It has taken two years for the Bank of Scotland, trading under the alphabet soup name of HBOS, to bed down its sometimes troublesome Australian subsidiary, BankWest, but recent events in the market flag the launch of what some observers see as a classic ‘crash, or crash through’ growth effort.
A whiff of what HBOS is up to came in mid-May when BankWest gleefully announced the winning of several banking and finance awards, and reported that its TeleNet Saver product had pulled in 20,000 new customers, with deposits under the name of that product heading for $2 billion.
Other highlights included: that 500 new customers a week were responding to the TeleNet sales pitch; that BankWest’s total deposit book had grown by 30 per cent in six months; and that BankWest’s share of the national bank deposit market had scaled the 3 per cent mark for the first time with the increase from TeleNet lifting BankWest’s share from 2.36 per cent to 3.02 per cent.
It all sounds like terrific stuff, especially when accompanied by research showing that BankWest’s recognition factor in the major banking markets of Sydney and Melbourne has risen from less than 1 per cent a few years ago to between 12 per cent and 15 per cent, thanks to TeleNet.
But, having acknowledged that a substantial new source of money appears to have been tapped, two critical questions ought to be asked. And since BankWest is no longer listed on the stock exchange, and the daily news media no longer follows the company as closely as it used to, Briefcase will do the job.
The first question is, why would 20,000 new customers rush to deposit money with a bank that research shows has a low (but rising) recognition factor? Answer, easy really; because the interest rate on offer is so attractive. How attractive? Well, according to an intensive Briefcase survey of term deposit rates (conducted by walking down a city street), Bankwest’s 12-month variable rate of 6 per cent, with no minimum balance required, is killing similar products from rival banks. In fact, it is about 0.5 of a percentage point better (which really means 9 per cent better) than other term deposits, which require minimum investment of around $10,000 – and so good that the Commonwealth Bank has retaliated with what it calls a “special” 6.1 per cent deposit rate “for a limited time”.
In other words, BankWest is adopting the John Hughes approach to doing a deal. You know the slogan: “I want your business, and I’m prepared to pay for it”.
Another way of describing the situation is that BankWest is buying recognition as it lifts its share of the national deposit market from an ultra-low 2.36 per cent to a slightly less low 3.02 per cent.
The second question is, now that BankWest has got the extra $2 billion (and rising), what’s it going to do with the loot? Answer… lend it as fast as it can because that’s what banks have to do, and why BankWest has just recruited 40 new business managers, mainly for the Sydney and Melbourne market.
It’s this second part of the banking equation which gets seriously interesting because there are certain rules about the cost of money, both as a borrower and a lender (see quote of the week at the foot of this column). In a nutshell, the most general rule is the higher the interest rate, the higher the risk.
In Bankwest’s case there has been a screamingly obvious need to go east and play in the national market, despite several earlier attempts flopping. How else would you explain a “less than 1 per cent recognition factor”? So, HBOS has pulled out the big banking gun and fired a 6 per cent, no minimum balance product, down Pitt and Collin streets, and roped in $2 billion and 20,000 new customers.
Getting that money out is now the job of the 40 new business managers, and they have the job of winning business from BankWest’s rivals - with the critical, and as yet untested question, who will they get, and at what price?
Will BankWest pick up triple-A rated customers prepared to walk away from Westpac, NAB and ANZ? Not easy if you start with a higher average cost of funds. Or will BankWest write its new business in the outer suburbs of Melbourne and Sydney where risk is higher, or with high street shopkeepers already in trouble with their existing bank?
Briefcase wishes BankWest the best of Scottish luck with its TeleNet product and zillion new customers. But there is a queasy feeling that anyone who offers an interest rate above the market, and who chases recognition by paying above the odds, will confront a few nasty credit quality questions further down the track.
On the question of BankWest and its big push to win recognition and business, there is a second product in the market that’s winning the hearts and wallets of credit card users. It’s the Zero MasterCard, which offers 0 per cent on purchases and balance transfers for the first four months, no annual fee, and a very attractive 12.99 per cent “ongoing” interest rate.
From all reports, the mob is rushing to get a slice of the new card, which might also indicate that not too many customers have read the fine print.
While the 0% come-on is undoubtedly clever marketing, and Briefcase can think of a few people who will be lining up for a slice of the action, there is a catch in the card. It’s found in the matter of cash advances, which come at a price of 19.99 per cent.
When Briefcase saw that 19.99 per cent, (let’s call it 20 per cent because who cares about the second decimal point?) it seemed like a ‘back-to-the-future’ experience because the last time an interest rate was that high was in the 1980s.
As with the TeleNet effort, BankWest deserves the best of luck because it has come up with a product that is eye-catching, winning recognition, and causing rival banks to take notice of HBOS as it tries to carve out a national niche.
But, the nagging question of ‘at what price’ remains. It is highly likely that the only people desperate enough to pay 20 per cent on a cash advance are, well, desperate people – and are they really the people a bank wants as customers?
Then again, perhaps this is all about building the book to make BankWest a bigger bank should someone want to buy it from HBOS. Now that’s a deliciously naughty thought.
“Those who lack money when they come to borrow will also lack money when they come to pay.” Oliver Goldsmith, 1762.