Faced with a slower-growing mortgage market, banks are upping the competition to attract more household deposits, hence putting their profit margins at risk.

“The competition in the mortgage market at the moment is pretty high and overall the growth is slowing down a little bit,” said Fred Ohlsson, ANZ’s group executive for Australia. “I think the competition for deposits we’ve seen in the last couple of months is also intensifying.”

In the past, savers were only being paid interest rates of about 2.5 per cent through term deposit specials, but recent months saw banks sweetening their offers for savers, with some interest rates even rising slightly. Just last month, ANZ, the National Australia Bank, and the Commonwealth Bank raised their headline rates for some savings accounts.

While this is great news for long-term savers, it is less welcome for bank shareholders as it is occurring at the same time that banks are also competing aggressively for home loan customers. These two trends are likely to put pressure on lenders’ profit margins.

Banks’ net interest margins--the difference between interest rates on loans and their funding costs--are a key driver of profitability. But some analysts predict that they will be crunched in the current low interest rate environment as borrowers repay loans more quickly.

The stiff competition is reflected in the mortgage market, as the National Australia Bank cut a group of fixed-rate loans this week following ANZ’s move early this month to extend a special in its two-year fixed rates.

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