With the money markets remaining volatile, customer deposits are a cheaper and more secure funding alternative for banks and, in a bid to boost their balance sheets, they are competing to lure in new customers by offering attractive interest rates for regular savers, writes Simon Carswell, Finance Correspondent

THE CREDIT crisis may have increased borrowing costs, but it has also driven up savings rates, offering cash-rich depositors attractive products, as banks seek to bolster their balance sheets amid a tougher funding climate.

Banks and building societies have been pushing hard to draw in customer savings as the competition for deposits has intensified.

The high cost of wholesale money makes customer deposits a cheaper and more secure funding alternative while the money markets remain volatile and there is continued uncertainty over how long the credit crunch will last.

Irish Banking Federation chief executive Pat Farrell told an Oireachtas committee this week that customer deposits accounted for 50 per cent of Irish bank funding and that banks were "keen" to attract more deposits in light of the inactivity and higher costs in the interbank funding market.

Derek Keogh, head of personal savings in Ireland at Anglo Irish Bank, says demand for deposits has been driven by the crisis. "Banks have been refocusing their funding mix as avenues of funding have closed."

Greg McAweeney, general manager of online bank RaboDirect, says: "From a consumer perspective it's clearly good news on the deposit side as banks compete for funding."

Financial institutions have raised deposit rates to attract funding from savers with so-called "sticky" deposits that are unlikely to be withdrawn in the short term.

Accounts for regular savings, rather than lump-sum deposits that cannot be touched for a period of time, offer the best interest rates for flush customers.

Several financial institutions, including Irish Nationwide, AIB and First Active, are offering savings rates of 7 per cent and higher, though there are varying conditions on their offers. Reading the small print is crucial in each case.

"The thing that deposit customers need to keep an eagle eye on is the restrictions on deposit products," says McAweeney.

"It might seem like a good idea now to go with an account that restricts access but as we get into choppy waters you might need access to your savings to cope with the unexpected. Some of the products out there will let you access your money but at a cost and it usually means that you won't get the interest you hoped for."

Irish Nationwide offers an attractive rate of 7.35 per cent for savers willing to set aside up to €1,000 a month, though depositors can only make two withdrawals a year without incurring a penalty and cannot miss any of their monthly instalments.

AIB pays a rate of 7.3 per cent on savings of up to €300 a month, offers unrestricted access and allows savers to miss as many monthly payments as they wish, though they must be customers of the bank to avail of the offer.

First Active and Halifax offer rates of more than 5 per cent on day-to-day deposits, but the rates fall depending on the balance. First Active's 5.22 per cent rate falls to 4.33 per cent if the balance rises over €15,000, so savers must watch that interest payments don't push the balance above this figure.

Banks with lower operating costs tend to pay higher interest rates, as they can afford to.

Northern Rock, which has no Irish branch network and relies on internet, postal and phone contact with customers, pays 5 per cent on account balances up to €3 million from a minimum of €1,000, while RaboDirect offers a 4.3 per cent rate on all balances up to €1 million from a minimum of just €1.

Irish depositors, who are among the best savers in Europe, have been slow to shop around and move to higher interest-paying accounts. Central Bank statistics show that in March €39.7 billion worth of retail deposits - or 60 per cent of Irish savings - was in overnight and demand accounts that paid interest of just 1.4 per cent. This is an improvement on last year, when deposits of €36 billion earned a paltry 1.05 per cent in interest. Depositors could be earning much more.

"Irish savers are losing €1 billion every year by having funds in low interest rate accounts," says Derek Keogh at Anglo.

McAweeney says that, since the crisis at Northern Rock, depositors have become more willing to spread their money around to protect their savings.

This, combined with the need for more customer funding, has led to greater competition in the €166 billion deposit market, 75 per cent of which is controlled by AIB, Bank of Ireland, Irish Life Permanent and Anglo Irish Bank, according to Goodbody Stockbrokers.

This week, RaboDirect launched a new savings product for business which offers a rate of 4 per cent on a demand account, while Anglo launched a new investment product where a third of an investor's money will go into a one-year deposit account paying annual interest at 8 per cent and the remainder is placed in an account for three years and 11 months for investments in commodities, equities, foreign exchange and property.

Irish Life Permanent, which has been outstripped by rivals in the deposit market in recent months, says it will unveil new products in the coming days to "reposition" itself.

Goodbody analyst Anna Lalor says that, for banks, deposits are "relatively cheaper" than the funding markets and in the current climate investors will want to see higher levels of deposits on bank balance sheets. She says the multiple of deposits to the market capitalisation of banks, a key indicator to gauge liquidity, will increase in the long term as a result of the turmoil. "If banks have a big deposit base, they will be regarded as less risky in a liquidity crisis," she says.

The Irish Financial Services Regulatory Authority is also watching the sector to ensure banks are passing on higher interest rates to savers as well as to borrowers.

Addressing the Oireachtas committee on economic and regulatory affairs last month, Mary O'Dea, the regulator's consumer director, said: "The cost of funding for banks has gone up and, inevitably, that has been passed on to consumers. Something we will consider closely, as we did when we were first established, is to ensure the increase is passed on to the depositor side as well. There should be a gain for deposits where borrowers are paying more."

McAweeney warns savers to scrutinise deals to ensure deposit rates do not fall when the promotional period on an account ends.

"Banks are masters at developing products to seduce you into opening an account but, when the honeymoon is over, the bank ends up with a fat margin at the consumer's expense."