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CFO Spotlight: Outlook positive for bank deposits despite Budget discipline

In a previous blog, I discussed whether the normalisation of broad money supply growth rates (essentially bank deposits and cash) post the pandemic expansion, would put pressure on bank deposit margins in the future (I argued it would). Figure 1 shows that hypothesis is indeed playing out as deposit costs have increased since the blog (the orange bars to the right of the black dotted line). I wanted to revisit this point given the added context of both the recent March 2024 GDP and Budget releases to assess how broad money, and therefore deposit funding and costs, could evolve as that is an important input into financial budgeting and forecasting for bank finance teams.

The approach I used was to start with the relationship between the change in broad money and national saving. From Figure 2 you can see that while not perfect, given not all national saving finds its way into a bank (e.g., saving could be used to purchase non-deposit assets like bonds), there is a directional correlation between the two.

It follows that if we can gauge the future path of national saving, then it will give us a directional view of broad money and bank deposits.

Though it is a simplified approach with limitations, we can use national accounts identities to estimate saving. In this model, national saving is a function of investment in the economy (I), the net government saving position (G-T), and the external balance (X-M). Using National Accounts Income and Expenditure data from Statistics NZ and projecting forward using forecasts from the Budget Economic and Fiscal Update (BEFU) 20241, we can get a sense of how each of these drivers will shape saving in the future.

Figure 3 highlights an improving external deficit position (X-M) as export growth is forecast to average 4.0% in real terms over the five years to 2028 relative to imports at 0.8%. Investment spending (I) is also forecast to average 1.2% in real terms including a decline of 5.6% in 2024 but is expected to recover to peak at 6.1% in real terms in 2026. These trends combined will improve the saving position.

Offsetting these positive drivers of saving is the forecast fiscal position. As Figure 4 illustrates, after a significant expansionary fiscal policy in response to COVID-19 (correlating with an increase in national saving and broad money), OBEGAL (effectively crown revenue less expenditure) is forecast to move into surplus by 2028.

We can use these forecasts to derive an estimate of national saving out to 2028. A caveat to the analysis is that the results will be imperfect as tax and macro forecast data is based on a June year end from the BEFU, while national accounts data is based on a March year end and is not reconciled to the BEFU. With those limitations in mind, Figure 5 indicates that despite contractionary fiscal policy settings, the overall impact is for national saving to revert towards pre-pandemic levels. This is driven by net exports in 2025 and investment spending in 2026-2028.

graphs-blog post

Given the relationship to broad money, should this forecast eventuate, we can expect deposit growth to also increase. But it is unlikely that an increase in the supply of deposits will translate into an easing of deposit costs given the expansion of credit through growing investment and exports will require a corresponding increase in stable deposits to ensure regulatory and risk settings are met.

The opportunity for banks is to take a strategic approach to deploying the injection of deposit funding as efficiently as possible and to work alongside equity capital providers to deliver much-needed infrastructure investment and productivity improvement opportunities that drive economic growth in a sustainable way.

However, if investment takes time to come onstream (as implied from Figure 3), in the interim banks have an opportunity to direct investment instead toward their own productivity improvement through operational excellence, or ’zero-operations‘ and business simplification. Those that execute these areas well will be better positioned and rewarded when lending and deposit activity pick up again by being able to scale growth without scaling complexity and marginal cost.

But as with all forecasting, and given the current domestic and geopolitical context, the macro picture may well evolve quite differently to the assumptions in Figure 3 and Figure 4. And while productivity improvements are table stakes, bank CFO’s are well advised to build alternate funding scenarios into their baseline as well as contingency plans to ensure balance sheet value is protected and appropriate risk and return settings are maintained.


1 Tax data is not part of National Accounting and has been solved using a National Accounts identity and forecasted using BEFU data.