We put an age old mantra to the test to find out whether institutions with similar credit ratings offer similar term deposit rates

The more similar the risk, the more similar the return; it’s a pretty reliable mantra when it comes to term deposits right?

Yes - but there are exceptions.

We have looked at the extent to which term deposit rates vary among banks and finance companies with similar credit ratings, following UDC Finance joining a bunch of other New Zealand banks and finance companies at the bottom end of Standard & Poor’s ‘investment grade’ band.

S&P has downgraded UDC’s credit rating by two notches below parent ANZ after the bank announced it agreed to sell the asset and financing company to Chinese behemoth, HNA Group.

With a new rating of BBB, UDC joins the Bank of Baroda, Bank of India, The Cooperative Bank, Heartland Bank, SBS Bank and Liberty, which have ratings between BBB and BBB-.

As the table below shows, all institutions in this category have similar term deposit rates, but there is an outlier - Liberty Financial.

Across the board, rates generally don’t differ by more than around 40 basis points, however the difference can be as large as 190 basis points in Liberty’s case.

for a $25,000 deposit	Rating	3/4 mths	5/6 mths	8/9 mths	1 yr	18 mths	2 yrs	3 yrs
p.a.		%	%	%	%	%	%	%
Bank of Baroda	BBB-	3.10	3.25	3.35	3.40	3.40	3.50	3.50
Bank of India	BBB-	3.10	3.25	3.25	3.50	3.60	3.75	4.00
	BBB	2.95	3.40	3.50	3.50	3.65	3.75	3.85
	BBB	3.10	3.30	3.70	3.40	3.40	3.40	3.70
	BBB	2.75	3.55	3.60	3.60	3.70	3.80	4.00
	BBB	3.40	3.95	4.15	4.65	4.85	5.00	5.40
	BBB	2.95	3.45	3.75	3.80	3.65	3.65	3.60

(Update: This table has been changed to reflect changes by UDC effective 13 January 2017.)

Put in dollar terms, the difference between what you can earn each year above the lowest rate on offer for a certain term, is generally only around $40 for a $25,000 term deposit.  

In Liberty’s case, you can earn up to $342 a year more in interest.

for a $25,000 deposit	Rating	3/4 mths	5/6 mths	8/9 mths	1 yr	18 mths	2 yrs	3 yrs
after-tax variation, annual		$	$	$	$	$	$	$
Bank of Baroda	BBB-	+63	0	+18	0	0	+18	0
Bank of India	BBB-	+63	0	0	+18	+36	+63	+90
	BBB	+36	+27	+45	+18	+45	+63	+63
	BBB	+63	+9	+81	0	0	0	+36
	BBB	0	+54	+63	+36	+54	+72	+90
	BBB	+117	+126	+162	+225	+261	+288	+342
	BBB	+36	+36	+90	+72	+65	+65	+18

We made these calculations using our term deposit calculator, assuming we pay tax of 28%.  

So what’s the moral of story? Deposit takers with similar risk profiles, will in most cases deliver similar returns.

For more on how credit ratings work, see our explainer here.