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ANZ NZ CEO David Hisco hits out at rival banks offering home loans for 5% deposits; questions whether it's the right thing to do or a good use of funds

Posted in Property

By Gareth Vaughan

Lending customers as much as 95% of the money they need to buy a house may not be the right thing to do and isn't the best use of funds by a bank in a world where banks are paying more for the money they borrow to on-lend to customers, says the boss of New Zealand's biggest bank.

ANZ New Zealand CEO David Hisco told interest.co.nz he was happy to let rivals - ASB, BNZ and Westpac - chase residential mortgage business at the top of the loan-to-valuation (LVR) ratio scale. Figures from the big banks' General Disclosure Statements (GDS) show ASB, BNZ and Westpac growing home loans with LVRs above 90% and ANZ's contracting. This is happening in a housing market where overall lending growth in the year to January, according to the Reserve Bank, was just 1.2% versus highs above 17% in 2004 and double digit growth as recently as April 2008.

"At the end of the day you’d have to ask yourself really whether if somebody has only got a 5% deposit that it’s a good thing to actually put them into a home loan," said Hisco.

"So I think there’s a debate there around what’s the right thing to do," Hisco added.

"And in any case home loans around that level attract an awful lot of capital. So it’s not really a sensible thing to do, from a capital usage perspective when funding costs are going up, to use funding on the least profitable business when you’ve got a question around whether it’s the right thing to do anyway."

"We’re taking a cautious approach to home loans in that 95% range. We’re probably happy to leave those to others if they’re keen for that sort of risk."

Cost of money up

ANZ NZ's chief financial officer Nick Freeman said the cost of securing overseas wholesale funding for banks is up about 50 basis points year-on-year, with five-year funding costing about 210 to 220 basis points over swap rates, including the cost of converting the money into New Zealand dollars.

ANZ's December quarter GDS - including the National Bank - shows its residential mortgages with LVRs above 90% down NZ$255 million over the three months to NZ$4.6 billion. In contrast, BNZ's rose NZ$79 million to NZ$2.3 billion and ASB's surged by NZ$490 million to NZ$3.923 billion.

Last month ASB CEO Barbara Chapman told interest.co.nz high LVR residential mortgage lending involved some very high quality customers, notably first home buyers, but was something ASB watched closely. Westpac, which is running billboard advertisements in Auckland promoting home loans from as little as a 5% deposit, increased its residential mortgages with LVRs above 90% by NZ$95 million to NZ$3.4 billion in the December quarter, meaning 8% of its total home loans are on LVRs above 90%.

BNZ's home loans at above 90% LVRs are also at 8% of its total residential mortgage book and ASB's 9.2%. ANZ's are 8%.

In the 80% to 89% LVR range ANZ grew by NZ$163 million in the December quarter to NZ$7.2 billion, meaning it has NZ$11.8 billion, or 21%, of its NZ$57.2 billion worth of home loans at LVRs above 80%. ASB has NZ$8.3 billion, or 19.5%, BNZ has NZ$4.2 billion, or 14%, and Westpac had NZ$9.2 billion, or 22%.

At December 31 Kiwibank had NZ$2 billion, or 18%, of its NZ$11.2 billion worth of home loans at LVRs above 80%. The state owned bank's home loans with LVRs above 90% fell NZ$37 million in the December quarter to NZ$428 million.

'No out of cycle floating mortgage rate hike coming in NZ'

In Australia, ANZ NZ's parent now reviews housing and small business floating interest rates monthly, on the second Friday of the month, independent of the Reserve Bank of Australia's Official Cash Rate (OCR) announcements, which happen on the first Tuesday of every month. Subsequently in February the ANZ Banking Group led an out of cycle hike to floating mortgage rates by Australian banks, who blamed an increase in their own funding costs, despite the Reserve Bank of Australia leaving the OCR at 4.25%.

Asked whether ANZ was likely to mirror either of these moves in New Zealand, Hisco said not at this point.

"Our funding profile is different to our business in Australia (where a big switch from floating mortgages to fixed ones hasn't happened because most customers are already floating and where lending growth has been stronger)," said Hisco. "We don’t have any plans, you never say never in what we might be doing in two years time, but I can’t see, certainly in the foreseeable future, needing to do that here."

Hisco is the second big New Zealand bank CEO to effectively rule out an out of cycle rate hike, - for now. Earlier this month Chapman told interest.co.nz an out of cycle floating rate hike was "not on our (ASB's) horizon." The banks have recently been lowering their fixed-term mortgage rates with some for six month and one-year terms now lower than their advertised floating rates. See all bank advertised home loan rates here.

IT move to one platform running late but initial target was 'reasonably unrealistic'

Meanwhile, Hisco acknowledged the move to get ANZ and National Bank staff onto one IT platform, eight years after ANZ bought the National Bank from Britain's Lloyds TSB, was running behind the initial schedule. ANZ said in November 2010 the move, effectively shutting down the ANZ IT platform and adopting the National Bank’s Systematics core banking system, should be completed by late 2011. Now ANZ's targeting completion by the end of 2012.

"That’ll get it done in under two years and these things generally take two to two and a half years," Hisco said. "We needed to mobilise a whole lot of people around getting active and thinking about it so we put a reasonably unrealistic time line on it (initially) to get people moving. But if we get it in by the end of this year, I’d be very happy because it would be done faster than most."

ANZ's 2011 annual results included costs related to the IT project of NZ$111 million. The bank's latest GDS notes the board has approved additional expenditure of about NZ$110 million for completion of the programme, to cover technology and related costs, with testing and integration expected to be completed later this calendar year.

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24 Comments

Well I had a go at reading

Well I had a go at reading through it all but gave up..so can anyone say whether Hisco made the point that the reason his rivals are churning out the credit at LVRs pushing 100% is all about keeping the property bubble intact?...well has he?
It must have been years ago when I made the point that if we had a govt and an RBNZ that were not both puppets to the banks...then we would have had LVR barriers by way of legislation....an easy thing to do....fat chance right.
So the only conclusion to come to is that NZ is owned by the banks and they dictate monetary and fiscal policy to whichever bunch of fatheads happen to have snouts in the pig trough.

Yes he did Wolly, you should

Yes he did Wolly, you should have read it.  He also promised free ice cream on mondays, and magical unicorn rides for children under ten.

It's a bit of a worry when

It's a bit of a worry when the banks sound more responsible than the government.  It underscores the probability that they are calling the shots as you suggest Wolly.

Dont Kiwi's just  love this

Dont Kiwi's just  love this easy credit cheap money drug ?  There is no doubt the lending at 95% LTVR is keeping the Auckland market artificailly bouyant . There will be tears yet over this . 

Is the 95% available just in

Is the 95% available just in Auckland though, or anywhere else in the country?

Looks like you've added 1 and

Looks like you've added 1 and 1 and come up with 11.
NZ banks don't fund at 2%.  Try looking at term deposit rates if you want an indicaion of what the cost is. Where do you think the majority of the funding for these loans comes from?
Even the offshore wholesale borrowing is a lot more expensive than 2% when converted into NZD. Just read interest.co.nz

Well ok, here is an ANZ bond

Well ok, here is an ANZ bond maturing in 2014, so let's call that 2year wholesale funding
https://www.nzx.com/markets/NZDX/bonds/ANB080
It currently yields 4.48%.
According to their website an ANZ 2yr term deposit pays 4.75%
So their cost to fund for 2 years is going to be somewhere around 4.5%
Again, according to the website their 2 year mortgage rate is 5.79%
So their interest margin for 2 year money is somewhere around 1.3%
It would be higher for floating, but even their on-call savings account pays 4.5% versus a floating rate mortgage of 5.74%
So still a hefty margin for sure  but not as completely outrageous as some would say. But when you apply 1-2% on billions of $ of assets you end up with many millions of $ of profit.

Is it relevant that the banks

Is it relevant that the banks borrowing costs are rising, and floating rates are slowly shifting into the belly of the curve?

Kind of a curious headline,

Kind of a curious headline, when the actual numbers you report show that ANZ has a larger portfolio of loans above 90% LVR than any of its competitors.

The point is Mark, ANZ's home

The point is Mark, ANZ's home loans in the above 90% LVR category are falling in value and the others are growing. Remember ANZ includes the National Bank so it is much bigger than any of its rivals.

LVR's between 80% - 89% grew

LVR's between 80% - 89% grew though.  They still have the highest value and percentage of LVR's above 80%.  Question is, are they getting worried?

Sure, I understand that point

Sure, I understand that point and I'm sure they're to be commended for the trend. It just seems a little rich to be 'hitting out' at others when at least in the past it looks like they have been as big a part of the problem as everyone else.

Sure, but keep in mind that

Sure, but keep in mind that David Hisco has only been ANZ NZ's CEO since September 2010 so we can't attribute the bank's lending policies prior to then to him.

The RBNZ should ban any loans

The RBNZ should ban any loans higher than 90% LVR, it's their job to make the banking system safer, and after what's happened to so many banks around the world, you can't say it doens't need it.

Banks should lend any ratio

Banks should lend any ratio of LVR they wish with one explicit condition :
 
There will be NO Guarantee that the Goverment will intervene if they become insolvent .....(unfortunately this is seldom the case as seen in the last GFC)
 
The Goverment should therefore regularly (maybe every month?) highlight Each Bank's   LVR and compared it with their equity base.....and maybe even the for the sake of the brain dead...highlight a ranking system in terms of safety....Perhaps Bernard could do the "public service" ?
 
In this way the Goverment can really wash their hands off any future Banking crisis (which will surely come as night and day). 
 
The problem ALL goverment faces if that there is a "Perceived" acceptance that Goverment WILL intervene whenever there is a Banking Crisis (even with explicit statement that they will not).
 
This "perception" must be killed and permanently abolished in the minds of ALL the electrorate.
 
 

Here here !!!!!!!!! One can

Here here !!!!!!!!!
One can only assume LOGICALLY the Government is controlled by banks if it does not do as you suggest or very similar.
Split the banks up into the safe part, with LVR's at 70% max and the risky part (which WONT be covered by any Government rescue) for greater than 70% LVR.
People are getting so used to 90% LVR's, when not so long ago, when banking collapses weren't as common as today, an LVR of 80% was considered risky and a PREMIUM was charged for insurance cover for any part above that.
 
 

@ Factboy  - a very sensible

@ Factboy  - a very sensible plan to split the banks into different categories of risk so innocent depositors do not wear the losses of  those speculating with 5 percent down, when and if one folds.
 
It seems absolutely ridiculous to extend credit beyond  5-10% down to anything or body for the purchase of assets other than government debt liabilities.
 
On a slightly different topic more appropriate to posts higher up, banks do have extra costs in terms of capital adequacy requirements for each mortgage they write: The RBNZ regulatory rules in respect of this area of concern can be viewed in section 36, page 22 here.
 
 

Once there is transparency in

Once there is transparency in the Bank's risk ration, there is no need to split banks or impose any LVR on their lendings.
 
The main problem is always depositors wanting to maximise returns and ignore risk with the perception that Goverment will always bailout the banks. Prior to the GFC, Deposit Taking Companies (ie Finance Companies) were paying twice as much as Banks, depositors flock to it with the assumption that Goverment will bailout their losses ...which it eventually did, although later than some had hoped. 
 
If the risk index of each bank is know then depositor will follow accordingly and realise that higher interest means higher risk. This will increase the cost of risk to banks and the market will price loan to borrowers accordingly.
 
The problem of course is made difficult with Central Bankers acting as final arbiters of interest rates via OCR, lender of last resort  etc. etc. CB should only be limited to regulatory functions of satutory limits to lendings and finance Banks cashflow only with good securities and at high punitive rates (aka Begahot Rule) 

Banks should be allowed to

Banks should be allowed to loan at whatever level they like, 100% if they wish.
If there are those out there stupid enough to sign up for these mortgages, so be it. Let the market do its thing.
Cheap money is not a significant factor in keeping the Auckland market artificially bouyant, simply supply/ demand is doing that.
Too much theory and not enough real world experience!
 

If a borrower can comfortably

If a borrower can comfortably service a loan then who cares what the lvr s? Someone on 80k can service 300k at any lvr.

No they

No they can't..................I could be a darn sight more to the point, but I'm being polte.
 
Where's your proof or justification?
So you're saying there is NO interest rate, that someone earning $80K per year (BEFORE tax) can not pay, let alone comfortably pay. REALLY !!!
I think generalised comments like this should need to have a tad more thought.
e.g. Something like...............Upto interest rates of    X% someone on $80K per year can afford a $300K mortgage and this interest rates is unlike to be achieved in the fore seeable future........................etc etc.
Banks recently worked on about $7 per month, per $1,000 of loan, as monthly interest, on a long'ish term predicted interest rate. So $300K would assume $2,100 pcm interest. This figure shouldn't be more than 30% of a persons take home pay to be considered SAFE. Beyond which insurance used to eb taken.
So take home pay on $80K would be about $4,500 pcm depending on Kiwisaver etc etc. 30% of that is $1,350. Divide by 7 and you get about $200K. Which is about two and a half times Gross income.
Two and half times gross salary was a LONG term multiplier used by banks and upto three and a half times for a 'good customers' (i.e. they showed they could save over a few years, with that bank. Could put a 20% deposit down from THEIR proven savings). Had good work prospects (i.e. their salary will rise more than inflation) etc etc.
Now theses were the boring old days. But then again banking collapses and Government bailouts didn't happen as often either.
 
 

What I meant really was that

What I meant really was that as long as a couple can comfortably service their loan [sure serviceability may change with interest rates] and stay living in their home then the LVR is no big deal.  If the couple have career level jobs then salary improvements & inflation will take care of most issues around LVR & serviceability.
Times have changed, and the milestones of adulthood are getting later -  e.g. age of getting married(or living together), first child, first career job, leaving home for good, are all getting pushed out further into late 20s & 30s.  So banks are really just meeting this market change.
Sure, "in our day" we got our first real job at 20, saved, took packed lunches, then had a 20% deposit and got our $60k loan at 21% but maybe times have changed. This next generation typically don't get their careers kick started til 26 with a student debt of 40k+, have high rents/utilities, have more consumables, have been leaning on parents longer, etc.  When they do get organised they may as well jump in & buy a house rather than waiting 7 more years which just pushes their 'lateness' even later.
Interesting, your 'rules of thumb'  - maybe they should be out on the mortgage calculators as well!