New Zealand's biggest bank paying 3% per annum to investors on its 500 mln euros of covered bonds

New Zealand's biggest bank paying 3% per annum to investors on its 500 mln euros of covered bonds

By Gareth Vaughan

ANZ New Zealand is paying a fixed interest rate or coupon of 3% per annum on its 500 million euros (NZ$864 million) covered bond issue.

The bank's latest General Disclosure Statement (GDS), covering the year to September 30, discloses this interest rate on ANZ's first covered bond issue, made in October to European institutional investors. At the time ANZ said the offer was priced at 95 basis points over the euro interest rate swap rate, but didn't disclose a specific coupon rate for the five-year issue.

BNZ was the first New Zealand bank to issue covered bonds in Europe, in November last year, with its 1 billion euros, seven-year issue priced at 62 basis points over the euro mid swap rate giving it a coupon of 3.125% per annum. Westpac has also issued euro denominated covered bonds, pricing a 1 billion euros five-year issue in June this year - also below ANZ's rate - at 75 basis points over the euro mid-swap rate.

The interest rates the three are paying to investors in covered bonds' key market of Europe emphasizes they are a cheap source of funding for the banks. That said, BNZ chief financial officer Ken Christie told interest.co.nz issuance costs and the cost of converting the covered bond money into New Zealand dollars - from euros to the US dollar and then the kiwi - was not cheap, ultimately adding about 110 basis points of additional funding costs.

Covered bonds are senior debt instruments backed by a dedicated group of home loans assigned to provide security for the debt known as a “cover pool.” Popular in Western Europe, they are usually issued for terms of five to 10 years. The way they're structured means if the issuing bank defaults, the assets in the cover pool are carved off - or ring fenced - from the bank issuer’s other assets solely for the benefit of the covered bondholders.

This ring fencing of a chunk of a bank’s balance sheet is why covered bonds were banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided last December to change the law, and the Australian parents of New Zealand's big four banks are now pushing ahead with their own covered bond issues.

Unlike with residential mortgage backed securities (RMBS), covered bond cashflows are funded by the issuer and not by the cashflows of the mortgage pool. Covered bond investors have dual recourse to the bank and mortgage pool collateral while senior bank bond investors can only claim on the bank, and RMBS investors can only claim on the collateral. Therefore covered bonds typically carry AAA credit ratings.

The Reserve Bank of New Zealand has set a cap that lets banks use up to 10% of their total assets as collateral for covered bonds. Westpac pulled between NZ$60 million and NZ$80 million worth of Christchurch residential mortgages out of the pool used as collateral against its inaugural covered bond issue after the devastating February 22 earthquake.

ANZ NZ dividend down; September quarter lending contracts, profit surges

Meanwhile, ANZ's GDS shows the bank paid its Australian parent dividends totaling NZ$421 million in the year to September, a period in which it produced record annual net profit after tax of NZ$1.085 billion. The dividend payments were down from NZ$492 million in the year to September 2010 and NZ$1 billion in 2009.

The GDS again shows a shrinking loan book at the country's biggest bank, with gross loans and advances down NZ$1.012 billion in the three months to September 30 to NZ$94.927 billion. Term deposits also fell, by NZ$1.498 billion, to NZ$33.799 billion.

However, the bank, which includes the ANZ and National banks, finance company UDC Finance and fund manager OnePath, recorded a NZ$103 million, or 42%, jump in September quarter profit to NZ$350 million as operating income rose NZ$104 million, or 13%, to NZ$926 million and operating expenses fell NZ$44 million, or 10%, to NZ$384 million. Net interest income dropped NZ$78 million, or 10%, to NZ$666 million.

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What is this article suggesting, just because the banks are issuing at less than 1% over euro mid, that they're raising funds at 3% odd ?

Strongly doubt it as rightly they won't be taking any currency risk - they will be swapping the eeuro back for Kiwi and paying less than 1% on NZD base interest rates

Grant A, read on. Here's the 4th!!! paragraph repeated below:

"The interest rates the three are paying to investors in covered bonds' key market of Europe emphasizes they are a cheap source of funding for the banks. That said, BNZ chief financial officer Ken Christie told interest.co.nz issuance costs and the cost of converting the covered bond money into New Zealand dollars - from euros to the US dollar and then the kiwi - was not cheap, ultimately adding about 110 basis points of additional funding costs."