Westpac NZ five-year bond pricing doesn't look too attractive for retail investors

Westpac NZ five-year bond pricing doesn't look too attractive for retail investors

Westpac New Zealand has launched a five-year bond offer that's likely to pay investors about 3.73% per annum.

The issue, of fixed-rate, senior, unsecured and unsubordinated bonds, targets retail and institutional investors with a minimum bond application and holding amount of $5,000.

The bonds will be priced on Wednesday, with the interest rate set at between 0.95% to 1% per annum over the five-year swap rate. Based on Monday's swap rate of 2.73%, that means an interest rate of about 3.73% per annum for investors.

Westpac's own five-year term deposit rate is currently 4.10%.

Westpac is looking to borrow NZ$100 million, potentially plus unlimited over-subscriptions. The money raised will be used for general corporate purposes, including making loans available to Westpac NZ’s customers, the bank says.

The bonds are due to be issued this Friday.

Westpac's Product Disclosure Statement is here.

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Little wonder Banks and achieving record profits

Back in the day investors ( savers) were happy to get a return of Inflation plus a 1/3 rd , so if inflation was 6% you would expect 8% for short -term savings and the Banks would lend at 11%

Now Banks borrow at 3.73 % and lend at 10 to 15 % on credit cards , vehicle and asset finance , etc .

And QE has made this possible

Boatman, I guess if someone is willing to receive 3.73% then more fool them. Surely the days are running short as to these retail rates continuing. I would have thought a rate starting with a 4 was a good start for investors. In January I took out a TD @ 4.27% with interest paid monthly which I reinvest - Rabobank. Since then, rates have dropped slightly.

Why would an NZ retail investor, with less than say $5m, choose this 5yr bond over deposit if it is going to cost them 48pts?
Because it can be sold later whereas a term depo is 'unbreakable'?

Liquidity and credit risk.

liquidity and credit risk better from bank's point of view ? Sorry; i don't understand these jargons . Thanks

Bonds should be more liquid than TDs as TD are generally 'unbreakable' (some hardship exceptions may apply) whereas you should be able to sell a bond before maturity date.

In terms of credit, my understanding is that a TD is less risky than bank bonds and, therefore, all things being equal should have a lower rather than higher interest rate.

I can only think that these are priced lower than TD because liquidity factor is worth more credit factor, or there is something else at play such as these are available to non-residents vs TDs are only available in NZ

Liquidity, agree as per my statement re resale vs being unbreakable, makes some sense.
Credit, I don't think so. My understanding is that, in case of default, TDs rank higher than bonds (bonds defaulted on first)

I'm sorry but this is ringing alarm bells with me. Is this bank in trouble? Issuing bonds to raise much needed capital and to possibly offset some bad loans that have recently begun to surface both within Westpac Australia and it's New Zealand subsidary has me worried. Westpac is being dragged through the coals in
australia right now with a big enquiry going on to the size of their "interest only" loans. Investors and Buyers of these bonds need to be aware! In the euro zone, Deutsche Bank started offering bonds called "CoCo Bonds" to also raise money to stay solvent. These CoCo bonds are called "Collateral Contingency" bonds. Go figure because the name means exactly that. These will be used as a contingency bail-in if the bank ends up in trouble.

I have similar thoughts, although I suspect it relates to this:
Reserve Bank slams Westpac over 'serious non-compliance' with risk rules.

Loose calculations suggest to me that they could be carrying anywhere between $2.5 billion to $10 billion in additional risk that wasn't properly accounted for in their unapproved models.

Alas, I am only speculating that any of this is relevant, however, this type of event fits in with a lot of my modelling, which is largely based on thematic analysis of historical patterns associated with economic agents.

Essential reading:
Banking crises in New Zealand – an historical perspective

I had the opposite reaction to this - that our banks must be in good shape to be able to issue bonds at such low rates. I don't think a small bond issue such as this is should be alarming.

Maybe the make up of their capital is such that they can can re-balance a portion of their balance sheet to bonds and away from more expensive TDs? Or more likely it is to increase reserves to meet this mandate from RBNZ after their internal models were found lacking:
https://www.rbnz.govt.nz/news/2017/11/westpac-capital-requirements-incre...
"The Reserve Bank has decided that Westpac’s conditions of registration should be amended to increase its minimum capital levels until the shortcomings and non-compliance identified in the independent report have been remedied. Westpac’s minimum capital ratio requirements will be 6.5 percent for Common Equity Tier 1 capital, 8 percent for Tier 1 capital and 10 percent for Total capital, with the additional 2.5 percent capital conservation buffer applying. Currently, for all other locally incorporated banks capital ratios are set at, respectively, 4.5 percent, 6 percent and 8 percent, plus the 2.5 percent buffer."

No good for wetpatch, but not too alarming. A bean counter or two will be getting a arse kicking there and they will be back to internal model and longer reserve requirements before too long.

Perhaps you could do a nice wee "explainer", detailing the various capital tiers, instrument types, degrees of subordination, that sort of thing.

And what happens to who, in what order, should it all turn to custard. Who gets baile in, and who gets bailed out. . .

Brian Gould says...

"Secondly, I said the vast majority of new money in circulation is created by the banks "by the stroke of a pen", and they then make their profits by charging interest on the money they create."

So, why did westpac bother issuing bonds if they can create the money with 'a stroke of the pen'?