By Gareth Vaughan
Westpac, which is growing lending faster than its big three rivals, says its growth is high quality and margins are improving, meaning it's not buying market share.
George Frazis, Westpac's CEO, told interest.co.nz that one aspect of lending while the economy was battling to recover was that you were supporting the recovery.
"It's actually the right time to be growing (lending) in a down market because cash flows are known, values are down so it's not as if there's any inflation of value," said Frazis.
"So when you've got a solid business, a solid proposition by a personal customer, you know that's a bankable proposition. So it's all about being open for business and that's what we've been."
Westpac, which released its September year results yesterday showing cash earnings up 36% to NZ$322 million and impairments down 39% to NZ$347 million, said it had grown business lending by 2.8%, with net growth of NZ$300 million to NZ$14.3 billion, in a market that experienced a systems decline of 4.6%. It said it increased agricultural lending by 7% versus total market growth of 1.8%, and its home lending grew by 5.6%, with net growth of NZ$1.9 billion to NZ$33.9 billion, versus market wide growth of 2.5%.
Based on all the banks most recent General Disclosure Statements, for the June quarter, Westpac lent more fresh money for residential mortgages than ASB, ANZ, BNZ or Kiwibank. Westpac's mortgage book grew by NZ$365 million in the three months to June with Kiwibank second at NZ$307 million.
And Frazis said the new business was good quality. Based on a loan to value ratio (LVR), just 1% of mortgages were above 90% compared to between 5% and 10% in the past. About 15% of home loans had LVRs above 80%.
He said the bank's funding position was also strong with its core funding ratio already sitting above 75%. The Reserve Bank stipulates banks must secure at least 65% of their funding from retail sources or bonds of more than 12 month duration and plans to lift that to 75% by mid 2012.
Meanwhile, Frazis said Westpac's lending growth was "not about buying market share" noting the bank's net interest margins rose in the second-half year to 2.16% from 2.07% in the first-half. They are, however, still down from 2.22% in the second-half of last year. And last week KPMG's June quarter Financial Institutions Performance Survey showed Westpac's interest margins down 6 basis points in the six months to June, making it the only one of the big four banks to record a fall.
Lending growth across the board
Frazis said Westpac was growing lending across all regions and all products.
"We are under weight in agriculture so that's why we're been growing stronger in agriculture, we've continued to reduce our exposure to property and we're increasing our exposure, both in home lending across the board, and in the SME segment across the board," said Frazis.
He expected similar low levels of systems lending growth to continue until a pick up in the second half of the 2010-2011 financial year.
"What will happen is home lending may improve somewhat, but not a huge amount. Business lending is what's going to recover somewhat but that is likely to come in the second half."
Westpac expects 2% Gross Domestic Product growth this year and 4% next year, weighted towards the second-half.
Covered bonds close
Meanwhile, Westpac CFO Richard Jamieson said the bank was aiming to issue covered bonds in the first-half of 2011, once approval was secured from its New Zealand board. He declined to comment on the size of any programme until then. In June Jamieson told interest.co.nz Westpac was hoping to issue covered bonds before Christmas and it was eyeing both domestic and international institutional investors.
Yesterday, Jamieson noted the Reserve Bank now says banks can issue covered bonds worth up to 10% of their total assets, up from its previous 5% guideline, which in Westpac's case would be NZ$5.12 billion.
Westpac was the first bank to lobby the Reserve Bank and government to allow covered bonds two years ago and Frazis said it supported the central bank's push for a legislative framework to support covered bonds, which it outlined in a recent consultation paper.
"The Reserve Bank of New Zealand should be congratulated on having the foresight to allow covered bonds in this market," Frazis said.
"It is an instrument that during the worst of the (global) financial crisis stood well, they were still available. So (covered bonds) are a good mechanism, well controlled in terms of volumes, to broaden the sources of funds for New Zealand."
Covered bonds are senior debt instruments issued by a bank, usually of five-to-ten year durations, and backed by a dedicated group of home loans known as a “cover pool.” If the issuing bank becomes insolvent, the assets in the cover pool are carved off from the 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 are banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted.
BNZ became the first New Zealand bank to issue covered bonds when it completed a NZ$425 million covered bond issue to domestic institutional investors in June. This was the first step in a NZ$3 billion covered bonds programme. BNZ CEO Andrew Thorburn told interest.co.nz last week his bank was now eyeing up overseas investors, and planned to talk to them about a covered bond issue before Christmas.
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