Westpac CEO George Frazis explains lending push; congratulates Reserve Bank on covered bonds foresight

Westpac CEO George Frazis explains lending push; congratulates Reserve Bank on covered bonds foresight

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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I have asked Westpac whether they will confirm or deny what Kerry Knight is saying here about the bank lending money, or being prepared to lend money, to Natural Dairy.


It doesn't seem to fit with George Frazis' description of high quality lending growth...

Great...now we know of two banks not to put our savings into.

Always the most insightful and intelligent commentator on this website - do you even know what a covered bond is??

last time I saw you commenting on these things you made out that they were equity...  well that's completely wrong....

They must be getting desperate to get Crafars behind them.  The losses are mounting and the international dairy prices look to be weakening, the NZ$ is going to parity, the bosses in Aussie are saying dump it and dont lose too much then get a job, with someone else, anyone but us.

I had a call from Brendon Gibson of Crafar receivers KordaMentha this morning. He says Westpac isn't lending any money to Natural Dairy. Rather, the receiver is providing a short-term vendor loan.

Hang on, what? So if the Crafar purchase goes through, Kordamentha are on the hook to, I assume, Westpac? How much are the receivers being paid for this little trick? It might shed some light on why they've been so damn keen to push this deal through.....

At best this sounds unethical, at worst possibly illegal? Its becoming very hard to understand why they haven't just said "Roll up, roll up, lets have a damn great auction and get rid of this lot one farm at a time". At least it would be transparent and Westpac could clear up their balance sheet.

Shows how much you know about how receiverships work.  As soon as the receiver takes over they are on the hook for every decision that they make...  they are liable - so of course KM are likely to be providing the funding and wanting to get the deal done as quickly as possible.

That is why, in part, receiverships seem so expensive - if it all goes wrong then the receivers could easily lose money.  I know of a couple of receiverships where that has actually happened - not big deals, but the receiver has still lost money.

before you start sounding off how about you first get schooled in the subject you want to comment on - otherwise you risk coming across as an ignorant fool - not that you would stand out at all on this website....

I didn't realise the RBNZ was in the running for a popularity contest, doesn't anyone get worried when the regulated start congratulating the regulator.

Well the point is that the Banking Act in Australia is unusual because it puts depositors ahead of all other creditors - not exactly the best way to run a bank...

Globally, the Australians are the odd ones out here.  Covered bonds are a common as muck in many countries and the international market is worth well over US$1 trillion.  So this is hardly an innovative finance product that the banks are wanting to use here.

And yes it is kudos to the RB  - covered bonds are long term instruments (5yrs+) which help the banks diversify and lengthen their maturity profiles - so it helps lower the risk to the banking system overall...