Westpac all set for 5 billion euros (NZ$8.8 billion) covered bonds programme

By Gareth Vaughan

Westpac New Zealand has been given the green light to become the second local bank to issue covered bonds with the first issue in a 5 billion euros (NZ$8.8 billion) programme planned for the first quarter of 2011.

“The (Westpac NZ) board has approved our covered bond programme which is a 5 billion euro programme initially,” Westpac’s chief financial officer Richard Jamieson told interest.co.nz.

Westpac will become just the second New Zealand or Australian bank to issue covered bonds after BNZ launched a NZ$3 billion programme in June, which it is now considering more than doubling.

Covered bonds are senior debt instruments backed by a dedicated group of home loans known as a “cover pool.” So if the issuing bank defaults, the assets in the cover pool are carved off from the issuer’s other assets solely for the benefit of the covered bondholders. The Reserve Bank says it’s comfortable with banks issuing covered bonds worth up to 10% of their total assets, based on the value of assets securitised.

Westpac's total assets stood at NZ$55.2 billion at September 30, meaning currently it could issue covered bonds worth up to NZ$5.52 billion. The bank says it has no plans to go beyond the Reserve Bank's 10% threshold, with the covered bonds programme taking place over several years during which it hopes to grow its total assets.

The Reserve Bank also says it wants a law passed to enable banks to issue bonds backed by legislation to help attract overseas investors. The central bank says covered bonds will lengthen the term structures of banks’ funding given they’re normally issued for between five and 10 years, diversify funding and provide access to relatively cheap long-term money.

However the Australian Prudential Regulation Authority, which supervises the Australian parents of New Zealand’s big four banks – ANZ, ASB, BNZ and Westpac, doesn’t allow covered bonds because in the event of a default by the bank issuer, depositors’ claims are diluted.

Jamieson said Westpac was targeting its first issue in the covered bond programme, which is likely to seek about 1 billion euros, for the first quarter of 2011. Bank staff would undertake a roadshow meeting potential European investors in January.

There could be domestic issues down the line but the initial target for Westpac was the European market, the world’s biggest and most developed covered bonds market. Jamieson said Westpac was looking at covered bonds as a relatively cheap form of funding to help diversify its funding base in a market (the covered bond market) that had “proven itself through the Global Financial Crisis.”

The term of the initial offer was yet to be determined.

“BNZ’s deal was seven years, it priced reasonably well (at a spread of 62 basis points per annum over the Euro mid swap rate). It depends on the market whether three, five or seven’s more appropriate. We’ll judge it on the way the market is in January and February," said Jamieson.

Separately, he said the bank’s board had also approved the lifting of its minimum Tier One Capital ratio buffer from 6.75% to 8.5% ahead of the introduction over the next few years of the so-called Basel III global banking regulatory reforms. As of September 30 Westpac’s ratio was sitting at 9.9%, well above the Reserve Bank’s 6% minimum.

Meanwhile, the bank’s September quarter General Disclosure Statement shows Westpac grew term housing loans by NZ$268 million to NZ$34.24 billion in the quarter. Jamieson said Westpac had recorded “quite pleasing” growth in housing, lifting its marketshare to 20.2% from 19.6% in the year to September 30.

The bank increased non-housing term loans by NZ$66 million to NZ$13.38 billion in the quarter, and total gross loans by NZ$378 million to NZ$50.76 billion.

Westpac’s term deposits rose NZ$308 million to NZ$17.77 billion. Jamieson said the bank grew its share of the overall deposits market to 19.6% from 19.2% over the year.