New Zealand's major banks sitting on NZ$48.5b of cash with no immediate need to raise funds in dicey overseas markets

By Gareth Vaughan

Amid concerns sovereign debt woes in Europe and the United States could push up the cost of New Zealand banks' funding and potentially even lead to credit markets freezing as they did after Lehman Brothers collapsed in 2008, New Zealand's big banks are sitting on more than NZ$48 billion worth of liquid assets and don't have major short-term funding needs.

The latest general disclosure statements from ANZ, ASB, BNZ and Westpac show the four with liquid assets of NZ$18 billion, NZ$10.548 billion, NZ$9.965 billion, and NZ$10.054 billion respectively, as of March 31. Across the four, that's a total of NZ$48.567 billion. State owned Kiwibank, meanwhile, had NZ$2.328 billion worth of liquid assets as of March 31.

Liquid assets include the likes of cash, treasury bills, government securities, residential mortgage backed securities, bank bonds, and call deposits with the Reserve Bank.

The banks' cashed up positions come at a time of weak lending growth with BNZ the only one of the big four to have grown overall lending in the March quarter when its gross loans and advances to customers rose NZ$523 million to NZ$56.172 billion. The latest Reserve Bank sector credit data shows weak lending growth in the three months from March to June. Total household claims (housing and consumer loans) rose NZ$712 million to NZ$184.103 billion, business debt rose just NZ$16 million to NZ$72.348 billion and agriculture debt increased NZ$50 million to NZ$47.251 billion.

BNZ 'very comfortable'

BNZ Treasurer Tim Main told interest.co.nz his bank was feeling "very comfortable at the moment" with its funding and liquidity position.

"We have already completed this year’s term funding requirements of around NZ$3.1 billion and have already pre-funded around NZ$1 billion of next year’s requirement," Main said. "This has in part been assisted by lower asset growth and good deposit growth."

BNZ has been the most active covered bond issuer among the New Zealand banks, having issued about NZ$3.47 billion worth since becoming the first New Zealand bank to issue covered bonds in June last year.

"We are targeting more pre-funding in September, though only a relatively small amount (NZ$500 million). Our next planned major public offshore issue is for November," Main said.

He said BNZ's covered bond exposure was now at around 6% of total assets, which is shy of the Reserve Bank's 10% limit.

"Our plan is to undertake one more public covered bond transaction (probably next year) to take this to around 8%, at which point we will step back from covered bonds and focus back onto senior unsecured funding. Having a 2% buffer on covered bonds will allow for any emergency funding required," Main added.

Despite its lending growth out pacing that of its rivals, BNZ said in its half-year results that one of the main reasons for its flat margins was because the bulk of the NZ$1.75 billion it raised in a European covered bond issue last November was being held in cash and earning lower returns than what it cost the bank to raise the money.

Meanwhile, in the very short-term, Main suggested bank treasurers will watch offshore commercial paper markets very carefully, given this market will reflect immediate concerns in capital markets generally.

"The good news though is that all NZ banks are AA (credit) rated, and if anything, Australian and New Zealand banks are enjoying something of a 'flight to quality'," Main said.

 Kiwibank, after recent overseas commercial paper programme launch, 'well positioned' with  'modest and manageable outstandings'

A spokesman for Kiwibank, which had borrowed NZ$927.275 million through a Euro denominated short-term commercial paper programme set up in November by the end of March, said the bank was well positioned and maintained a strong liquidity position to cope with any dislocation overseas.

"We continue to monitor domestic and offshore funding opportunities. Our short term offshore outstandings are modest and manageable," the Kiwibank spokesman said.

"New Zealand issuers in offshore commercial paper markets are benefiting from the relative strength of the New Zealand economy · In comparison to during the Global Financial Crisis, offshore funding is less of a concern to New Zealand banks due to longer maturity profiles, flat asset growth and improved savings rates."

ASB eyes covered bond issue by year's end

ASB chief financial officer Shayne Bryant said his bank was hoping to get an inaugural covered bond issue away before the end of 2011 and was currently investigating programmes that would allow it to issue covered bonds both domestically and offshore.

Nonetheless Bryant said ASB was very well funded.

 "We remain well above the Reserve Bank’s core funding ratio,' Bryant said. "Further, with forecast deposit growth outstripping forecast lending growth, the need for new additional wholesale funding is not anticipated."

 ANZ, the only other one of the big four yet to issue covered bonds, put its initial issue on ice in June. Nonetheless an ANZ spokeswoman said the bank was "very comfortable" with its funding situation.

 No more 2011 funding planned at Westpac

A Westpac spokesman said his bank didn't currently have any offshore funding, or covered bond issues planned, for the balance of the 2011 financial year.

" We are comfortably positioned, our June covered bond was on top of current needs so we have capacity to sustain substantially long outages in global capital markets," the Westpac spokesman said.

Over the weekend BNZ CEO Andrew Thorburn said Standard & Poor's downgrade of the United States' sovereign credit rating, and turmoil in Europe as market attention moved to Italy's debt, was likely to see the cost of funds for New Zealand banks rise.

36% of the big five's funding from overseas

PricewaterhouseCoopers' Banking Perspectives report, released last week, showed the big four banks plus Kiwibank obtained 36% of their funding from overseas as of the first halves of their current financial years. PwC noted bank customer deposits rose nearly 5% to NZ$174 billion from NZ$166 billion during the period.

"The increasing tenor of the funding book has stabilised in the current period," PwC said, "suggesting that the banks have reached a stage where they are comfortable with their compliance with the Reserve Bank's liquidity requirements as well as their own internal viewpoints of the current risks in the funding markets."

 The auditing firm also noted that the major banks have a buffer of at least 5% over the current 70% core funding ratio.

Introduced in April of last year as a move to reduce New Zealand banks' reliance on short-term overseas borrowing, the core funding ratio sets out that banks must secure at least 70% of their funding from retail deposits or wholesale sources such as bonds with durations of at least one year. The central bank lifted the ratio to 70% from 65% on July 1 and will increase it again, to 75%, on July 1 next year. In a speech over the weekend Reserve Bank Governor Alan Bollard said there could be further "minor developments" to the liquidity policy.

 Taxpayer still on hook for NZ$9 billion of bank wholesale funding

Although no longer party to a Crown retail deposit guarantee, the taxpayer is still guaranteeing NZ$9 billion (as of the most recent Crown financial statements) worth of bank wholesale securities guaranteed through the government's wholesale funding guarantee facility which was in place from November 2008 to April 2010. Treasury has made no provision in the Crown accounts for losses under the scheme believing the probability of loss is  remote.

"At the time of closing the scheme on 30 April 2010, the Crown had issued 24 guarantee certificates; the benefit of those guarantees will remain in place for the underlying securities until the scheduled maturity of those securities. The terms of these securities range from 2 to 5 years. Over time, the value of securities issued with the benefit of Crown guarantees will reduce, with the last guarantee certificate expiring in October 2014," Treasury says.

The guaranteed wholesale securities were issued by ANZ, BNZ, Westpac and Kiwibank. ASB never issued any securities under the scheme. In Australia the major banks, owners of New Zealand's majors, recently stepped up their efforts to buy back tens of billions of dollars worth of Australian government guaranteed wholesale funding as they sought to replace it with cheaper funding. However, the banks here won't be following suit. For whilst their Aussie parents pay monthly fees on all their outstanding guaranteed debt, their subsidiaries here had to pay Treasury fees upfront when each guarantee was granted, and Treasury says they're non-refundable.

The objective of the government's opt-in wholesale funding guarantee was to facilitate access to international financial markets by New Zealand banks at a time when international investors were highly risk averse and where many other governments had offered guarantees on their banks’ wholesale debt.

(Story updated to reflect ANZ has NZ$18 billion of liquid assets, rather than NZ$11.8 billion, when NZ$6.2 billion of residential mortgage backed securities not included in the GDS liquid assets disclosure, are added. This lifts total liquid assets held by the big four banks to NZ$48.567 billion from NZ$42.425 billion).

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