ASB grows home loans by NZ$791 mln in March quarter with 71% of growth in loans where borrower has less than 20% equity

ASB grows home loans by NZ$791 mln in March quarter with 71% of growth in loans where borrower has less than 20% equity

By Gareth Vaughan

Hot on the heels of the Reserve Bank moving to force the big four banks to hold more capital against home loans where borrowers have less than 20% equity, ASB has revealed that 71% of its residential mortgage lending growth in the March quarter came in high loan-to-value-ratio (LVRs) lending.

ASB's latest General Disclosure Statement (GDS), the first from a major bank covering the March quarter, shows it grew housing loans by NZ$791 million, or about 2%, during the three months to March 31. Of that growth NZ$565 million stemmed from loans where the borrower has less than 20% equity.

In the December quarter ASB recorded an even higher percentage of its residential mortgage growth through high LVR lending. Then NZ$882 million, or 95%, of its NZ$932 million quarterly growth came via lending where borrowers had a deposit, or equity, worth less than 20% of their loan.

The bank now has a total of NZ$8.737 billion, or 22%, of its residential mortgage book at LVRs above 80%. That's up from 21% at December 31 last year. Some 7.5% is at LVRs above 90% and 14.6% at LVRs between 80.1% and 90%.

'Quantifying impact'

Last week the Reserve Bank said the big four banks would have to hold an average of 12% more capital against their housing loans to cover any potential losses from high LVR lending, which adds up to about NZ$500 million between them, or the equivalent of NZ$125 million each. The central bank and prudential regulator said about 30% of all new residential mortgage lending was at LVRs over 80%, up from about 25% in late 2011 and early 2012.

In the GDS ASB says it's in the process of "quantifying the impact" of the Reserve Bank move to force it to hold more capital against high LVR home loans.

In February the bank's CEO, Barbara Chapman, told interest.co.nz ASB was chasing the high LVR end of the market.

"I think there's a lot of good quality business in the 80% plus market and we're focused very much on the quality of the customer in that area. I'm absolutely committed to continuing our focus on that and we're not seeing any difficulty in terms of arrears coming out of that book," Chapman said then.

ASB has been offering a Sony Bravia 42-inch LED TV and up to NZ$1,000 cash on new lending over NZ$100,000.

Based on April's national average median house price of NZ$390,500 recorded by the Real Estate Institute of New Zealand, a home buyer would require NZ$78,100 to muster a 20% deposit. In Auckland, based on the median price of NZ$555,000, they'd need NZ$111,000.

In the year to March overall housing lending grew 4.6%, according to Reserve Bank sector credit data. Although that's the fastest annual growth rate since November 2008, it's well down on the double digit growth recorded between 2003 and 2008, which peaked at 17.4% in April 2004.

Profit up 11%

ASB's GDS also shows its unaudited March quarter net profit after tax up NZ$18 million, or 11%, to NZ$178 million from NZ$160 million in the same period of the previous year. This came as total operating income rose NZ$33 million, or 8% to NZ$451 million and total operating expenses were unchanged at NZ$183 million. Impairment losses on loans rose NZ$7 million to NZ$20 million. Net interest earnings increased NZ$22 million, or 7%, to NZ$354 million.

During the March quarter total advances to customers rose NZ$1.143 billion, or 2%, to NZ$56.628 billion, and deposits increased NZ$682 million, or 2%, to NZ$41.230 billion. Individually impaired loans slipped NZ$1 million to NZ$328 million, but 90 day past due assets rose NZ$37 million, or 26%, to NZ$180 million.

Meanwhile, the GDS shows ASB has paid parent Commonwealth Bank of Australia ordinary dividends of NZ$90 million so far in its current financial year, versus NZ$500 million in the first nine months of its previous financial year.

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One needs to be careful about jumping to conclusions about this type of thing, without understanding the nature of the loans and the borrowers circumstances .  For example , Its very tax efficient to ramp up your borowings to maximum on investment properties, and investors are fully into the market again.  
 Banks are generally not reckless lenders and are,  for the most part , very careful in assessing past behaviour of borrowers.
I am sure these loans are not in the "sub-prime" catagory , or to unemployed people or people with poor credit records .

  • The loans could be to people who are more than able to service the debts with multiple income sources  .
  • Borrowers who own other assets and whose personal Balance Sheets are strong with lower debt levels are lower risk
  • Or , who borrowers who  have other property assets where the LTVR is at lower levels , some have mortgage-free homes
  • Or , where investor -  buyers are maximising their borrowings are part of a tax- planning excersize
  • People with high yielding assets such as Bonds issued in say 2007 , yielding between 8 % and 10% can use these as collateral for property loans of  up to 90% without have to relinquish the bond or the strong income stream