The Co-operative Bank makes big increase to its high LVR residential mortgage exposure after correcting erroneous disclosures

By Gareth Vaughan

The Co-operative Bank has seen its residential mortgages with loan-to-valuation ratios (LVRs) between 80% and 90% more than double, and its mortgages with LVRs above 90% jump 38% after correcting loan classifications to bring them within Reserve Bank regulations.

The reclassifications are revealed in the Co-operative Bank's General Disclosure Statement (GDS) for the six months to September 30.

The bank's CEO Bruce McLachlan told interest.co.nz talks on the issue had taken place with the Reserve Bank over a couple of weeks.

"Basically we had been under stating our high LVR position," McLachlan said. "And what it relates to is we had only NZ$7.8 million of non-mortgage lending, mostly against things like cars, where we had misinterpreted the rules and hadn't been aggregating that on with the mortgage amounts owing when setting what an LVR was of a mortgage."

"So the NZ$7.8 million of this other lending dragged up NZ$98 million of mortgages from under 80% (LVR) to over 80% (LVR) so the consequence of it is we've gone from previously being very low end of the market in terms of our portfolio with low equity, we were 13.4% under our old methodology, and then under this revision we've gone up to 22%," McLachlan added.

"So it's quite a substantial change and it impacted our capital adequacy by 0.6% so instead of (the bank's total capital ratio of risk weighted exposures) being 17.7% at the end of September we're 17.1%."

McLachlan said, however, that the run off of the other lending would be quick because the actual mortgage loans are all under 80% LVRs and the likes of car loans are repaid "so much quicker."

The GDS shows Co-operative Bank had NZ$84.9 million worth of residential mortgages with LVRs between 90% and 100% at September 30, up NZ$23.3 million from June 30. It also shows mortgages with LVRs between 80% and 90% at NZ$155.2 million, up NZ$78.6 million, and mortgages with LVRs below 80% down NZ$9.1 million to NZ$886.9 million.

The GDS also shows NZ$10.5 million worth of mortgages with LVRs greater than 100%. No comparison for this figure was in the June GDS but the March one disclosed NZ$2.6 million.

The bank's tier one capital ratio, representing member's funds, came in at 17% at September 30, versus a corrected 16.6% at June 30. At 17.1%, the total capital ratio is up from June's restated 17%. The Reserve Bank mandated minimums are currently 4% and 8% of risk weighted exposures, respectively, although these will increase to 8.5% and 10.5% from next year. See more on this here.

Meanwhile, unaudited September quarter profit attributable to members almost trebled to NZ$1.3 million from NZ$448,000 in the same period of last year, the last quarter before the then PSIS obtained banking registration from the Reserve Bank. PSIS became a registered bank and changed its name to The Co-operative Bank Limited on October 26 last year.

The Co-operative Bank's net interest income rose NZ$145,000, or 1%, to NZ$10.065 million and its net operating income rose NZ$647,000, or 4%, to NZ$15.2 million. Operating expenses were up NZ$1 million, or 7%, to NZ$14.6 million and impairment losses rose NZ$231,000, or 42%, to NZ$784,000.

The bank's gross impaired assets rose NZ$8 million in the three months to September 30 to NZ$3.517 million, and its 90 day past due assets fell NZ$2.7 million to NZ$1.3 million. Total assets increased NZ$6.3 million to NZ$1.48 billion and total liabilities rose NZ$4.8 million to NZ$1.347 billion. Members reserves increased NZ$1.4 million to NZ$132.421 million.

In October McLachlan told interest.co.nz he expected another New Zealand owned retail bank to grow to a similar size as Kiwibank over the next decade and he wanted it to be the Co-operative Bank. He said the Co-operative Bank appealed to a "very large" group of New Zealanders.

"It's not a demographic. It's not a group of New Zealanders you can divide up by age or income (or) political persuasion," McLachlan said. "It's actually an attitude. We find the attitude exists in New Zealanders from north to south, of all age groups, of all incomes. And there is a common element in that group and that is that they care about New Zealand and they are about people. And that real caring attitude is really our target."

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