By Gareth Vaughan
Westpac NZ's CEO says the bank's recent switch to primarily focus on home loans where the borrower has at least 20% equity is because its internal risk modelling suggests increased market volatility and therefore higher risk.
Westpac recently introduced a low equity fee for lending on mortgages with loan-to-value ratios (LVRs) between 80% and 85%, meaning all new residential mortgage lending with LVRs in this range now have a 0.25% fee added to the carded/agreed loan interest rate. The bank already had low equity fees in place for mortgages with LVRs above 85%.
Westpac grew mortgages by NZ$500 million, or just 1%, in the six months to March 31 to NZ$36.4 billion. CEO Peter Clare says Westpac has adopted a "risk based approach" through which it's targeting mortgages with LVRs of less than 80%. This has seen Westpac's marketshare fall.
As recently as a year ago, just after Clare took Westpac's helm from George Frazis, the bank was still keen on what Clare then described as "conservative" home loans with LVRs above 90%. At that time Westpac had been advertising home loans from as little as a 5% deposit.
Asked by interest.co.nz whether he was worried about the heated Auckland housing market, especially following a recent bubble warning from the Financial Markets Authority, Clare said he was comfortable with Westpac's risk settings.
"We wrote higher proportions of above 80% LVR lending two years ago and that was kind of a smart time for us to be doing it because the price volatility at that stage was minimal," Clare said.
"So we weren't likely to experience volatility that could drive ordinary outcomes. The modelling from a risk perspective that we're doing now suggests that there are increased levels of volatility and obviously that results in higher risk, which results in the need for a higher price."
'We haven't pulled back from high LVR lending'
That said, Clare added that Westpac hadn't pulled back from 80% plus LVR lending.
"We've just said that if you borrow between 80% and 85% there is a 25 basis point additional margin."
Westpac has about 61% of its total NZ$59.9 billion of net loans in housing.
Clare was speaking after Westpac posted a 7% rise in half-year cash earnings for the six months to March 31 to a record NZ$370 million. See Westpac NZ's full results presentation here.
He said Westpac was well positioned to deal with any regulatory responses to the strong housing market, whether these be the introduction of the Reserve Bank's proposed macro-prudential tools or something else. The new low equity fee was an example of responding to this additional risk.
The Reserve Bank says it's considering four macro-prudential tools that could be used to lessen risk in the financial system including the possible use of LVR caps. Asked whether he thought financial system stability was under threat at the moment, Clare said this wasn't for him to determine.
"I'm not accountable for the financial stability of the economy, that's a question for (Reserve Bank Governor) Graeme Wheeler. My team and I are here to run the bank the best way we see fit to deliver consistent, enduring returns for the shareholders, a safe place to work and excellent customer experiences. I can't comment beyond that," Clare said.
He said in his view the three key factors in house price movements were supply, demand and employment levels.
The presentation accompanying Westpac's results included the two charts below comparing its high LVR mortgages with those of its main rivals and showing a drop in mortgage delinquencies. See more on the big five banks' high LVR residential mortgage lending in my story here.
'Exciting product & electronic distribution announcements coming'
Meanwhile, Clare said Westpac would soon be "lifting the curtain" on "exciting product and electronic distribution innovations". This comes against the backdrop of huge growth, albeit from a low base, in the number of customers banking via their mobile phones as demonstrated in Westpac's chart below.
CFO hints at debt raising
Meanwhile, chief financial officer Leigh Barlett said wholesale debt maturities during the first-half of Westpac's financial year had been refinanced through customer deposits, which grew 7% in the period compared with just 1% lending growth. Funding costs hadn't changed much because Westpac hadn't been raising new wholesale debt. Although there weren't any "material" debt maturities during the balance of the financial year - until September 30 - Barlett said Westpac did have more than NZ$2 billion worth of debt maturities falling in 2014.
"We do have a strategy where we pre-fund maturities in advance and we clearly have maturities coming up in 2014 so we will at some stage go to the market to address those future maturities," Barlett said.
Any decision on when and how it replaced this money would be assessed against the likes of market conditions, deposit growth and loan growth.
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7 Comments
The modelling from a risk perspective that we're doing now suggests that there are increased levels of volatility and obviously that results in higher risk, which results in the need for a higher price."
"We've just said that if you borrow between 80% and 85% there is a 25 basis point additional margin."
If volatility translates into lower property prices, how does a higher interest rate help the indebted better cope with falling equity - Surely such low levels of equity, hence high leverage demand that the only rational choice is to sell. And live to trade again, another day - capital preservation is surely paramount.
Big blue you are the money. Half a percent as the absolute minimum. Pure greed on their part maximizing earnings which for most part will go off shore. In reality,they don't give a stuff about being a good corporate citizen and even less about their clients who for most will be the average citizen struggling along to meet their daily needs as a family and feeling the pain as the regular mortgage payment with over inflated interest component drops out of their accounts!
Wrong correlation.
As Redward Associates noted today "it is unclear that lower mortgage interest rates have played much of a role in house prices gains recently".
"Monetary conditions are TOO firm. NZD at multi decade highs."
Interest rates can only flatline or drop.
Interest rates will not be rising for the short or medium term.
Labour market is weak, with youth , grad unemployment high.
House prices are outside the PTA & are not a valid reason for rate hikes (directly)
Big Blue, sounds like your alot like other people who got sucked in by all the sprukers and over borrow to get in and make your fortune in the property game.
I sincerely hope interest rates increase to desimate the rediculous borrowing for unproductive investments that could cost the country dearly.
Off course the banks don't care, they know the Government (tax payer) well bail them out. That is if they can afford to.
Kimy you completely defy logic?
Your proposed method of stopping immigrants purchasing property in Aoteroa is ridiculous - in every sence. There are far more affective policies to do this.
Besides if we keep borrowing from overseas at the rate we do, well probably default and end up being owned/controlled form overseas.
Cheers
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