Westpac NZ eyes capital increase

Bernard Hickey
Westpac New Zealand estimates it could need an extra NZ$100 million in capital under new requirements being worked on by the Reserve Bank of New Zealand in an attempt to slow lending to landlords.

Westpac NZ chief executive David McLean told Banking Day in an interview after the release of Westpac's interim results that the bank had modeled the expected increase in capital requirements for landlord mortgages from the Reserve Bank's consultation documents.

"It's an amount for Westpac in the order of NZ$100 million based on a number of hypotheses and assumptions we've had to make at a high level, which we think will be easily able to be absorbed by us," he said.

The figure is the first estimate from any of the big four New Zealand banks of the amount of extra capital needed to adjust for the higher capital requirements for residential investment mortgages.

Westpac's mortgage portfolio rose 5.4 per cent to NZ$40.7 billion in the first half of the financial year, up 5.4 per cent from a year ago and in line with system growth. Total bank mortgage lending in New Zealand at the end of March was NZ$199.7 billion, implying all those banks would need to raise almost NZ$500 million in fresh capital if the modelling used by Westpac was applied across the entire sector.

The Reserve Bank announced on March 5 it was considering creating a new sub-class for rental property mortgages for capital adequacy purposes to reflect the higher risks for landlord mortgages than for mortgages for owner-occupied houses. Consultation ended on April 17 and the bank has said it wants to apply the new capital rules from July 1.

McLean said Westpac was likely to increase its interest rates for landlords to adjust for the higher capital requirements, although that response could be affected by competition.

"Our likely response would be to adjust the pricing of those loans to differentiate them from owner-occupied mortgages," he said.

"It would have some effect on pricing, but it wouldn't be punitive for that segment."

Earlier, Westpac reported its cash earnings rose two per cent to NZ$441 million in the first half from the same half a year ago. Impairments rose NZ$9 million to NZ$31 million, partly offsetting a NZ$23 million rise in net interest income to NZ$832 million.

Westpac said its net interest margin rose to 2.29 per cent from 2.27 per cent in the second half of 2013/14 and 2.28 per cent in the first half of 2013/14.

McLean said a fall in mortgage margins as customers moved to less profitable fixed mortgages from floating mortgages was offset by a rise in deposit margins.

"When you net out the mortgages and deposits, the two basis points is explained by wholesale funding costs down two basis points," he said, adding he expected the hot competition in the mortgage market to continue.

McLean said Westpac was comfortable with its exposure to New Zealand's housing market, where annual house price inflation surged over 15 per cent in Auckland in the first quarter of 2015. The Reserve Bank warned last month an over-valued property market was creating risks for financial stability.

Westpac had regularly conducted stress tests based on the scenarios suggested by the Reserve Bank, McLean said.

"We don't see alarming levels of risk in the book at this stage," McLean said, adding that restrictions on high loan-to-valuation ratio lending in place since October 2013 had reduced the bank's risks.