Banks raise cheap wholesale funding ahead of Spring mortgage surge

In its latest quarterly survey of financial institutions, KPMG notes that Westpac launched a five-year medium-term note issue in July, notionally seeking $100 million but with unlimited oversubscriptions and managed to sell $900 million at an interest rate of 2.22 percent.

After the Reserve Bank’s surprise 50 basis point cut to 1 percent of its official cash rate in early August, ASB Bank launched a five-year bond, also seeking $100 million, but managed to raise $600 million at 1.83 percent.

“Being able to lock in such low levels of funding should help fuel the competitive fires ahead of the traditionally active Spring mortgage market, with the possibility of further record-low mortgage rates being offered,” KPMG says.

The big four Australian-owned banks, Kiwibank and the Cooperative Bank are all currently offering two-year fixed mortgages, the most popular term, at the “special” interest rate of 3.59 percent, according to the GoodReturns website.

KPMG notes that, while New Zealand banks await the Reserve Bank’s final decision on how much capital they will have to hold in future, the Australian parents of the big four New Zealand banks are also being required to hold more capital.

“This reminds us that New Zealand banks are not the only ones to feel the heat on capital,” it says.

A trend that was "more worrying, at least from a New Zealand perspective,” is the Australian Prudential Regulation Authority’s decision to reduce the maximum exposure of Australian banks to their overseas subsidiaries from 50 percent of total capital currently to 25 percent of tier 1 capital.

“On the back of likely increases in required capital from New Zealand subsidiaries, the pressure is being put on these banking groups on both sides of the Tasman."

ANZ Bank is the most impacted because its capital exposure to its New Zealand subsidiary is already near the new limit but the other banks' exposure to their New Zealand subsidiaries is considerably lower.

KPMG notes the Reserve Bank has released a summary of consultations on a new mortgage bond standard and was supportive of the introduction of "a high-grade residential mortgage-backed securities framework."

The new standard "aims to provide a deeper market for these types of securities, allowing both issuers easier access to the liquidity this provides and investors with greater access to more opportunities and greater liquidity," it says.

"This may also result in tying up quite closely with greater levels of capital needing to back bank lending where banks may look to move more of their loans off-balance sheet through such mortgage bonds or other loan-backed securities."

Mortgages currently account for more than 50 percent of New Zealand bank lending.