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Sluggish mortgage growth prompts aggressive loosening of lending standards

Sluggish growth in net mortgage lending appears to be driving some of the major banks to compete by aggressively loosening their credit criteria with ASB Bank leading the charge even as its mortgage book continues to shrink.

Tuesday, March 6th 2012, 9:07AM

by Jenny Ruth

However, the bank grabbing the most market share, the government's Kiwibank, appears to be bucking the trend by gravitating towards less risky mortgage lending.

With all but HSBC's December quarter disclosure statements now published (and assuming HSBC's mortgage book will be steady at just below $1 billion where it's been since September 2010), it's clear growth in the mortgage market slowed in the three months.

Growth across all banks was just $330 million in the December quarter, down from $800 million in the September quarter. To ensure like-for-like comparisons, the figures include the Cooperative Bank, although it didn't become a bank until October 26.

Only the mortgage books of Bank of New Zealand, up $227 million, and Kiwibank, up $260 million, showed any significant growth.

Westpac, whose mortgage lending has grown strongly in earlier quarters, saw its book grow just $29 million.
The largest home lending bank with 30.29% of the market, ANZ Bank, showed the most shrinkage, down $148 million in the quarter, while ASB Bank's fell $38 million.

Across both the June and September quarters, Kiwibank accounted for 51.2% of the growth in mortgage lending by all banks with BNZ a close second with 47.1%.

The two banks are the smallest of the "big five," Kiwibank's share of the mortgage market standing at 6.65% at December 31 while BNZ's was 16.39%.

ASB, whose book shrank by $47 million between June and December and whose market share fell from 22.36% to 22.18% in that period, nevertheless grew its mortgages with loan-to-valuation ratios (LVRs) between 80.1% and 90% by $140 million and its mortgages with LVRs above 90% by $406 million.

The available figures suggest this trend towards riskier lending by ASB has been underway since at least the June quarter.

BNZ demonstrated a similar loosening in the December quarter when loans with LVRs above 80% accounted for 60.8% of its mortgage book's overall growth. However, since March 31, 68% of BNZ's book's growth has been of less risky loans with LVRs below 80%.

Westpac, which had 20.78% of the market at December 31, is demonstrating a similar trend while ANZ's book showed only those mortgages with LVRs between 80% and 90% were growing with the shrinkage coming from both the less than 80% and more than 90% parts of its book.

In sharp contrast, 95.8% of the increase in Kiwibank's mortgage book in the September quarter was of mortgages with LVRs below 80%. Its mortgages with LVRs above 90% shrank by $37 million in the quarter.

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Westpac predicting rates to rise faster than forecast

In its recently released quarterly economic overview report, Stephens writes that Westpac’s prediction is for 90-day interest rates to rise much faster than either the Reserve Bank or the market expects.

It picks the first move in interest rates to happen in June 2013, when it says the OCR will still be at 2.50%.

By 2014, Westpac expects 90-day rates to be 4%. By comparison, the RBNZ tips them to have barely moved at 2.75% and the swaps market implied pricing puts them even lower, at just over 2.50%.
By 2015, Westpac expects rates to be over 5%.

Stephens’ report said that the Christchurch rebuild would make it hard for New Zealand to avoid substantial inflation.

“The inflation figures suggest that central co-ordination of small to moderate repairs – the bulk of the activity to date – has been effective in limiting construction cost inflation. This is unlikely to remain the case as major repairs and rebuilds take over as the main form of activity.”

He pointed to the fact that new housing in the Canterbury region has already risen roughly 10% over the past year.

Stephens said he expected home loan rates to follow the same trajectory as 90-day rates. They might stay on hold for another year or so but then would have to rise.

“Floating rates may not rise quite as rapidly as 90-day rates because at the moment banks have to pay a higher margin to procure funds from overseas. That pressure might come off.”
But he said it was unrealistic to expect the current historic lows to continue past 2013.

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