Monday 7th November 2016
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Westpac Banking Corp's New Zealand chief executive David McLean is comfortable with the quality of his $45.1 billion mortgage book, saying it would take an extreme downturn to kick off major losses.
New Zealand's housing market has been the subject of great scrutiny by policymakers in recent years as a shortage of property in its biggest cities combined with a rapid inflow of net migration to push up prices to what's been described as unsustainable levels and prompted the Reserve Bank to impose lending curbs on highly leveraged mortgage borrowing. That has yet to spill over into the quality of the major banks' mortgage loan books, with Westpac today report in a decline in its ratio of mortgage delinquencies past 90 days.
Chief executive David McLean told BusinessDesk the core mortgage lending business is "still going quite well" and that it's areas on the fringe that the bank is losing appetite for.
"We won't really know unfortunately until there's a downturn whether we're writing bad business or not," he said.
The Reserve Bank has been complaining about unsustainable increases in house prices for several years, and recently got the lender to undertake reverse stress testing, where it seeks to find out what level of loan default it takes to start eating into the bank's capital.
"The types of scenarios that would see us take losses of any magnitude in that portfolio are extreme scenarios in terms of unemployment, immigration, house prices declines," McLean said. "It would be a major economic downturn for that to happen."
Like rivals Bank of New Zealand and ANZ Bank New Zealand, Westpac's local business didn't report much deterioration in the quality of its residential loan portfolio, with impairment charges increasing in agricultural and commercial lending.
Westpac's McLean said they're as "comfortable as we can be at this point, but we do keep a very watching brief". The bank's stress testing of its $5.9 billion dairy book showed a quarter of the portfolio as being stressed, up from 4.7 percent a year earlier, though recent gains in the forecast payout to farmers had eased some of Westpac's concerns.
The lender was more cautious about funding property development after getting stung during the previous downturn between 2009 and 2011 when Westpac was overexposed in that sector.
"We've been very cautious for the last five or six years - we just want to make sure that the business we do there is very very sound," McLean said. "Where we lost money in that post-08 period often the apartment buildings weren't even great things where you wouldn't want to live - so we're applying a range of criteria, not just quantitative but qualitative as well to the counterparty."
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