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Bank of NZ done issuing covered bonds for now; funding issues loom for lenders

Friday 11th May 2012

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Bank of New Zealand, the biggest issuer of covered bonds among the nation's banks, says it is done selling the debt for now and may not return to the market for two years.

The local unit of National Australia Bank has $4.1 billion of covered bonds on issue, amounting to about 52 percent of the $7.9 billion total outstanding from New Zealand banks. Selling the debt, which has a long history in Europe, has given banks another avenue for credit as other sources of funds became more expensive or dried up in the wake of the global financial crisis.

"At this stage we're comfortable with the levels we're at," chief executive Andrew Thorburn told BusinessDesk. "For the next 18 months or two years we will not be into the market." BNZ's covered bonds have a maturity profile of 3-8 years.

It has tapped the market more aggressively than rivals ANZ National, with $1.9 billion outstanding, Westpac Banking Corp with $1.6 billion and ASB on $300 million, as at March 29.

Covered bonds typically attract top credit ratings because they're backed by a 'cover pool' of home mortgages which get ring-fenced for the bondholders in the event of a bank default. The global market for the debt is valued at about US$3 trillion and is dominated by European banks.

In New Zealand, legislation was introduced to the parliament this week formalising the Reserve Bank's oversight of covered bonds and requiring banks to register the loans in the covered pool.

Covered bonds can already be used as collateral in the central bank's repo operations. The Reserve Bank's financial stability report, released this week, noted that risks remain for bank funding, especially if offshore term debt markets are disrupted again.

It was because of "adverse financial market conditions" that the central bank last November pushed out the date by which it would require banks to increase their core funding ratio to 75 percent from 70 percent by six months to Jan. 1 next year.

The CFR sets out the balance of total funding of more than one-year maturity and is meant to provide a buffer in times of financial crisis by reducing lenders' reliance on short-term international credit lines. Any further disruptions in offshore debt markets would again create difficulties for banks to obtain unsecured long-term wholesale debt, the Reserve Bank said.

Pressures will also increase on banks because under the Reserve Bank's requirements, 20 percent of long-term funding will no longer qualify as core funding by the end of 2012. By the end of 2015, "more than 70 percent of the current long-term wholesale funding - or $38 billion - will no longer qualify," the bank's financial stability report says.

"In a scenario where global term markets are effectively closed to New Zealand banks for a prolonged length of time, banks' core funding buffers would be progressively eroded," it said. "They would likely need to obtain significantly more retail funding."

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