Low risk to NZ covered bonds from Auckland property correction, Fitch says

New Zealand's major banks' covered bonds, which stand at about $14 billion, are at low risk from any correction in the Auckland property market because they're backed by a 'cover' pool of mortgages with a relatively low loan-to-value ratio (LVR), Fitch Ratings says.

As at June 30, some $20 billion of residential mortgages in New Zealand were encumbered by covered bond programmes, of which 44% were against properties in Auckland, Fitch said. But the weighted-average LVR for mortgages in the cover pools was 47% and less than 4% of the loans were at an LVR above 80%, it said.

"Fitch does not feel that a decline in property prices would pose significant risk to the New Zealand cover pools," Fitch said. "The mortgage assets included in the cover pools analysed by Fitch are characterised by low LVRs and relatively low exposure to investment loans."

Expected losses for each cover pool in the event of a correction was estimated at just 4%. Fitch says it doesn't believe there is an immediate threat of a property correction in New Zealand. Residential property values in Auckland soared 56% between June 2011 and June 2015, based on QV data, and gained 20% across the rest of the country in that period.

Covered bonds are secured by a pool of mortgage loans to which the investors have a preferential claim in the event of default, which means they typically attract an AAA credit rating - above the banks' own ratings - making them cheaper to fund. They have gained in popularity and volume as an alternative source of funding since the global financial crisis.

Last week, Standard & Poor's downgraded by one notch the stand-alone credit profiles of the country's four biggest banks - ANZ Bank New Zealand, ASB Bank, Bank of New Zealand and Westpac New Zealand - because of risks associated with Auckland's residential property market. S&P said the rapid rise in Auckland house prices had amplified the risk of a sharp correction, even if such an event remained unlikely.

Fitch's updated second quarter covered bonds report shows ASB Bank's $2.4 billion of covered bonds on issue have the greatest exposure to Auckland, with 63% of the $3.6 billion cover pool made up of mortgages on Auckland properties. ANZ Bank has the biggest New Zealand covered bond programme, at $4.79 billion, backed by $6.7 billion of home loans, of which 43% are on Auckland properties.

Bank of New Zealand has $3.75 billion of covered bonds on issue, backed by a cover pool of $4.2 billion, and with 38% on Auckland properties, while Westpac's $2.95 billion of the bonds has a cover pool of $5.1 billion, of which about 39% are for Auckland properties. Kiwibank's programme is tiny by comparison, at $191 million, with cover from a $316 million pool of home loans, with 38% in Auckland.

Under legislation introduced in 2012, New Zealand banks issuing covered bonds were required to register their programmes with the Reserve Bank and disclose the pool of assets that the investors would call on if a bank defaulted.

(BusinessDesk)