Westpac NZ sees LVR speed limits slowing housing credit as business lending picks up

Westpac Banking Corp's New Zealand unit expects housing credit growth to slow next year as the Reserve Bank's LVR restrictions bite, although that will be offset by faster business credit growth as the economy accelerates.

The bank forecasts housing credit to grow 5.7 percent in 2013, up from 3.7 percent in 2012, before slowing to a 5.2 percent pace in 2014. By contrast, business credit is seen slowing to 3.1 percent this year from 3.3 percent in 2012, before picking up to 4.9 percent next year. Total credit growth is forecast to rise to 5 percent from 4.5 percent.

"The Reserve Bank's prudential speed limits have or will knock a little bit of wind out of the sails in lending growth in housing," NZ chief executive Peter Clare told BusinessDesk. Still, "we're starting to see slightly higher levels of business and consumer confidence. We see green shoots of opportunity."

Westpac would be relatively sheltered from the central bank's curbs as most of its mortgage lending growth has been in the sub-80 percent loan to value range, he said.

The Treasury said today in its monthly economic indicators report that based on initial predictions the LVR restrictions introduced on Oct. 1 "are having the expected effect of dampening growth in mortgage finance and reducing the risk and potential impact of a major correction in house prices."

Westpac's net loans rose to $61.6 billion in the second half of its 2013 financial year, from $59.4 billion in the same period a year earlier, it reported today. Housing loans rose 4.5 percent to $37.5 billion and business and institutional loans gained 2.3 percent to $22.3 billion.

The proportion of variable rate mortgages fell to 37 percent from 43 percent. Overall its net interest margin shrank 34 basis points to 2.38 percent, although about two third of the contraction was a result of a transfer of $7.2 billion of liquid assets to the New Zealand unit from the Westpac group and excluding that effect, margin contraction was about 10 basis points.

Chief financial officer Leigh Bartlett said much of the margin contraction occurred in the first half, when there was "intense competition in lending and consumers' preference was for the lowest rate fixed-rate mortgages."

"So there was compression on the lending spread and also a squeeze on the deposit side," he said. While the lending squeeze continued into the second half, growth in deposits enabled it to recover some of its deposit margin.

Westpac is forecasting the New Zealand economy will grow 2.8 percent this year, before accelerating to 3.8 percent in 2014. Consumer prices may rise 2.1 percent in 2014 from 1.5 percent this year, spurring the Reserve Bank to lift its official cash rate to 3.5 percent from a record low 2.5 percent currently.

Expectations of higher interest rates are ensuring relatively limited growth in term deposits across the country as customers prefer to keep the money on call, Westpac said.

Westpac New Zealand reported a 9 percent increase in cash earnings, which exclude one-time items, rose to $770 million in the year ended Sept. 30, according to its Australian parent's results.

New Zealand generates 9 percent of earnings for Australia's second-largest lender, excluding its group businesses and Westpac Pacific business. The parent today posted an 8 percent gain in cash earnings to A$7.1 billion, meeting estimates, while its net interest margin shrank 2 basis points to 2.15 percent. Revenue from ordinary activities climbed 4 percent to A$18.6 billion.

Expenses were flat and its expense to income ratio fell by 15 basis points. Impairment charges dropped 39 percent.

Total deposits climbed to $46.6 billion in the second half from $42 billion a year earlier, of which term deposits increased to $24.9 billion from $23.1 billion and other deposits were up about 15 percent to $21.7 billion.

Westpac's shares fell 1.1 percent to A$34.21 on the ASX today and have climbed 33 percent this year.