Kiwibank turning down borrowers

"What surprised us is the number of people who expect they can get mortgages who don’t meet anywhere near the normal conforming credit criteria," Knowles told Good Returns.

The number of unacceptable applications is starting to slow now, but it has kept the fledgling bank extremely busy and has slowed its overall growth, he says.

It isn’t always immediately obvious that an application will fail and "you do have to give people the benefit of the doubt."

Kiwibank will have more than 200 branches by the end of this month which will then be the biggest branch network. WestpacTrust currently has the largest network with 201 branches.

Surely, people should have a good idea whether or not they can afford a loan?

"People are desperate. They believe somehow, if they tell their story a bit differently, that Father Christmas will come," Knowles says.

Even though home ownership is falling in New Zealand, the desire to own a home remains as strong as ever.

One of the problems in New Zealand is that the commercial non-conforming industry is still in its infancy so people who don’t meet normal lending criteria have nowhere to go, he says.

Kiwibank’s lending criteria is similar, perhaps a little tougher, than that of the major banks. "When you’re starting up, you want to make sure you’re writing good quality business. Over time, we might get a little more flexible. At the moment, we’re hard on the edges."

Kiwibank’s lending rates are well below that of the major trading banks. Its floating rate mortgage is currently at 7.1%. With the 90-day bank bills, from which floating rate mortgages are traditionally financed, currently at 5.92%, Kiwibank’s margin is only 118 basis points compared to the accepted rule of thumb of between 150 and 200 points.

Some commentators, including KPMG’s Andrew Dinsdale, have said Kiwibank won’t be able to discount at such levels for ever.

Not surprisingly, Knowles rejects such views. "I don’t see us as discounting. We’re a low cost operation. We’ve got a price and it’s cheaper. That’s not a discount."

He says the major banks’ current rates are excessive and that the mortgage industry in other countries manages to run on about 100 basis point margins. "This is a fairly well defined market. We have very low credit risk in New Zealand relative to other markets. We can sustain good profits at our current margins."

Knowles also attacks the practice of "honeymoon" offers to new customers, saying it’s wrong to treat your existing customers worse than new ones.

While there has been some reaction to Kiwibank’s presence, it hasn’t been major. Knowles says that isn’t surprising because Kiwibank isn’t having that much of an impact on the major banks yet. "If we continue the way we’re doing, we will have an impact."

Dinsdale has suggested ANZ Bank is the most vulnerable because of the legacy from its takeover of the former Post Bank. Knowles won’t be drawn on whether this is so, but agrees ANZ Bank has been more reactive to Kiwibank’s presence than the other banks. Customers are coming from all the major banks, he says.

Kiwibank’s mortgage lending ranges from very large loans to very small ones in some rural towns but the average is about the same as for the other banks, he says.

At this stage, Kiwibank isn’t working with mortgage brokers. Knowles says that’s something they will consider next year. "We’re not set up for it at the moment. You can’t go into it half-heartedly."

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