Westpac Banking Corp., New Zealand's second-biggest lender by total assets has announced plans for the sale of covered bonds as it expressed confidence foreign investors are still bullish of the country's economic strength.

Westpac is looking to raise up to 1 billion euros through a covered bond issue, following Bank of New Zealand's lead, and Treasurer Jim Reardon told BusinessDesk four investment banks have a mandate to manage the sale. The bank will test investor appetite for the sale when they go on a roadshow to meet European investors. They haven't settled on a price due to the volatility in the market, he said.

[Get this delivered to your inbox for FREE. Subscribe to our daily Markets Newsletter.]

"New Zealand's economy has been relatively firm through the troubles, and the view is that it's stable rather than faltering," Reardon said. "We will do more over time - we want to be a regular issuer," though that will have to be within regulatory requirements, he said.

The Reserve Bank today set an initial limit that covered bonds make up no more than 10% of a bank's total assets, though it will review this after two years. Banks have been interested in the securities as the central bank introduced tougher balance sheet requirements that meant lenders have to source more cash domestically, and for longer periods.

Westpac boosted its earnings 36% to $322 million in the year ended Sept. 30, slashing its charge on impaired assets by $347 million. At the time, chief executive George Frazis said the lender's core funding ratio, the level of liquid assets available, was about 75%, the target the central bank wants to lift the ratio to in the future.

Lenders have had to take a tougher stance in securing funding since the global financial crisis when credit lines dried up amid the collapse of financial institutions on Wall Street. That led to increased competition in the local deposit rate market, as banks were forced to offer higher returns to win over investors.

Reardon said deposit rates are "particularly competitive," and investors who would typically invest in riskier ventures have decided to park their funds in the bank instead.

Westpac is reasonably optimistic about the economy, and wants to boost funding to take advantage of the predicted upturn.

"We've got our short-term funding foundation, and when growth comes back, we'll be in a position to participate," Reardon said. "We look at unemployment - as long as people have jobs and cut back on spending, cut back their leverage, they're still paying the mortgage."

Covered bonds, which aren't allowed in Australia, give investors priority ranking on a pool of residential mortgages. That means they often attract better credit ratings than the institution offering them. They differ from residential mortgage-backed securities (RMBS) by making the mortgage pool a secondary guarantee, rather than the primary as it is in an RMBS programme.

BNZ kicked off the first covered bond issue in June when it raised $425 million locally, and a further 1 billion euros in a November sale.

More from IBT Markets:
Subscribe to get this delivered to your inbox daily
Follow us on Twitter.
Follow us on Facebook