NZ bank exposure to dairy farms will weigh on asset quality amid low milk prices, Fitch says

Friday 5th June 2015

New Zealand banks' exposure to dairy farming will put their asset quality under pressure as milk prices fail to recover as quickly as expected, according to credit rating agency Fitch Ratings.

Auckland based Fonterra Cooperative Group last week cut its forecast milk payout to farmers for the 2014/15 season by 10 cents to $4.40 per kilogram of milk solids, the lowest level in eight years and down from a record $8.40/kgMS the previous season. It set its opening forecast for the upcoming 2015/16 season at $5.25/kgMS.

"Farmers are well placed to withstand this season's weaker prices because of the substantial cash payout by Fonterra" from the 2013/14 season, Fitch said in a statement. "Smaller payouts in this season were widely anticipated following last year's drop in global dairy prices, and farmers have generally used last season's high prices and dividends to pay down debt or invest."

Last month, the Reserve Bank warned persistently low dairy prices could put stress on indebted farmers operating with negative cash flow this season, that could taint the wider financial system if it stressed lenders' loan books. The central bank estimates a quarter of dairy farmers are operating in negative cash flow.

A weakening in the New Zealand dollar since mid-2014 had cushioned farmers from the impact of global price falls by supporting prices in New Zealand dollars, Fitch said.

"Nevertheless, the failure of prices to recover towards the long term average of $6/kgMS by mid-2015 will exert pressure on asset quality within banks' dairy exposures," the ratings agency said. "Banks' credit assessments when lending to dairy farmers tend to incorporate long term average payouts. If payouts remain below levels used for serviceability assessments, these may prove too generous for the most highly leveraged borrowers."

New Zealand banks have significant exposure to the dairy industry, with dairy loans making up nearly two-thirds of total agricultural loans, which account for about 15 percent of total bank loans, it said.

Of the nation's largest lenders, Bank of New Zealand has the biggest exposure to agriculture loans, accounting for 15 percent of its total credit exposure, followed by ANZ Bank New Zealand at 12 percent, ASB Bank at 11 percent and Westpac New Zealand at 8 percent.

Fitch said it expects a "modest deterioration" in asset quality across banks' loan books in 2015 following the 1 percentage point increase in the official cash rate last year, and noted that bad loans have started rising from cyclical lows in the six months to the end of March 2015.

"New Zealand banks are generally well capitalised, have strong profitability and sound asset quality," Fitch said. "This gives them ample capacity to absorb impaired loan levels similar to 2009-10."

BusinessDesk.co.nz

Comments from our readers

No comments yet