NZ banks strong enough to withstand prolonged weakness in dairy prices: RBNZ

Wednesday 16th March 2016

ASB Bank, ANZ Bank New Zealand, Bank of New Zealand, Westpac New Zealand and Rabobank New Zealand - which account for about 98 percent of lending to dairy farmers - are strong enough to withstand a protracted period of low dairy prices, according to Reserve Bank stress testing.

The five lenders are expected to face losses over a longer time frame if dairy prices stay below the average breakeven price for as long as five years, the central bank said in a report today. The lenders stress tested their dairy portfolios at the behest of the Reserve Bank, operating under two scenarios: one where prices didn't recover until the 2017/18 season and a more severe test where the payout remained below $5 per kilogram of milk solids until 2019/20.

The $38 billion of debt to dairy farmers accounts for about 10 percent of total lending in New Zealand, and is seen as a risk to the country's broader financial system as global prices slump in the face of heightened production. Fonterra Cooperative Group this month cut its forecast payout to farmers to $3.90/kgMS, and hinted it may extend its interest-free loan payments to help some farmer shareholders through the second season of negative cash flow.

Bernard Hodgetts, RBNZ head of macro-financial, told a briefing in Wellington that the first scenario was "a little more severe than the industry view" whereas the second would be "particularly unusual" but "not totally implausible."

Under the first scenario, dairy farm land prices are expected to drop 20 percent and lenders would face an increase in their bad debt expense of about 3 percent on average, writing off about 12 percent of loans. The more severe scenario would likely lead to a 40 percent drop in farm prices with banks facing increased impairment charges of about 8 percent, with 25 percent of loans written off.

Report author Ashley Dunstan said the scale of loans written off would create "very challenging conditions" for selling farms, particularly in later years, and there was uncertainty as to whether enough buyers would emerge to absorb an increase in listings.

"This analysis suggests that banks should plan for the possibility that the time taken to write off stressed dairy exposures could be significantly longer than assumed in the tests," Dunstan said. "There is a risk that the lags involved in resolving stressed dairy assets are larger than reported, potentially creating an ongoing source of uncertainty for banks."

Toby Fiennes, RBNZ head of prudential supervision, said banks are still helping their customers through the current downturn, providing working capital and "not rushing to foreclose."

The lenders are considering the results of the tests and will discuss what, if any action, they need to take with Reserve Bank, the RBNZ said.

BusinessDesk.co.nz

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