RBNZ asks banks to stress test dairy loans
RBNZ asks banks to stress test dairy loans, confident they can weather downturn
By Paul McBeth
Nov.
11 (BusinessDesk) - New Zealand's major lenders are able to
cope with a protracted downturn in the dairy sector, which
the Reserve Bank estimates could cause credit losses of as
much as 18 percent over a four-year period.
The
central bank has requested the five biggest lenders to the
dairy sector - ASB Bank, ANZ Bank New Zealand, Bank of New
Zealand, Westpac New Zealand and Rabobank New Zealand - to
stress test their portfolios, which the Reserve Bank sees as
a growing risk to the health of the nation's financial
stability. The regulator was encouraged by "realistic
provisions" set aside for the portfolios, and its modelling
suggests a sustained downturn would be manageable for the
wider system.
"The dairy sector faces a second consecutive season of weak cash flow due to low international dairy commodity prices," governor Graeme Wheeler said in a statement issued with today's Financial Stability Report. "Prices have shown some recovery since August, but many indebted farms are coming under increased pressure, which would be exacerbated if low dairy prices are sustained or dairy farm prices fall significantly."
The Reserve
Bank has previously cited concerns about the level of
indebtedness among a core group of dairy farmers, with about
10 percent of farms accounting for a third of the sector’s
debt, and six months ago warned the high level of farms
operating in negative cash flow could lead to an increase in
foreclosures.
Lenders are currently working with dairy farms under financial stress on an expectation future payouts will be "significantly higher" than those in 2014/15 and 2015/16 seasons, the report said. That's increased debt levels by about 10 percent over the past year, and banks' watchlist loans now account for about 5.8 percent of outstanding dairy lending.
The Reserve Bank's initial
modelling shows non-performing dairy loans will increase to
7.8 percent of sector debt under the base case scenario,
which projects a quick recovery in the payout over the next
four years.
Under a severe scenario, where the payout
stayed at or below $5 per kilogram of milk solids for the
next four years, that would rise as high as 44 percent, due
in part to a sharp drop in farm values.
The Reserve Bank said it was highly uncertain how many non-performing loans would result in defaults though loss rates for the banking system would range between 2 and 14 percent of all dairy lending. That would amount to credit losses of between 2 percent and 18 percent of pre-tax profit for the five biggest lenders, "suggesting that they are manageable for the system as a whole," the report said.
The results
of the private lenders' stress testing is expected to be
completed before the end of the year, and will be reported
on in due course, the Reserve Bank
said.
(BusinessDesk)