New Zealand's big five banks - which hold most of the $38 billion in dairy loans - are strong enough to withstand a protracted, up to five-year period of low dairy payouts, according to a Reserve Bank stress test.
The Reserve Bank asked the ASB, ANZ, BNZ, Westpac and Rabobank New Zealand to stress-test their portfolios under two scenarios: that the dairy payout recovers to $5.25 per kilogram of milksolids (kgMS) by the 2017-18 season, and with a 20% decline in dairy farm prices.
The second scenario outlined a fall to $3 in 2015-16 and to remain below $5 until the 2019-20 season, with a 40% fall in land prices.
Fonterra this month cut its forecast payout to farmers to $3.90 per kgMS, and hinted it may extend its interest-free loan payments to help some farmer shareholders through the second season of negative cash flow, BusinessDesk reported.
Concerns are mounting that the latest forecast payouts - which could amount to $7 billion-$8 billion less in the economy, leaves dairy farmers in a cash-negative position, and struggling to repay loans.
The Reserve Bank's summary of its Bulletin report yesterday said the low global milk prices were generating significant financial pressure for dairy farmers. About half the dairy sector was experiencing a second consecutive season of operating losses.
Reserve Bank macro-financial head Bernard Hodgetts said bank lending to the dairy sector stood about $38 billion, or about 10% of the banking system's total lending. He said the Reserve Bank would expect losses of the order seen in the stress scenarios to be absorbed largely through lower bank earnings, ‘‘rather than through an erosion of bank capital''.
‘‘On average, banks reported losses under the two scenarios ranging between 3%-8% of their total dairy sector exposures,'' Mr Hodgetts said.
ASB rural economist Nathan Penny noted the report found the average break-even across the sample of banks was $5/kg, compared with DairyNZ's estimate of $5.30/kg.
The Reserve Bank tests showed the banks were well-positioned to manage through ‘‘worst-case'' dairy downturn scenarios, including the ability to absorb ‘‘worst-case'' losses.
Mr Hodgetts said the test results suggested that in the shorter term, banks would increase their dairy lending in order to support existing borrowers facing negative cash flow, before facing a longer term rise in loan losses, if there was a prolonged dairy sector downturn.
Opposition leader Andrew Little said the Government should call a summit of banks, ministers, Federated Farmers and Fonterra to develop solutions to keep efficient farms in business, and productive land in New Zealand's hands.
‘‘Banks have been with the farmers in the boom times. The Reserve Bank's report shows they can stand by them in the bad times,'' Mr Little said in a statement yesterday.
Report author Ashley Dunstan said the scale of loans written off would create ‘‘very challenging conditions'' for selling farms, particularly in later years.
There was also 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.
