ASB Bank, ANZ Bank New Zealand, Bank of New Zealand, Westpac New Zealand and Rabobank New Zealand - which account for about 98 per cent 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 yesterday. 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 per cent 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, said 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 per cent and lenders would face an increase in their bad debt expense of about 3 per cent on average, writing off about 12 per cent of loans. The more severe scenario would likely lead to a 40 per cent drop in farm prices with banks facing increased impairment charges of about 8 per cent, with 25 per cent of loans written off.
