Five biggest rural lenders to conduct 'stress test'

Reserve Bank Governor, Graeme Wheeler, said New Zealand's financial system continued to perform well, despite a deterioration in the outlook for global financial stability.

The Reserve Bank said it had asked the country's five biggest rural lenders to conduct a "stress test" of their exposure to dairy farm debt, and had encouraged them to set aside provisions to reflect a likely increase in problem loans to the sector if prices product prices remain low.

The central bank, in its six monthly financial stability report, many indebted farms were coming under increased pressure, which would be made worse if dairy prices remained low or if dairy farm prices fell significantly. New Zealand's top five rural lenders are ANZ, ASB, BNZ, Rabobank and Westpac.

"The banks are working with dairy farmers experiencing difficulty, and it is important that they continue to take a medium-term view when assessing farm viability," the Reserve Bank said.

"The banks' losses on dairy exposures are expected to be manageable but banks need to ensure that they set aside realistic provisions for the likely increase in problem loans," it said.

Reserve Bank Governor, Graeme Wheeler, said New Zealand's financial system continued to perform well, despite a deterioration in the outlook for global financial stability and increased risks related to the dairy and housing sectors.

"The dairy sector faces a second consecutive season of weak cash flow due to low international dairy commodity prices," he said.

"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," he said.

Cash flow stress could also add downward pressure to the price of dairy farms, it said.

Farm prices held up relatively well during the 2014-15 season, supported by low interest rates and a positive long-term outlook for the sector.

However, turnover in the market for dairy farms has declined over the past year, with annual sales declining from around 310 to 260.

A sharp decline in farm prices would reduce the value of bank collateral, adding to the risk of a rise in non-performing dairy loans, it said.

Read the latest Financial Stability Report here: