Don’t stress, our banks will be ok – RBNZ

Written By: - Date published: 4:34 pm, March 16th, 2016 - 36 comments
Categories: Economy - Tags: , ,

Foreclose on banks not people

Guest Post: by Simon Louisson

The news for cow cockies and the wider dairy industry just gets grimmer and grimmer, but relax everyone, the banks will be fine, according to the Reserve Bank of New Zealand today.

On a day when prices fell another 2.9 percent in Global Dairy Trade auction and Fonterra announced it was shutting a cheese factory in Kaikoura with the loss of 30 jobs, the central bank released its “stress test” of the five main rural lending banks and found they will survive a severe industry downturn intact ,albeit with some losses.

The RB conducted the test, which involved “long and heavy” discussions with Westpac, ANZ, BNZ, ASB and Rabobank, because of its concern over their exposure to dairy and the severe impact of the dairy price downturn on the industry’s huge debt to those banks.

Dairy farmers owe banks around $40 billion (and rising every day), with over 80 percent of farms expected to run at a loss at this season’s forecast farmgate payout of $3.90/kg of milksolids. Over half of farms are already in their second season of losses and needing higher working capital from the banks, according to the head of the RB’s Macro Financial Department, Bernard Hodgetts.

“That’s when financial stress really builds up,” he said.

He did not comment on potential emotional and mental stresses.

He told a news briefing on the release of the report, that the current dairy payout price meant farms were under the bank’s “severe” Scenario 2 where over 44 percent of farms were likely to default on debt payments and farm values were likely to plunge a whopping 40 percent.

Even under the more optimistic Scenario 1, of a price recovery, farm values were likely to slump 25 percent with defaults at around 11 percent.

Under Scenario 2, bank’s bad debt exposure will be around $8.5 billion possibly as high as $12 billion. Multiple foreclosures are a certainty.

Of course the banks won’t take all the “impaired loans” as losses because they have secured the debt against the land and cows. But that’s how much the farmers in default will likely lose.

Still, the banks will take a substantial hit so that by the 2019/20 year, a quarter of the dairy industry’s by then $45 billion-plus of loans, will have to written off.

Before you start crying, all four major Australian-owned banks continued record runs of profitability in 2015, with a combined haul of $4.59 billion, topped by ANZ at $1.77 billion.

Hodgetts said there was no doubt the dairy industry was highly leveraged and because it comprised around 10 percent of the banks’ total lending of $350 billion, posed a “structural” threat to the financial system.

He said the banks’ losses via the dairy industry would be “largely absorbed through profits”.
What he didn’t say, is that those losses will cut banks’ tax bills so it will be we taxpayers who will take the final hit. Bank losses will only be a fraction of farm owners’ losses, he said.

Because of the likely precipitous fall in farm prices under Scenario 2, banks will be unable to immediately sell all default farms after foreclosures and “the process of writing off could be protracted, potentially over a long time”.

While some analysts believe the dairy industry and the government have continually been overly optimistic about a recovery of dairy prices, Hodgetts said the RB modelling had been intentionally severe.
The bank believes the breakeven price for our farmers is around $5.30/kg of milksolids and because New Zealand is an efficient producer, that will be the international price point.

“You have to look pretty hard to see prices in any industry below breakeven for over five years,” he said.

Hodgetts said the bank’s stress test was narrowly focussed and it had not tested for multiple simultaneous shocks such as a steep fall in house or commercial property prices with the dairy drop. That wider stress test was last done in late 2014 and he could not say when it will next be done.

Nor had the bank measured the flow-on effects such as yesterday’s report by MYOB showing that one in five of all small businesses are hurting from the effects of the downturn in dairy farming.

Earlier this month, Fonterra demanded 90-day credit terms from its 20,000 suppliers prompting questions about its own working capital and or cashflow.

However, the giant co-op denied problems, despite analysts saying its own gearing (debt to equity ratio) was far too high at around 50 percent. Fonterra says it is on-track to cut it to 45 percent.

It has signalled it will soon offer another $350 million in interest-free loans to troubled farmers to supplement the $430 million scheme announced in September.

That will probably be announced next week at its half- year result meeting which promises to be an lively but unhappy occasion.

(Simon Louisson formerly worked for The Wall Street Journal, NZPA, Reuters and was most recently a political and media adviser to the Green Party)

36 comments on “Don’t stress, our banks will be ok – RBNZ ”

  • Comments are now closed

  1. McFlock 1
    16 March 2016 at 4:51 pm

    oh thank goodness, I’m so relieved. At least the bankers will be alright.

  2. Saarbo 2
    16 March 2016 at 4:57 pm

    The Fonterra payout this year is $3.90 plus Dividend (sh/b .40 to 50 cents…to be announced 23 March) plus 50 cent loan from Fonterra….total payout this year will be close to $5. A lot of farmers in the Waikato that I know reckon they will break even…mainly the small family owned/run farms. The larger farms in the south island may be a different story.

    But yeah, things are looking pretty bad, and I think many on The Standard predicted this downturn( extending 5 years) 18 months ago.

    I reckon most farmers who operate their own farms have plenty of scope to reduce costs to take farm working expenses under $3.50, even under $3. A little too much panic happening now, perhaps their wasn’t enough 18 months ago though.

    Thats my view.

    • Saarbo 2.1
      17 March 2016 at 6:47 am

      And I forgot, farmers get another 50 cents a kgms approx for cattle sales…so just under $5.50 per kgms this year of potential cash in flow.
      For some reason…no media will report this.

  3. Ad 3
    16 March 2016 at 5:09 pm

    Our Reserve Bank has the economic leadership of New Zealand.

    We deserve better government.

  4. Macro 4
    16 March 2016 at 5:11 pm

    The complicity of both Banks and the National Government in fostering this ridiculous gamble on building our Milk Powder Republic needs to be fully understood and the blame sheeted where it lies. Farmers have also been greedy and happily frolicked down the garden path led on by Banks with easy lending criteria and a government happy to turn a blind eye to all the polluting externialities, subsidizing irrigation, allowing fonterra to mine for coal, and even usurping the democratically elected ECAN and replacing it with government cronies.
    Our farmers claim they farm in an unsubsidized economy – bullshit

  5. weka 5
    16 March 2016 at 5:14 pm

    Toby Manhire ‏@toby_etc 2 hrs2 hours ago

    Does the Overseas Investment Act exempt Australian banks taking ownership of NZ farms via foreclosure from going through the OIO?

    https://twitter.com/toby_etc/status/709930675336519680

    Andy Milne ‏@AndyBMilne 2h2 hours ago

    @toby_etc banks exercising rights as mortgagee does not require transfer of ownership, therefore no OIO involvement required.

    Dovil ‏@Dovil 2h2 hours ago

    @AndyBMilne @toby_etc I assume bank then sells it and it would come into force if overseas buyer? Even though in overseas hands already?

    Andy Milne ‏@AndyBMilne 1h1 hour ago

    @Dovil I believe so. Most banks couldn’t be bothered with this tho, so may accept a lower bid from a kiwi buyer to avoid hassle @toby_etc

    • Chooky 5.1
      16 March 2016 at 5:21 pm

      that is the issue of the day!…farms into blind trusts and off- shore buyers..no restrictions?

      NZ for SALE

  6. alwyn 6
    16 March 2016 at 5:17 pm

    “What he didn’t say, is that those losses will cut banks’ tax bills so it will be we taxpayers who will take the final hit.”
    My goodness, what a fascinating view of the world you have.

    If that is the logic you follow I suppose your next statement will be along the lines of.

    “We don’t care how old you are. Nobody is allowed to retire because that would mean a drop in your income. Then you bastards wouldn’t be paying as much tax as you should. Miserable lazy swine! Back to the millstone.”

    • mickysavage 6.1
      16 March 2016 at 6:25 pm

      Weird Alwyn. Simon’s comment makes perfect sense. Yours does not.

      • alwyn 6.1.1
        16 March 2016 at 7:05 pm

        Sorry you have trouble understanding it.
        Perhaps you should consider how there is any difference between the logic in each case. You may not like it but I think they are just the same. Exaggerated of course but not different in principle.

        • Outdoor 6.1.1.1
          17 March 2016 at 10:20 pm

          The difference in logic? Simon writes that the taxpayers end up worse off due to problems caused by low dairy prices & reduced bank profits, the taxpayer did not force the increased dairy industry debt, did not cause the slump in international prices but ends up in a poorer position.
          You suggest we outlaw retirement as that would reduce our tax paid. This requires a government to pass laws, ignores the reality that while old people retire young people enter the workforce & those in productive jobs get an income increase & pay more tax. If you are so stupid that you can’t see the difference between the situations then your education has been limited.

      • Nic the NZer 6.1.2
        16 March 2016 at 7:08 pm

        Labour did push that view at the last election , its called a policy of raising the retirement age (to supposedly cut the pension bill).

    • Nic the NZer 6.2
      16 March 2016 at 6:59 pm

      Well put Alwyn. You can have your credibility back now in fact, though it was due already from showing the situation changed around your comments.

      If NZ gets away with the main fall out being a reduction in bank profits and an expansion in the govt deficit then we should be very pleased to have gotten off so lightly. Though these crisis have a manner of spiraling beyond what is forecast by stress tests. I still strongly suggest that the govt should re-implement a deposit guarantee for all bank deposits however. This would reduce the threat of any bank runs and in the worst case we should expect the govt is already backing up all our banks anyway. The guarantee is itself no burden on the RB anyway.

      • alwyn 6.2.1
        16 March 2016 at 7:07 pm

        “showing the situation changed around your comments”.
        Does this refer to the fact that Forex accounts were covered in Australia from 2008 to 2011, even if they aren’t now?

  7. Jones 7
    16 March 2016 at 5:30 pm

    This is why the banks are not passing on the OCR cut. They need to bank ahead of what they can see are losses to the value of the farmland.

    That is also why the scenario of cash rich foreign entities buying the land from the banks is a very real one. The banks will be seeking to minimize their losses by simply selling to the highest bidder.

  8. vto 8
    16 March 2016 at 5:33 pm

    why on earth have you called them “our” banks simon?

    they are nothing of the sort

    they are foreign banks

  9. Peter Wilson 9
    16 March 2016 at 5:55 pm

    Some dairy farms are profitable at $3.90, having working expenses of $3.50. What annoys me is that DairyNZ analysis consistently ignores this.

    https://keithwoodford.wordpress.com/2016/03/09/controlling-dairy-farm-cost-of-production/#more-1409

  10. b waghorn 10
    16 March 2016 at 7:46 pm

    They are very good farmers those banks, their livestock looks after itself mostly,the tax payer takes care of all the health care, and if they manage them properly they can get 40 to 60 years production out of them.

  11. NZJester 11
    16 March 2016 at 7:54 pm

    I see the cost cutting has started with the laying off of staff at a lot of Dairy farms.
    I bet the staff that are left will be expected to take up the slack with no extra pay.

  12. venezia 12
    16 March 2016 at 9:49 pm

    ” Our farmers claim they farm in an unsubsidized economy ”
    Subsidies in farming have been the case for a long time. This includes: water (free use of), pollution effects of fresh water (who cleans it up? Who pays the price?) Irrigation – direct government funding….
    So where do they get the idea they are not subsidised?

  13. esoteric pineapples 13
    17 March 2016 at 8:50 am

    So basically New Zealand has its own version of the sub prime crisis of 2008

  14. Smilin 14
    17 March 2016 at 4:10 pm

    Its not like they couldn’t see it commin, the govt and the banks,and Fonterra, but because now in NZ we have so much of our economy dependent on what the banks and financial institutions do, that the fact that you can actually stay alive on a farm if its broke is meaningless but you wouldn’t live long in a bank if it went broke, nothun to eat
    Get real everyone this power given to the world of money is a load bullshit
    The money does not create value, it controls value which is a huge difference to what something is actually worth.
    Hillside workshops could have been a saving asset for this country but that fucking banker who runs this country thinks he knows better.
    And now it’s happening to the biggest business in the country
    But we are all screwed to the value of new by greed and desire and power control of money and those who own it
    Thats right money is owned its not a means of exchange, that’s an old wives/ husbands tale that was never was real
    Why should someone get 5 million bonus for the year when their work has failed to maintain itself leaving billions of dollars in debt
    So the finance industry just like everyone else wants to be richer but when someone steals from the bank you get a govt sanctioned war
    If someone says that’s what the banks are doing to us ,stealing,and you are considered a terrorist or subversive
    Its like this you couldn’t build a car for what you pay for it so the corporate model does work but there is obviously a big difference between a car manufacturer and a bank you can get your money’s worth out of a car, a bank na never
    All a bank needs to do is convince people to buy into what is that they are, pretty easy when they control the government and the power to wipe out whole nations and people in power who try to question their honesty
    Yep banks and their reps have far too much power in this country hence we are not really a democracy but some weird version of a totalitarian state run by a banker
    Forget him being PM he’s here to let us know game over for socialism in this country or that’s what he would have us believe, that’s his ego trip and a bloody expensive one for the rest of us it would seem.

  15. Kieren Trass 15
    30 March 2016 at 9:00 am

    Allan Hubbards SCF used to fill the gap for lending to overstretched farmers and he also lent $30M of his own funds (equity in a trust) to farmers (in some cases to farmers seriously considering suicide as an option to get out of their difficult financial position, there are real cases of lives being saved by Allan’s generousity) and Allan got accused of ‘dodgy lending practices’ yet Fonterra can lend $780Million interest free to farmers in much deeper financial difficulties and yet no-one is accusing Fonterra of dodgy lending.
    Remember it was only 5 years ago that Bill English placed SCF in receivership and promptly ‘bailed investors out for $1Billion of your money’ citing the potential negative impact on the rural economy and the overall stability of NZs economy if the government didn’t cough up the $1Billion? Fast forward to today where the banks may face losses of $8Billion and the same Bill English says their will be no bailout, the banks and NZs economy is robust enough to cope with that…
    “A few billion of losses for the banks is not a threat to financial stability. The regime that’s in place now means the banks are stronger than they’ve ever been,” he said. The ‘regime’ Bill is referring to is the OBR policy which guarantees bank losses will be borne by the banks customers deposits…

    Read more: http://www.newshub.co.nz/politics/govt-rules-out-struggling-farmer-bail-out-2016031311#ixzz44K8i4JJ2

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    BeehiveBy beehive.govt.nz
    1 week ago

  • Unnecessary bureaucracy cut in oceans sector
    Oceans and Fisheries Minister Shane Jones is streamlining high-level oceans management while maintaining a focus on supporting the sector’s role in the export-led recovery of the economy. “I am working to realise the untapped potential of our fishing and aquaculture sector. To achieve that we need to be smarter with ...
    BeehiveBy beehive.govt.nz
    1 week ago

  • Opinion: It’s time for an arts and creative sector strategy
    I was initially resistant to the idea often suggested to me that the Government should deliver an arts strategy. The whole point of the arts and creativity is that people should do whatever the hell they want, unbound by the dictates of politicians in Wellington. Peter Jackson, Kiri Te Kanawa, Eleanor ...
    BeehiveBy beehive.govt.nz
    1 week ago

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