Indebted dairy farms need good seasons, barely covering costs
AUCKLAND: Some heavily indebted dairy farmers are barely covering their interest payments despite relatively strong prices for several seasons, Westpac NZ chief executive David McLean says.
‘‘The ones who’ve got more leverage, most of those are still covering their cost of production but some of them are close to the edge,’’ he says.
‘‘Their interest cover isn’t that great — there are a lot of farmers who are doing it tough and there’s not a lot of buffer.’’
That’s why although only 0.32% of Westpac’s agribusiness portfolio was actually impaired at September 30, down from 0.42% a year earlier, loans classed as ‘‘stressed’’ rose from 9.7% to 10% of the portfolio.
Mr McLean said it was only the dairy sector that remained stressed because other farmers ‘‘are doing quite nicely’’.
Fonterra’s payout fell to just $3.90/kg of milk solids in the 2015/16 season from a still poor $4.40 the previous season. At that time, the average dairy farmer needed a payout above $5 to break even.
Rising costs pushed the 2017/18 season’s average breakeven point to $5.88/kg, although the Reserve Bank estimated the most indebted farmers would need a payout above $6.20.
That was still above the $6.12/kg Fonterra paid in the 2016/17 season but the past two years were higher at $6.69 and $6.35 respectively.
This year is also shaping up well with Fonterra’s advance payout at $7.05/kg, the midpoint of its current $6.55$7.55 forecast.
Mr McLean said some farmers needed prices to remain high for longer to fully recover.
‘‘We need the dairy payout to stay at these levels or higher for quite a sustained period,’’ he said.
Agribusiness loans grew from $9.2 billion to $9.5 billion in the year ended September, accounting for 8.1% of total capital employed.
Westpac New Zealand lifted annual net profit 3% to $964 million, boosted by a net $10 million writeback of charges against profit for bad debts and the $40 million gain from selling its Paymark stake.
The bank said its core earnings for the year were down 1% amid strong competition and rising costs.
‘‘We think we’ve delivered a balanced result in a challenging environment,’’ Mr McLean said.
Westpac’s operating costs rose 7% in the year to $993 million while net interest income was nearly flat at $1.97 billion and noninterest income rose 10% to $448 million — the latter reflected the Paymark profit which helped offset the bank removing or reducing 13 fees in the year and removing five products from service or sale.
The fee reductions followed the joint review of conduct and culture by the Reserve Bank and the Financial Markets Authority which was sparked by the Australian royal commission into financial services.
Westpac’s chief financial officer, Ian Hankins, said 2% of the costs increase related to that review, another 2% related to other regulatory changes including RBNZ’s policy restricting outsourcing and the bank’s remediation work on its internal models for calculating capital.
In late 2017, RBNZ had announced that Westpac had failed to get approval to use nearly half the internal models it had been using since it was accredited to do so in 2008.
The only New Zealand banks allowed to use internal models are the four Australianowned banks which account for about 88% of the NZ banking system, giving them a strong competitive advantage.
While Westpac worked to get the necessary approvals, RBNZ had ordered the bank to hold about $1 billion of additional capital, a twopercentagepoint overlay above its minimum required capital. RBNZ will lift that impost from December 31.
Mr Hankins said Westpac NZ’s capital position at September 30 was little changed from June 30 when it had common equity of 12%, total tier 1 capital of 14.7% and total capital including tier 2 capital of 16.7%.
That compared with ASB Bank’s total capital of 14%, ANZ Bank’s 13.5% and Bank of New Zealand’s 13.7%.
In February, RBNZ revealed that ANZ Bank held slightly more than half the capital to support every $100 of mortgages than the Governmentowned Kiwibank had to hold.
RBNZ, which has estimated the banks would need to raise another $20 billion in capital to meet the proposed requirements, has said the major banks could meet the new requirements by withholding 70% of the dividends they pay their Australian parents over a fiveyear period.
RBNZ is scheduled to announce its final decisions in early December. Observers expect it might extend the phasein period from the proposed five years. — BusinessDesk