RBNZ says banks can ab­sorb dairy losses

The Pak Banker - - FRONT PAGE -

WELLING­TON: Banks can cope with the dairy down­turn in New Zealand, even though about half the coun­try's farm­ers are ex­pe­ri­enc­ing a se­cond straight sea­son of losses, the cen­tral bank said. The five big­gest lenders, which ac­count for 98 per­cent of banks' NZ$38 bil­lion ($25 bil­lion) ex­po­sure to the dairy in­dus­try, can ab­sorb losses from earn­ings rather than through an ero­sion of cap­i­tal, the Re­serve Bank said Wed­nes­day in Welling­ton. A stress test of the banks shows av­er­age losses of 3 per­cent to 8 per­cent of to­tal ex­po­sure un­der two sce­nar­ios that are worse than the RBNZ's cur­rent fore­cast, it said.

Fon­terra Co­op­er­a­tive Group, the world's big­gest dairy ex­porter, this month cut the fore­cast pay­out to its New Zealand farm­ers to a fresh nine-year low amid a global milk glut. About 80 per­cent of those farm­ers are op­er­at­ing at a loss, the RBNZ es­ti­mates.

"Low global milk prices are gen­er­at­ing sig­nif­i­cant fi­nan­cial pres­sure for dairy farm­ers, with around one half of the dairy sec­tor cur­rently ex­pe­ri­enc­ing a se­cond con­sec­u­tive sea­son of op­er­at­ing losses," said Bernard Hod­getts, head of the RBNZ's macro fi­nan­cial depart­ment. Still, banks' loan losses "would be rea­son­ably com­fort­ably met out of bank earn­ings," he said.

The RBNZ es­ti­mates farm­ers would break even with a pay­out of NZ$5.30 per kilo­gram of milk­solids. Fon­terra is cur­rently fore­cast­ing a pay­out of as much as NZ$4.30 for the sea­son end­ing May 31, which in­cludes NZ$3.90 for milk and a 35-40 cent div­i­dend.

The RBNZ tested two sce­nar­ios late last year. The first as­sumed the dairy pay­out re­cov­ers to NZ$5.25 by the 2017/18 sea­son; the se­cond en­vis­aged the pay­out fall­ing to NZ$3 in 2015/16 and re­main­ing at or below NZ$5 un­til the 2019/20 sea­son. Un­der the se­cond sce­nario, banks' losses would av­er­age 8 per­cent of their over­all ex­po­sure, which equates to just over NZ$3 bil­lion in to­tal. Dairy sec­tor lend­ing ac­counts for ap­prox­i­mately 10 per­cent of the NZ$348 bil­lion of over­all bank lend­ing in New Zealand.

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