Kiwi black holes. They beat us in the Rugby World Cup, we are beating them in the Test cricket at the moment — New Zealanders are a constant in our lives, culturally, in sport and in business, especially banking, where problems in the country’s huge dairy industry and worries about the booming Auckland housing markets are the two major offshore risks for our big four banks. They dominate the NZ economy as they do here. The RBA reminded them of the growing level of risk across the Tasman in its recent Financial Stability Review:

“… the deterioration in New Zealand’s dairy sector in response to low global milk prices will be an area to watch, given the size of the Australian bank subsidiaries’ exposures to that sector … However, rapid housing price growth in Auckland, along with strong investor activity, has heightened the risk of a future fall in housing prices and associated bank loan losses.”

That exposure to dairying is around US$30 billion — and it’s a nasty reminder to Australian shareholders in the big four that risks lie outside this country as well as within. This morning the RBA’s concerns were underlined by the latest Financial Stability Review from the Reserve Bank of NZ.

“The dairy sector faces a second consecutive season of weak cash flow due to low international dairy commodity prices.  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.”

“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 … A sharp downturn could challenge financial stability, given the large exposure of the banking system to the Auckland housing market.”

So with the RBNZ expecting the big four Aussie banks to incur losses on loans to the dairying sector, and growing worries about the Auckland housing market, will the quartet reveal those losses to Australian investors, or bury them in their impaired loans and provisions? — Glenn Dyer

BHP shares on the nose. Investors around the world are ditching BHP Billiton shares. They have fallen every day since last Thursday, when two dams that it co-owns with rival Vale in Brazil, at their Samarco mine and pellet operation, burst and flooded nearby villages with mining waste. Two people are dead, and more than 20 are missing in what is the biggest mining-related disaster for the company (and in fact, for any Australian mining company) for years. Deutsche Bank reckons the cost could be US$1 billion (A$1.4 billion) to clean up the wreckage and remediate the damaged areas. And some analysts wonder if Samarco will be restarted with both BHP and Vale writing off what is a high-cost, low-margin business compared to their respective iron ore operations.

Some hard-hearted analysts are now speculating that BHP will be forced to abandon its “progressive” dividend policy, which means the company paying shareholders as much as the company can afford. (Many analysts hate the policy because they essentially don’t like shareholders because they take money the analysts and their banks could be using in deals for BHP). BHP shares are down 11% since last Friday (Sydney time) when news of the spill broke. BHP shares are down a massive 37% so far in 2015. Vale shares are down 9% and 31% so far this year. In the year to June, BHP has cash flows of US$6.3 billion, so the cost of fixing the damage is easily covered. But investors don’t like it because they are certain the cost will rise. So what about the dead? — Glenn Dyer

Junk food, junk stock? Burgers, fries, wraps, coffee and sodas are the staples of McDonald’s, and concerns about quality, their healthiness and just poor or indifferent service, especially in drive-thrus, are the staple complaints about the fast-food giant. Successive managements have made numerous attempts to fix these worries, with different results. But those hard heads on Wall Street don’t worry about the food, but the financial fix promised by the current management: a change to Macca’s corporate structure itself, with most eyes on a fat, juicy restructure, with the thousands of properties the company-owned outlets sit on across the US spun off into what Americans call a real estate investment trust. That’s part of the reason Macca’s share price is up 21% so far this year, against virtually no rise in the wider market.

But overnight management rejected that option at a briefing for investors, opting instead to continue cutting costs, and boost dividends to 89 US cents a share a quarter, or US$3.56 a year. The higher dividend will be funded by debt. In fact returns promised to shareholders will jump US$10 billion to US$30 billion for the three years ending 2016. Management admitted this would result in the company’s credit standing being cut, which is exactly what happened a couple of hours later when Standard & Poor’s cut the rating to just three levels above junk. That US$3.56 dividend wouldn’t buy you a Big Mac in the US, where the average price of the big burger in July of this year was US$4.79. — Glenn Dyer

Peter Fray

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