Big four’s Kiwi dairy stress. Earlier this week we told you about the upcoming results of the stress tests on the Kiwi operations of our big four banks by the Reserve bank of NZ, which is worried the dairy crisis could deepen and threaten the country’s financial system and economy. Yesterday the RBNZ released a summary of the tests on the five largest dairy lenders (including the NZ operations of NAB, ANZ, Westpac and CommBank). The results were grouped across the five banks and the news was that if the dairy recession deepens, driving land prices down sharply, then the banks could be up for billions of dollars in losses. The results will now be discussed with the five banks by the RBNZ — and no doubt in Australia by APRA and the Reserve Bank (which has estimated our big four have A$30 billion exposed to the NZ dairy sector). Kiwi dairy prices have fallen more than 60% in the past two and a bit years, and Fonterra, the Kiwi dairy giant, has slashed its milk solids price to farmers from NZ$8.50 a kilo two years ago to NZ$3.90 currently.
The stress test was in two parts: the first assumed that the dairy payout recovers to NZ$5.25 per kilogram of milk solids by the 2017-18 season (currently $3.90 a kg) and a fall in dairy land prices of 20%. The second assumed a dairy payout falling to NZ$3 in 2015-16 and remaining below NZ$5 until the 2019-20 season with land prices falling 40%. The tests showed potential losses of between 12% and 25% regarding initial exposures to the dairy sector for the banks — or a top of around NZ$4 billion. That’s a big whack seeing as the Kiwi banking industry makes profits of around NZ$5 billion a year. The stress tests were limited to the loan and other exposures to the dairy sector. It didn’t look at the knock-on impact to companies servicing and supplying the sector, or to other parts of the economy, such as a fall in land prices spillover into land prices for housing and commercial property. — Glenn Dyer
Kiwi economy grows, slows. One way to ease the pain of any deepening in the dairy recession would be for the rest of the NZ economy to grow more strongly to offset the dampening impact of the cow juice bust (a bit like the way housing and household spending is offsetting the slide in business (mining) investment in Australia. Sadly, there seems little chance of that happening any time soon, judging by the latest growth figures. New Zealand’s economy expanded more than expected in the fourth quarter, but annual growth slowed sharply from the near boom-like conditions of 2014. Statistics NZ said yesterday that GDP grew 0.9% in the fourth quarter (compared with the 0.6% growth in Australia), for annual growth of 2.3%, (3% in Australia) and down sharply from the 3.3% annual rate in 2014 (when the dairy boom was dying). Growth was faster than market forecasts of 0.6% and 2%, but economists said the coming year remains problematic with China slowing, the dairy wobble worsening and the housing boom slowing. For banks and the economy, the worst that could happen would be for the housing boom to slide more sharply and the rebuilding of Canterbury to slow as well. The RBNZ reckons growth will rise to 3% this year, but with dairying slumping, that would leave household spending to hold up the entire economy — a big ask. — Glenn Dyer
Hot air from ASIC. It seems ASIC chair Greg Medcraft is engaging in a bit of “warning the Tsar” by telling banks they have to lift their game so far as culture is concerned; nice words, but APRA head Wayne Byers and RBA supremo Glenn Stevens were hammering this line in 2014 and 2015. This morning’s stories say Medcraft is concerned at bank culture so far as the CommInsure debacle and financial advice scandals at the Commonwealth, the weak oversight and record-keeping at the ANZ, not to mention those claims that the ANZ’s traders attempted to rort a key market interest rate. There has been financial planning problems at other banks. Then there’s the weak record-keeping and oversight of lending to home owners and investors (APRA and the RBA forced the hand of the banks last year with a thorough examination of their loan books, forcing more than $85 billion of mortgages to be reclassified). And ASIC ran a rod through the banks over some rorts in fixed-rate/interest-only lending, as well as some weak record-keeping and oversight. Now the banks are facing pressures from rising bad and doubtful debts from a number of weak major corporates (Dick Smith, McAleese, Arrium), and slowing home loan growth. But for all the talk from the likes of Medcraft and Byers, no senior bank executive or board have received anything greater than a slap on the knuckles with a rather soft ruler. — Glenn Dyer