Late last year the Reserve Bank said it wants banks to increase the amount of capital held as security against loans, with weighted capital increases likely to be greater for riskier parts of banks’ lending.
That prompted fears the dairy and construction sectors in particular could wear the brunt of the higher capital requirements through higher interest rates.
Hiddleston is hoping for the best but preparing for the worst.’
“In the case of ANZ the changes would require an additional $8 billion of capital to be retained.”
Having to increase the capital could result in downward pressure on the amount of lending available to the rural sector, possibly by as much as $10b, coming at a time when the need for agribusiness investment has never been greater.
ANZ’s Greener Pastures report in 2012 predicted a shortfall of capital in New Zealand of $200b between then and 2050 for this country to take full advantage of emerging opportunities.
“This is not about price of capital as much as availability of capital.”
Hiddleston challenged Reserve Bank concerns over risk exposure in the rural sector contributing to any need for greater capital retentions.
“We had one receivership in three years through the dairy downturn when 80% of our clients were in the red.”
ANZ is naturally fully supportive of a sound secure banking system.
“But you have to ask ‘how strong is strong enough?’. This means the system can withstand a one-in-200 year shock. That is only a 0.5% risk.”
He sees some irony in increasing capital reserves and lowering lending amounts.
“We see New York and Singapore based hedge funds offering to fill that finance gap and you have to question who our customers could be getting into bed with. When the next financial shock comes along, if those funds behave the way many did in the last global financial crisis when customers were called on to repay loans, the pressure on the system is greater, not less.
“It goes against what is trying to be achieved.”
He is confident that despite any perceived risks, agri-sector lending is already secure.
“We stress-test our loan book, modelling all customers on a 7.25% loan rate and there are many on rates significantly less than that.”
Meantime, ANZ has moved to reduce its agricultural lending exposure in recent years, with a market share in March of 28.3%, significantly down from a historical high of 36% several years ago.
Hiddleston said the bank has more than 70% of its rural customers making principal repayments but in some cases the amounts are small.
In its last Financial Stability Report the Reserve Bank expressed concern over the fact 35% of dairy debt is to farms holding $35 a kilo milksolids or greater debt.
That potentially puts some lower-valued, highly indebted farms in negative equity.
“This is where the long road is there to try and bring financial strength to those operations.”
These operators are going to also require a somewhat different approach than less indebted clients. One bad year in three easily leaves the indebted operators re-exposed.
“They are going to need more capital but who will provide it? It could be second tier financiers.”
Often that debt is on poorer quality or located dairy land and the spread between good to poor is 15-20% variance in value, if it even manages to sell.
“We all have our problem clients.
“Do they want to stay in the industry and how will they do it and this is in a favourable low interest rate environment too. We have been in an environment where good farmers have been subsidising poor ones and maybe that will not continue.”
He welcomes the capital transfer Westland dairy shareholders with the proposed sale offer from Yili providing a positive outcome for indebted farmers there.
For those owing less substantial amounts it is a case of keeping the rigour and discipline there to keep the repayments up.
