Friday, March 29, 2024

Aussies cut cash for Kiwi banks

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Agriculture Minister Damien O’Connor is calling for calm heads as the appetite of the Australian-owned banks to fund the New Zealand economy and farming, in particular, is further squeezed.
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The news continues to worsen for the local arms of the big Aussie banks after their own regulator slashed the amount of their capital that can be allocated to foreign subsidiaries from 50% to 25%.

Designed to limit the potential for losses from foreign subsidiaries to tip up their parent companies in Australia, the move by the Australian Prudential Regulation Authority (APRA) last week risks making it even harder for the NZ subsidiaries of the Australian banks to meet increases in minimum capital requirements already in the works here.

Thoses NZ subsidiaries have already said the hefty increases in capital proposed by the Reserve Bank could lead to significantly higher borrowing costs as they hike interest rates to maintain the returns from their local operations.

The banks warn rural borrowers will cop the biggest increases because of the higher risk weight applied to lending against farms, which historically experience bigger ups and downs in values and are seen as a riskier security than houses.

In its submission to the Reserve Bank last month the country’s largest dairy farmer Dairy Holdings warned of a perfect storm where rising interest rates and falling international dairy prices could lead to massive falls in farm values. 

Speaking before APRA’s announcement O’Connor advised against slamming the brakes on lending to farmers.

“If you look at the history of banks they usually have done pretty well, regardless of what happens in terms of profits.

“They certainly have been very healthy over the last number of years and if they could absorb some of the additional cost for the security of themselves and the NZ economy and the primary sector then we would probably all be better off.”

Multiplied across the rural sector’s $63b debt pile O’Connor said the impact on borrowing costs of the capital proposals is about $300m or 6% of annual profits though those figures are based on the Reserve Bank’s own estimates and considerably lower than the banking industry’s estimate of the cost.

“It is hardly going to undermine their viability if they absorb that increase in cost and allow farmers to carry on through a flat time for commodity prices,” he said.

O’Connor also had a word of advice for a generation of farmers used to easy credit.

While he doesn’t want to see them cut off at the knees by their bankers the minimum capital proposals being debated are indicative of a shift to a more conservative approach to banking following the financial crisis a decade ago. 

“The reality is that land prices are not going to swing up wildly and (that has been) sobering for some people who just assumed that farm prices were going to keep on going up and up.

“Farming for capital gain and not running a positive cashflow is a risky way to progress.”

O’Connor said even if the Government wanted to it cannot force the Reserve Bank to back down on its proposals.

“That decision is an independent one for the Reserve Bank governor and it clearly seems to be based on him being concerned about international financial stability and the exposure our banks have to debt, particularly in the primary sector.

“The reality is hard to deny and I guess it is how they manage it.”

The Reserve Bank is expected to announce its final decision on how much capital the banks must hold by November.

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