Not many shareholders in Australian banks or investment analysts covering our banks, mention the level of exposure the big four have in NZ which is their biggest offshore market. The Reserve Bank of Australia (and APRA) have been keeping a close watch on that exposure and in the second Financial Stability Review for the year, issued in October, the RBA singled out NZ for special mention.
"…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. Housing lending in New Zealand is quite geographically concentrated, with about half of the stock of debt secured against properties in Auckland.
"The major banks also have substantial exposures to the agriculture sector in New Zealand, reflecting the economic importance of the dairy industry there. Specifically, the major banks’ exposures to the agriculture sector are around 13 per cent of their credit exposures in New Zealand, around two-thirds of which (roughly $30 billion) are to the dairy industry. Although a much smaller share of assets than housing lending, dairy exposures are riskier in terms of both their probability of default and likely losses in that event, and the risk of loss is currently higher than usual given the low level of global milk prices. There is also a risk that stress in the dairy sector might exacerbate the rural property price cycle," the RBA said in its Stability Review last month.
So along with the Australian housing and commercial property markets (especially in Sydney and Melbourne) and the still worrying level of investor lending and interest only loans, shareholders have another area of concern in New Zealand to keep an eye on – one that is a long way away and difficult to monitor.
So help this morning from the Reserve Bank of NZ (RBNZ) which issued its latest review of the stability of the country’s financial system.
And guess what are the main concerns – yes, property lending for housing in Auckland and to the dairy industry.
And the RBNZ says that risks related to the dairy and housing sectors have “increased” in the past six months. “Global economic growth has softened over the past six months, and uncertainty over the path of economic and financial adjustment in China has helped to depress commodity prices and added to financial market uncertainty,” the RBNZ Governor, Graeme Wheeler said in the review
Interest rates at historic lows are encouraging higher leverage, leading to a build-up in risk in international asset markets. This environment creates risks for the New Zealand banking system, which remains reliant on the global markets for funding.
“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.
“House price growth in Auckland has increased strongly with house price-to-income ratios in the region now comparable to those seen in some of the world’s most expensive cities.
"Rising investor activity has been an important driver of price developments, and international evidence suggests that investor loans have a higher tendency to default in the event of a major downturn in the housing market.
“A sharp downturn could challenge financial stability, given the large exposure of the banking system to the Auckland housing market. While it is still too early to judge the effect of recent policy changes, they are expected to help moderate pressure on Auckland house prices, and will improve the resilience of bank balance sheets to a housing downturn,” Mr Wheeler said.
Deputy Governor, Grant Spencer, said that “The banks are working with dairy farmers experiencing difficulty, and it is important that they continue to take a medium-term view when assessing farm viability.
"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.
“New rules on Auckland residential investor loans came in to force on 1 November. The bulk of these loans are now required to have a loan-to-value ratio (LVR) of no more than 70 percent. Banks are also now required to put residential property investment loans in a separate asset class and hold more capital against them.
“LVR restrictions have been eased outside of Auckland where housing market activity has been more subdued. However, the Bank is closely monitoring the recent rises in house price inflation in some areas such as Hamilton and Tauranga,” Mr Spencer added.
