Moody's warns on NZ dairy bank debt

Ratings agency Moody's Investors Service has warned that a slump in milk prices since February is negative for New Zealand banks, given the Big Four banks have up to ten per cent of their loans exposed to dairy farmers.

Dairy commodity prices have slumped more than 50 per cent since February as demand from China has slowed, Russia's ban on European imports has freed up European milk for export and production in Europe, Australia and the United States has surged.

Moody's said National Australia Bank's Bank of New Zealand was the most exposed to agricultural debt with 15 per cent of its assets in farm loans, while ANZ had 12 per cent, Commonwealth Bank of Australia's ASB had 11 per cent of its loans with farmers and Westpac had eight per cent. Farm loans made up 14 per cent of all bank loans.

It said dairy loans made up around 69 per cent of all farm loans as at the end of March this year and farm loans were the second biggest category of lending behind residential mortgages on 53 per cent.

"A deterioration in the asset quality of dairy loans would have a material effect on the banks," said Daniel Yu, Assistant Vice President - Analyst, Financial Institutions Group, Moody's Investors Service.

Yu noted that the last time the payout from New Zealand's largest dairy cooperative, Fonterra, dropped sharply, which was in 2009, non performing farm loans spiked to 3.92 per cent by late 2010.

They have since dropped to around one per cent after a record payout of NZ$8.40/kg in 2013/14, but Fonterra lowered its payout for the current 2014/15 season to NZ$4.70/kg last week.

Moody's said it did not expect non performing farm loans to spike back to 2010 levels because many farmers had saved their record 2013/14 payouts and the payout was expected to recover to NZ$6/kg in 2015/16.