SYDNEY: National Australia Bank (NAB) on Tuesday reported the first increase in bad loans in almost six years largely due to its exposure to New Zealand's dairy industry, highlighting the risks to banks owed around US$25 billion by cash-strapped farmers.
Australia's biggest lender said it does not expect losses due to these impaired loans, which analysts said have yet to ring any alarm bells, but they add to the pressures for a banking sector that is already battling slowing revenue growth and stricter capital rules.
Global dairy prices have slumped 55% since early 2014, adding pressure on New Zealand farmers, the majority of whom are already operating below break-even.
"We assume that dairy prices will not recover significantly in the next couple of years. Problem loans are thus likely to increase further," said Moody's Investors Service senior vice-president Sovereign Risk Group Marie Diron, adding that the pressure on asset quality "will be off a very strong base."
Dairy products make up around a quarter of New Zealand's total exports and the industry accounts for just under 10% of total borrowing in the country.
Non-performing loans at Australian banks stand at an average 1.7% of total assets, according to estimates by Thomson Reuters Starmine, far better than the global average of 3.5%.
DAIRY DENT
Melbourne-based NAB said impaired assets in New Zealand dairy exposures rose to NZ$420 million during the quarter-ended December while posting an 8% increase in quarterly cash profit. These impaired assets led the bank to report its first increase in bad loans since March 2010.
Last week, Commonwealth Bank of Australia (CAB)'s New Zealand arm ASB Bank Ltd said its loan impairment expense climbed 11% to NZ$41 million, largely due to its exposure to the dairy sector. Overall, CBA reported the sharpest rise in bad debts in more than six years.
"New Zealand's rural sector continues to face headwinds, particularly in relation to volatile international commodity prices," ASB chief executive Barbara Chapman said.
These concerns, however, have yet to ring any alarm bells, company executives and analysts say.
"If you look at New Zealand this is going to be a risk but it has always been manageable in the past. It's not a major concern," said Bell Potter analyst TS Lim. - Reuters
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