Last week, we put out our Agri Bank dashboard showing all the movements in the Agri Banks from portfolio size to market share. You can find the article here.
In this article, we wanted to dive into a particular dataset that is very meaningful for farmers with their access to credit.
This particular dataset is the “Non-Performing Loans Ratio” or “NPL’s”
Put simply, this is a ratio (expressed as a percentage) of the banks “non performing” Agri loans over its total loans.
A non-performing loan is defined as all loans overdue or those that are overdue.
The actual definition can get quite complicated and differs between banks*, but broadly it’s a very good measure of the quality of the credit sitting in that respective bank’s portfolio.
This dataset is a “canary in the coal mine” in respect to changing bank credit appetite and ultimately the cost of that credit.
And we all know that when a market has more supply, price generally drops and vice versa.
When examining the data, it’s not just what level it is at right now, but the way the trend line is heading.
(* Rabo is a case in point, by design, they run a very high ratio of non-performing loans due to internal decisions- this does not mean that the quality of their lending book is worse – i.e they have a different approach for calculating.)
Also, NPL’s should not be confused with actual bank losses via write offs. These are much lower again and are normally represented by “individual provisions”.
The graph below shows the major banks NPL’s over the last three years, with a non- weighted* average line through the middle.
(* non weighted meaning that its does not take into account the relative size of each bank’s Agri portfolio when calculating the average, however the trend line is still instructive as to what’s occurring)
Knowledge is power.
Below is our quarterly snapshot on all bank movements, with source data from RBNZ for the period ending 30 June 2021.
We put this together so you can understand the increasingly complex forces at play driving access to capital and the cost of that capital.
Understanding this is critical - not only saving time and focus by putting your energy into the right parts of your credit process- but also to increase your chances of getting the right credit result.
In this edition: even though is only been 90 days since the last update, so much has happened in that time.
Bank lending continues to break records and nearly all of it in the home loan sector.
But for the first quarter in a long time, Agri has experienced a small growth in loans - could this be the turnaround?
Market share change analysis shows:
- One major bank in freefall, but that same bank is also well set up for future growth with very low
non-performing loans and a good capital base.
- One other bank has turned a corner after shedding dramatic amounts of Agri loans.
- And it's probably no surprise to see the debt repayment coming nearly solely from dairy.
- Conversely, horticulture debt continues to grow at well above market rates - is this a sign of a sector expanding, or are banks simply more expansive in this sector to re-balance their portfolios?
As always, if you have any questions, please contact us directly.
Ever had that feeling of utter and total business confidence? When you know that your business is humming, profits are good, and you’ve got a great team of people in all your key roles?
Chances are, you probably felt quite bullish about expansion or further investment.
Chances are you probably felt emotionally very good as well.
Of course, you probably have. Although as a farmer, up until recently, you’ve probably been feeling a little bit of the opposite. Weighed down by previously lower commodity prices, then resultant bank pressure and all wrapped up in increasing environmental and social pressure, confidence in the Agri sector has been distinctly uncommon.
In fact, “broader agricultural economy net confidence” (source: Rabobank economic survey, last version Dec 2020) has been net negative since early 2018. That’s a heck of a long time despite commodity prices during this time increasing to near record highs.
Right, so we all know what Chinese Whispers is don’t we?
It’s a kids game where players form a line or circle, and the first player comes up with a message and whispers it to the ear of the second person in the line.
The second player repeats the message to the third player, and so on.
When the last player is reached, they announce the message they heard to the entire group. The first person then compares the original message with the final version.
Mistakes often accumulate along the way, so the last player’s reading differs significantly from that of the first player, usually with quite amusing or humorous effect.
Unfortunately, this can also happen in the Agri credit process.
And the effect is not humorous nor amusing. It can be downright devastating.
Credit approvals in Agri all have significant consequences – they are the difference between getting further investment capital or not (which can have significant wealth accumulation opportunities in the future) and at the other end of the spectrum, they could mean the difference between paying significantly more in interest, or even worse, having to divest a farm at the wrong time.
Suffice to say, the stakes are high.
So what has all of this got to do with Chinese whispers? Well, the Agri credit chain is not a band of one.
Very rarely does the frontline banker have the sole discretion to make a lending decision. In nearly all cases, this decision will be referred to another authority.
Often, it goes through at least two other parties – sometimes further.
All along that journey there is risk that the message evolves, changes or weakens.
And guess what the most important link is – you the farmer – and your start point with what you provide to the frontline banker.
How and what you provide, frame, analyse and present is a significant determinant to the success of that credit process – and whether you accumulate more wealth in the future, or don’t.
But the best part about this, is that its easy to control if you know how.
Let’s start by understanding some of the assessment factors that a bank goes through with the credit process.
Now, to the uninitiated eye, a typical credit process looks like this: Have a meeting with the bank, maybe have a tour of the physical assets, provide your past financial statements and your future budgets and make your request.
I was reading an article recently about the traits of some of the most engaged businesses based on a survey by Gallup. It was a global survey and started by noting that, “85% of employees are not engaged or actively disengaged at work. The economic consequences of this global "norm" are approximately $7 trillion in lost productivity”
Keeping in mind the NZ economy is about $USD200BN, that is staggering.
The article talked about the key traits of high engagement companies being:
Having a shared Mission – employees have a clear sense of where they are going and why and feel like they are on a journey together.
People Development - Hire and set them up for success. Care for them, share information with them, build a plan for them, coach both strengths and weaknesses, and provide meaningful feedback.
Valued Voice: Trust between co-workers and leaders is so high that both sides are open to communicating ideas and information to avoid problems and create new solutions
Earned Trust & Benevolence: They live their core values both internally and with the external market rewarding those who demonstrate them and not tolerating those who don’t. The customer base and employees genuinely believe that the company has their best interests at heart.
It got me thinking about farming
And in particular- how engagement levels have been lowered by financial stress (albeit now improving) and now increasing compliance - something highlighted in KPMG’s recent Agribusiness agenda with the following statement “ a sector that is fatigued, straining to cope with the wide range of issues that is having to respond to on a day-to-day basis with morale falling”.
So, what does engagement have to do with succession?
Well, everything we say.
Knowledge is power.
With that quote deeply in mind, we are proud to introduce the "NZAB Agri Bank Dashboard".
It's a quarterly snapshot on all bank movements, with source data from RBNZ.
Why is this important?
Well, understanding the forces at play in each bank gives us very strong direction on how we help our farmers more easily access capital, who from, plus the likely costs of that funding.
It also saves time for our farmers and puts energy into the right parts of your credit process, rather than chasing shadows in an increasingly complex world. All of this so you can focus on what you do best- running your own strategy and your business effectively.
We'd love your feedback.
Anything that you think might be useful, we'd love to hear from you!
We'll add to this dashboard over time - including things like a bank appetite index (diving deeper into each banks metrics for viability and security assessment).
We'll put this out quarterly from here.
The version below is with data to the 31 March 2021.
The interest cost that you pay as a farmer is one of the biggest costs on farm that you will face. It is right up there with your feed/grazing bill and your wage bill. Suffice to say, it should demand your attention.
We are in a great period, with farmers enjoying some of the lowest rates ever.
However, whilst those rates have dropped substantially over the last few years, the range of rates being offered to different farmers in the market is now incredibly wide versus history.
Farmer A could easily be paying double that of Farmer B.
Within that we are also seeing some significant change in the components that make up your interest rate and can see some interesting movements coming up as bank appetite shifts into the positive territory.
How you take advantage of that will require a specialised approach.
Firstly, lets start with what makes up your interest rate.
To illustrate, let’s narrow this discussion to only floating rate lending.
Your floating interest rate is made up of three things - The underlying “base indicator”, the banks’ “liquidity costs” and the banks “customer margin”.
It’s that time of year when we’re finalising budgets for FY 22 and the ultimate question on all dairy farmers lips is: “what payout do we use for budgeting next year?”
It is a much different landscape entering into FY 22 than it was in FY 21. This time a year ago we were knee deep in COVID-19 and incredible uncertainty was evident in all parts of the world economy. A common trend amongst most bank economists were milk price forecasts leading with $5 in front of it. When Fonterra finally delivered their opening forecast of $6.00+, it was met with mild jubilation (albeit noting the very wide range offered).
What a turnaround it has ended up being. At $7.60, being the current mid-point (milk only) with a sense of some upside potential, its going to be the second equal payout of all time.
As you know we are very interested in the “why” when banks show differing levels of appetite in the Agri Sector.
By understanding the “why” from a bank perspective allows farmers to better understand how they should navigate their credit and negotiation processes with their bank.
Knowing this allows our farmers to more effectively separate their strategy from what is good for their business and what is good for their bank which can, at times, be quite different things.
This short article looks at the impact of differing bank strategies since 2007 when lending took off quite aggressively in the Agri sector with the first “whole milk powder boom” and the very challenging volatility that followed.
These first graphs show how much capital each bank has leant to the Agri Sector (in total), since 2008.