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.

We spent a few days in Cromwell with the kids at the end of the last school holidays. After a fairly long and dreary Timaru winter it was nice to escape to the open spaces of Central Otago.

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.