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.
We're rapt to announce that Jordain Adams has joined our Canterbury team alongside Nathan, Nick, Cam and Cameron. We've been able to work alongside Jordain in her previous role with a local corporate Agri-banking team and her work ethic and style really impressed us, so we are delighted she has chosen to join our team for the next stage of her career. Read below for a bit of Jordain's background.
Jordain joins Charlotte, Grant and Cam Blain in filling new roles created this year so far to meet the increasing demand for our services.
It's an exciting time for our company as our customers are really seeing the financial benefits of the hard work and careful planning that has been central to our strategy over the last few years. It gives us confidence to continue to invest in our people, our technology platform and our customers to ensure that we remain the leaders in our field.
We're still on the hunt for more of the best people. We are creating roles across New Zealand and would love to talk to more likeminded professionals who want to know more about what we do and why it makes a difference.
Every few months another ‘most trusted” survey hits the media headlines, providing a bit of fodder for office and talkback conversations.
Most trusted brand, most trusted New Zealand celebrities (past winners including such luminaries as Suzanne Paul and Richie McCaw!), and most trusted professions (politicians not typically well represented!).
In a world of fake news, consumerism, brands and ideologies built around personalities, genuine trust is as valuable as ever.
Last week Andrew wrote a great article on succession, focusing on inter-generational businesses that have the quality, diversity and profitability to appeal to family and support positive succession outcomes. Without these dynamics, successful succession outcomes are hard to come by.
This week I would like to focus on a few other elements that will support succession, with a central focus around trust.
I read an article recently that described the three core elements of Trust.
The article was focused on what breeds trust in organisations, but the principles can be applied to any situation where trust is critical to a positive outcome or experience. The elements were:
- A mindset built around genuine benevolence – that is, that you feel that the party you are dealing with has your best interests at heart. That doesn’t mean a fair and balanced commercial outcome can’t be achieved or is given away, but it means that you have confidence that the other party is genuinely interested in your success, your satisfaction or in meeting your key needs. And critically, that they will do it on a sustained basis, not just a one-off transaction.
- Competence – this is pretty simple. At the core of any relationship that has a high degree of trust is the confidence that the other party is competent – that they can do the job, provide the service, run your organisation, provide great advice – with an appropriate level of skill or execution.
- The ability and willingness to resolve disputes – any relationship will have times where tension is high, or parties aren’t seeing eye to eye. A relationship that is built on trust will have the ability to navigate these times and find a solution and outcome that allows all parties to move on with the relationship intact (and possibly strengthened).
So how does trust relate to positive succession outcomes
(and running a successful business)?
When you think about it, trust is at the core of succession in so many ways. To achieve a positive succession outcome, you need to trust:
- Each other – the base of everything else that goes into a succession process. Do you have trust in each other? Do you have confidence that those involved have your best interests at heart? Are you able to be open and honest with each other, knowing that sharing openly won’t be used against you? Do you exhibit trust when setting up the ongoing structure of the business? And have you earned trust?
- In advisors – invariably, a well-managed succession process will involve a group of advisors. In some cases, these advisors will have an execution role – legal framework, ownership structure, funding solutions etc. In other cases, an advisor will play a key leadership role in facilitating the succession process and being a part of the ongoing execution. Whatever the role they play, having the ability to trust your advisory team – the faith that they are working for you, that they are competent to do the job you are asking – is critical. Trust is also at the core of holding all these parties to account for their own performance and execution.
- To put the right people in the right roles – as Andrew pointed out in his article, a great business is key to succession. And a great business has the right people on the bus and puts the right people in the right roles. Whether that be operationally, or at advisory or governance level, being prepared to make the hard calls on key people and trust in their abilities is key.
- To be held genuinely accountable – again, another fundamental value of a great business. Having built a clear strategy, having plotted a deliberate pathway, having developed excellent systems for monitoring performance – are you prepared to be held accountable to all these elements?
- To let others, have control or influence in your business – this can be one of the hardest things to achieve. Having built a business over decades, being in control of most aspects operationally and making all the decisions, are you prepared to let others in? What do you need in place to be able to trust that the people coming in to run the business, drive decision making or provide governance or strategic support are trustworthy? Or what is it about yourself that you need to get comfortable with, to allow yourself to trust these people?
- The process – there are rarely quick and easy solutions to succession. These are processes that take time and energy and patience and leadership. And at times you will be frustrated, or feel things aren’t moving quickly enough or in the right direction. But if you have laid out a clear process, with clearly defined roles and responsibilities, at times you will need to just sit back and trust the process.
- To let go! – possibly the last and the hardest step. Trusting your process, the people around you, the plan and the structure and being able to step back and let go.
We work with many businesses at various stages of the succession process.
Trust doesn’t get built overnight. It’s built on great communication, on openness, on transparency, on a willingness to let go and on the confidence that there is a level of competence from all involved that inspires trust.
When there is trust – and where succession is done well, what does that look like? And what has led to that point?
When I draw on personal experience, the businesses I see doing this well exhibit the following characteristics
- Starting early – and the earlier the better
- Communication – an environment where open and honest communication is encouraged, and where people feel like they can articulate their needs and be heard and understood
- Transparency – being open and transparent about what the business is, how it is performing, what its strategy is, what are its strengths and weaknesses. Being honest about what the exiting generation wants and needs. And having an environment where the next generation feels the same.
- Clear expectations – what do you want personally, and what do you expect of others?
- Leadership – who is going to drive this process. Who has the competence and mindset to see a truly great process from beginning to end?
- Independence – getting the right people around the business, people who genuinely want to see a great outcome and will go on the journey with you. Too often we see a “succession plan” – a document that lays out some needs and a structure, but no pathway to a successful endpoint. Great independent support will be there right through with you, playing a key role in successful execution.
- And of course, a great business – one that everyone wants to be a part of.
And the last element that often gets missed is to have some fun!
Being able to build and transition an inter-generational business is something to be immensely proud of. Yes, there will be bumps along the way, but you are achieving something that few businesses have the opportunity to do. That should be a satisfying and fun process, something to cherish and appreciate.
No successful and sustainable relationship exists without trust.
And successful and sustainable relationships are at the heart of succession and running strong businesses. At NZAB, trust is our highest priority. We exist to see our clients succeed, and every month we are measured on that. We employ the best in the market, with years of knowledge and experience and the know how to help you navigate the challenges of succession, the challenges of building a business that people want to be a part of.
So, trust the process!
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.