Hard times for farmers means losses for banks, analyst predicts
After recent profit downgrades from Elders and Nufarm, a new report by CLSA banking analyst Brian Johnson says banks could bear the brunt of a slump affecting several agricultural areas, especially wheat and live cattle.
With the official forecaster also predicting lean times for farmers, Mr Johnson wrote that a growing number of agribusiness borrowers could come under pressure from high debt levels and falling land prices.
Mr Johnson's report argued that waves of bank loan losses in cyclical industries were caused by "euphoric" lending in good times, followed by credit rationing when conditions soured.
"Australian bank agricultural lending portfolios demonstrate this cycle better than most, with loan losses set to rise," it said.
Particular pressure points included northern Australian beef production, hit by weak exports and falling land prices, and the drought-affected West Australian wheat belt, the report said.
NAB is the nation's biggest agribusiness lender and, the report noted, ANZ also has a higher exposure to primary industries.
Latest figures from banks suggest asset quality remains strong, but Mr Johnson said "the reality could yet be worse" given the pressures on business borrowers from the high Australian dollar, and banks' inability to see loan loss cycles coming.
The prediction comes after agribusiness lender Rabobank last month reported a 10.5 per cent rise in Australian after-tax profits in 2012 to $234 million, amid "challenging" conditions and a rush by borrowers to pay down debt.
The Australian Bureau of Agricultural and Resource Economics and Sciences also expects "subdued" conditions in the sector, with export earnings tipped to fall slightly in 2013-14.
Fertiliser maker Nufarm last week slashed its outlook for profits, after reporting a 53 per cent slump in earnings in the first half.
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CLSA banking analyst Brian Johnson warned that Australian banks are likely to face more loan losses from their agribusiness exposure as weak conditions, heavy farmer debts and falling land prices take a growing toll — particularly in sectors like wheat and live cattle.
The report highlights wheat and live cattle as key pressure points, with particular stress in northern Australian beef production (hit by weak exports and falling land prices) and the drought-affected West Australian wheat belt.
According to the article, NAB is the nation's biggest agribusiness lender, and ANZ also has a higher-than-average exposure to primary industries — making both banks more directly exposed to farm-sector stress.
Banks' latest figures show asset quality remains strong, but Johnson cautioned the reality could be worse because pressures on business borrowers — such as a high Australian dollar and rising farm debt — can trigger loan loss cycles that banks sometimes fail to foresee.
The article notes recent profit downgrades from Elders and that fertiliser maker Nufarm slashed its outlook after reporting a 53% slump in first-half earnings. By contrast, Rabobank reported a 10.5% rise in Australian after-tax profits to $234 million in 2012 amid challenging conditions and a borrower push to pay down debt.
Falling land prices reduce the value of collateral while high farmer debt levels make borrowers more vulnerable to cash-flow shocks. Combined, these factors can push agribusiness borrowers into distress and raise the likelihood of bank loan losses.
ABARES expects 'subdued' conditions in the sector, forecasting that export earnings are tipped to fall slightly in 2013–14 — a sign for investors that agribusiness revenues and related bank exposures could be under pressure.
The report argues that waves of loan losses in cyclical industries often follow 'euphoric' lending in boom times. Lenders loosen credit when conditions are good, then tighten credit when conditions sour, which can amplify defaults among agribusiness borrowers and lead to rising loan losses.
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