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 Australia'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 $234 million in Australian after-tax profits for 2012, 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.
Frequently Asked Questions about this Article…
CLSA banking analyst Brian Johnson warns that weak conditions for farmers, heavy debts and falling land prices could push a growing number of agribusiness borrowers into trouble. He says cyclical lending — “euphoric” credit in good times followed by rationing when conditions sour — means Australian bank agricultural lending portfolios are likely to see loan losses rise.
The report highlights wheat and live cattle as key pressure points. Northern Australian beef production has been hit by weak exports and falling land prices, while the drought-affected Western Australian wheat belt is also under strain.
According to the article, NAB is Australia’s biggest agribusiness lender and ANZ also has relatively higher exposure to primary industries, making them more exposed if farm loan losses rise.
The article notes recent profit downgrades from Elders and Nufarm. Nufarm cut its profit outlook after reporting a 53% slump in earnings in the first half. By contrast, agribusiness lender Rabobank reported a 10.5% rise (A$234 million) in Australian after-tax profits for 2012, despite challenging conditions and borrowers rushing to pay down debt.
Key stressors mentioned are high borrower debt levels, falling land prices, weak export markets, drought in key growing regions, and the high Australian dollar — all of which can squeeze farm incomes and make loan servicing harder.
Latest bank figures in the article suggest asset quality remains strong for now, but the analyst cautions the reality could be worse than it appears, given pressures on business borrowers and banks’ historical difficulty in spotting loan-loss cycles early.
The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) expects 'subdued' conditions in the sector, with export earnings tipped to fall slightly in 2013–14, according to the article.
Everyday investors should monitor profit downgrades and earnings reports from agribusiness firms (for example Elders and Nufarm), bank commentary and asset-quality metrics, exposure levels at major lenders like NAB and ANZ, and official sector outlooks such as ABARES — all of which can signal rising loan-loss risk tied to farming conditions.
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