Westpac Financial Performance Update
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Reserve Bank of New Zealand - Stress testing
Five largest Dairy sector lenders subject to stress testing
Two scenarios were tested
Scenario 1 assuming that the dairy payout recovers to $5.25 per kilogram of milk-solids by the 2017/18 season and a fall in
dairy land prices of 20 percent
Scenario 2, the dairy payout was assumed to fall to $3 in 2015/16 and remain below $5 until the 2019/20 season with a fall in
land prices of 40 percent.
RBNZ conclusions
On average, banks reported losses under the two scenarios ranging between 3 to 8 percent of their total dairy sector exposures.
Bank lending to the dairy sector stands at around $38 billion, which is approximately 10 percent of the banking system's total
lending. We would expect losses of the order seen in the stress scenarios to be absorbed largely through lower bank earnings
rather than through an erosion of bank capital.
The test results suggested that in the shorter term, banks would increase their dairy lending in order to support existing
borrowers facing negative cash flow, before facing a longer term rise in loan losses if there were a prolonged dairy sector
downturn.
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