This week’s Property Review continues the focus on financial institutions’ current attitudes towards the beef sector. Click here to refer back to last week’s report
Strong cattle prices and a positive industry outlook spell good news for beef producers, with major lending institutions maintaining longer-term risk policies when it comes to managing their beef loan book.
Rabobank regional manager Southern Queensland and Northern New South Wales, Brad James, said his bank’s credit risk analysis for beef has not changed for quite some time.
“We review it regularly, but our key lending metrics remain the same,” he said.
Ben Barrett, ANZ Director Corporate Agribusiness, agrees.
“While it is certainly great to see the benefit of strong cattle prices filtering through to our customer base, ANZ’s lending policies to the beef sector have remained unchanged. It is important to have consistent policies and frameworks in place to support clients through commodity and property cycles,” Mr Barrett said.
Westpac’s general manager agribusiness, Steve Hannan said his company had a tried and tested set of principles that have been around for quite a number of years.
“Westpac, which celebrates its two-hundredth year in business on April 8, understands the cyclical nature of the industry and the seasons in beef. We’ve stuck to what we feel is a strong lending recipe which, in some years, is conservative, but in others is very responsible.”
NAB’s head of agribusiness Khan Horne said the bank has been lending to the Australian beef industry since the 1850s and takes a consistent approach.
“It is a sector we strongly support, even though it can attract considerable debt,” Mr Horne said.
“NAB looks at whether the client is a producer, a lotfeeder or a backgrounder. It also looks at where the clients lives – whether it is the Northern Territory or King Island. The loan to value ratio of a lotfeeding business on Queensland’s Darling Downs might be different to a grazier in the Channel Country who breeds cattle. There are so many different business structures and operating models in the beef industry – it’s impossible to generalise,” he said.
No hard and fast rules
It’s often been said that banks create a set of basic ‘ground rules’ for each commodity, but the four bankers agreed that every case with beef lenders was treated on its merits.
Mr Horne said NAB lends to hundreds of commodities and the requirements for each were unique.
“For instance, there are annual production systems versus monthly production systems; certain commodities (tree nut crops for example) which might not come into play for seven years; and highly regulated versus much less regulated industries.”
“There are so many different business models and different economic, commodity and production cycles that need to be factored into the equation. There are so many beef producers in Australia, you can’t point to the ‘average’ beef producer because the ‘average’ doesn’t exist.”
Mr James said there were no simple across the board ground rules for beef lending.
“What we do is review commodity prices, influencing factors, farming techniques and efficiencies. It is prudent that we review factors that influence clients’ abilities to service any commitment they take on.
“We also take a broad view of an industry sector, looking at where that particular borrower fits in with those broad parameters and whether they have the country mix, the experience, the background or the track level to handle the debt they are seeking.”
ANZ’s Ben Barrett said it was important to have a long-term view to lending, rather than change year on year with the vagaries of the commodity price cycles.
“Each client’s operation is unique. For instance, two beef producers might have similar sized neighbouring properties, both running 10,000 head herds. But one can support a higher level of debt than the other because of his cost structure and management.”
Mr Barratt said it was ‘case by case’ depending on the characteristics of individual borrowers.
“There is no tick-a-box, one-size-fits-all approach. We benchmark our clients against others in the industry. We look at their historical financial performance or their board forecast to see if they have the capacity to borrow that extra money. We then sensitise their costs, such as interest rate rises or commodity price falls, to ensure they can withstand a shock, if we run into a period of prolonged drought, poor commodity prices or bad seasonal conditions.”
Westpac’s Steve Hannan agrees with his counterparts.
“Every customer’s business is different, so therefore every customer’s goals are different. We take into account ability to service debt, equity, time in industry and a borrower’s ability when making decisions. We treat every customer as an individual.”
He said each year Westpac reviewed all sectors across agriculture, as well as its credit underwriting principles.
“The ownership of that review is now done by an industry specialist on the ground, who works closely with our risk family to review those underwriting principles given the season and the outlook. The process is minimal, but constant.”
Are more foreclosures likely in 2017?
For default loans held by banks, or rural properties operating under financial pressure, experts suggest that the time may be right to exit, with strong prices on offer for rural property.
When the issue was discussed with Chapman Eastway agribusiness consultant Gabriel Passmore two weeks ago, he indicated there would be more people likely to exit the industry this year following an active latter-half of 2016 – but it was not likely to be a ‘rampant’ increase.
“It must be said that rural lenders have made large efforts over the last two to three years to work with clients who have impaired files to avoid foreclosure. Instead they have worked towards a range of alternative solutions to try and find the best solution for both the client and the bank,” Mr Passmore said.
Brad James said Rabobank’s default loans in beef were extremely low.
“Having said that, one is too many, in my opinion, because it has a profound effect on individuals. We are mindful of that.
“There are still landholders who are feeling the effects of droughts and floods and when it does rain, it takes them a long time to recover – particularly when they have to diminish their herd to maintain their existence. However, seasonal conditions are not always the catalyst for somebody’s financial position. It may just tip them over the edge.”
Steve Hannan said Westpac also reported a very low number of distressed or default loans, even through the drought and coming out of the current drought.
“Westpac works really hard with its customers trying to predict where potential risks might emerge, especially as the wet draws to a close over the next six to eight weeks in Queensland. Westpac has a very low number of distressed accounts, but it continues to actively engage with and support those farming customers working through their situations.”
The ANZ’s Ben Barrett agrees that the banking and finance sector continues to have a low number of distressed or impaired loans in the agricultural sector.
“Given that the number of distressed or impaired loans remains low, and the banking and finance sector continues to work constructively with customers and their advisors, I don’t think there will be another cycle of mortgagee sales this year,” he said.