Dairy portfolio stress testing Bernard Hodgetts Head of Macro - - PowerPoint PPT Presentation

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dairy portfolio stress testing
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Dairy portfolio stress testing Bernard Hodgetts Head of Macro - - PowerPoint PPT Presentation

Jan 01, 2024 240 likes •351 views

Dairy portfolio stress testing Bernard Hodgetts Head of Macro Financial Department Dairy stress tests - objectives How would the banks dairy sector asset quality evolve under stress scenarios? How would banks respond to a rise in

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Bernard Hodgetts Head of Macro Financial Department

Dairy portfolio stress testing

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Dairy stress tests - objectives

  • How would the banks’ dairy sector asset

quality evolve under stress scenarios?

  • How would banks respond to a rise in

defaults?

  • Stress tests an input into bank risk

management.

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Dairy sector debt

Dairy sector is around 10% of bank lending Debt levels remain elevated relative to incomes [Total banking system loans = $348 billion]

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Two stress scenarios

Fonterra payout ($ per kgMS) Dairy land price (% change) Scenario 1 Scenario 2 Scenario 1 Scenario 2 2014-15 4.65 4.65 10 10 2015-16 3.75 3.00

  • 15
  • 20

2016-17 4.75 4.00

  • 10
  • 15

2017-18 5.25 4.50

  • 10

2018-19 5.75 5.00 2019-20 6.00 5.50

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Stress scenarios

Fonterra payout Farm land price

2 4 6 8 10 2 4 6 8 10 2001 2004 2007 2010 2013 2016 2019 $/kgMS $/kgMS Scenario 1 Scenario 2 Breakeven Scenario 50 100 150 200 250 300 50 100 150 200 250 300 2001 2004 2007 2010 2013 2016 2019 Index Index Scenario 1 Scenario 2 Scenario

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Three stages in the evolution of problem loans

Rating downgrade

  • Assessed risk

increases.

  • Profits decline

due to general provision.

  • Required capital

increases. Default

  • Breach of loan

agreement

  • e.g. 90 days past

due.

  • Profits decline

due to specific provision. Write-off

  • Loan collateral is

sold.

  • Could be

voluntary.

  • Written off

balance sheet.

  • Profits adjusted if

actual loss differs from provision. Increasing bank oversight and ongoing negotiations between bank and farmer

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200 400 600 800 1000 1200 1400 1600 1800 2 4 6 8 10 12 Portfolio growth Risk weight (RHS) Index % Current 2015-16 - Scenario 1 2015-16 - Scenario 2

Capital held against dairy loans would increase in the near-term

Banks continue to provide working capital Assessed portfolio risk increases

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Banks provision for losses during first three years of the scenarios

Cumulative bad debt charge (% initial exposure)

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Some stressed loans are written off in later years

Cumulative loans written off (% initial exposure)

5 10 15 20 25 5 10 15 20 25 2015-16 2017-18 2019-20 % % Scenario 2 Scenario 1

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Some observations

  • Modelled scenarios are intentionally severe.
  • Reported loss rates manageable for banking

system.

  • Losses largely absorbed through profits.
  • Resolving stressed assets could take longer.
  • Stress tests useful input to bank risk

management.