Friday, July 1, 2022

Loan landscape shifts for rural bankers

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Farmers can expect farm lending in the future to be a more complex affair as climate change, nutrient and water regulations make lending decisions more than a simple cashflow exercise.

ASB’s Ben Speedy says farm business sustainability will become a far more significant factor in valuing, and lending, to an operation.

Farmers can expect farm lending in the future to be a more complex affair as climate change, nutrient and water regulations make lending decisions more than a simple cashflow exercise.

ASB general manager for rural banking Ben Speedy said as rural bankers talk with customers around kitchen tables, subjects like He Waka Eke Noa (HWEN) and farm environment plans (FEPs) are among the subjects coming up, alongside the usual cashflow budgets for the season.

“It can be a tricky conversation to get started, but once you get past any political perspectives it’s really valuable, with many of our customers welcoming the discussion and seeing the benefit,” Speedy said.

At present only about half the bank’s customers have FEPs, but he puts this partly down to timing. 

All farms must have an environment plan completed by the end of 2024, under the Government’s policy, and banks are increasingly engaging customers about their understanding and obligations.

ASB has focused recently on enabling industry leaders to access innovative ‘sustainable’ finance facilities to help progress their ambitions, with Craigmore and Fortuna Group two of the first rural corporate customers to benefit.

ASB found that while many of its larger rural customers had an advanced sustainability vision with work already under way, they required support to develop a long-term strategy with the right metrics and targets to drive positive impact.

“We have developed a sustainable transition loan, aimed at providing specific support in developing strategies and plans with measurable targets. Fortuna Group and Craigmore were among the first examples of industry leaders to take advantage of this,” he said.

Craigmore is skewed towards overseas shareholders and is one of this country’s largest rural corporates operating across forestry, farming and horticulture. Speedy said as such it understands what investors are looking for in modern landowning corporates, in terms of sustainability and social expectations.

“For Craigmore and Fortuna Group it is going well beyond simple compliance – they both have strong visions in social as well as environmental performance,” he said.

He said it is accepted in the finance industry that whatever colour the Government is, carbon policy and emissions reduction targets are not going away.

Banks and other financial institutions have had this reinforced through recent legislation, to require them to report in line with the Task Force for Climate-Related Financial Disclosures (TCFD).

Acknowledged as a world-first, the law requires the financial sector to disclose the impacts of climate change on their business and how they will manage climate-related risks and opportunities.

For the trading banks, one of their largest exposures lies with dairy farm clients.

“That can be tricky to articulate, that’s the banking system’s challenge,” he said. 

“Agricultural lending is a significant proportion of most banks’ balance sheets. The answer is not banks stopping lending to farmers, but how we support a transition to a lower emissions economy, hence He Waka Eke Noa is of key interest to us.”

He said the bank must analyse two main climate change risks in relation to its rural lending. 

The first, the physical risk of how a changed climate will affect land and productivity through increased extreme weather events, as well as longer-term chronic shifts, for example rainfall patterns.

While banks are exploring the potential physical impact of climate change on different regions and farm types in New Zealand, there is a lack of clear data on how this may impact productivity and financial performance. 

“This underscores the importance of banks working alongside our customers to help them understand the likely impacts and what response will be most effective. We are talking long-term horizons, so there are real opportunities to grow our knowledge and build resilience by investing in the right things early on,” he said.

The second risk area involves the ‘transition’ risk. That is how the entire industry is going to reduce emissions to reach net zero by 2050. 

He said this is a harder risk to understand, as there are currently limited proven options available to support a sustainable reduction in emissions without impacting financial viability.

As such, creating funding to explore and accelerate innovative solutions is extremely important to the industry.

He envisages a time when every property, including farms, will carry a risk score that will influence property values and banks’ ability to lend on them.

Future farm loans are already likely to be assessed on being the right land-use in the right place.

“An example of this is dairying in non-traditional dairy areas. Customers will need to be aware of the risk that when they want to sell the property in the future lending may not be as available for the next buyer if they want to maintain the current farming system on that land,” he said.

As government seeks discussion on carbon forests, Speedy said ASB’s position is not to lend for the establishment of permanent monocultural forests on productive farmland. 

“We are very much about the right tree, right place. The recent change in government policy has obviously helped on this,” he said. 

Overall, he emphasises ASB’s commitment to its farming customers and the wider industry. 

The definition of a ‘progressive’ farmer differs significantly from how one would have been defined 20 years ago, he said.

“Farmers are extremely passionate about doing the best thing for their land and with the current high commodity values, many are in a good position to build sustainability and adapt to new requirements and demands,” he said. 

“Yes, there are challenges – but as we get clarity on policy, I think there are great opportunities to embed the long-term resilience of the whole sector.”

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