The BNZ's Australian parent has revealed it has more than half a billion dollars of "new impaired'' New Zealand dairy assets on its books, up from none a year ago.
While the majority of the $A522million ($NZ566.7million) of new impairments are fully secured, that is entirely reliant on farm values and selling prices remaining buoyant.
About $30billion is tied up in New Zealand dairy lending at present.
Both the BNZ and its parent, the National Australia Bank, delivered their respective half-year-to-March reports yesterday.
Bad dairy debt and a decline in net interest margins resulted in the BNZ's cash earnings falling 3% for the half year to March.
The BNZ's bad and doubtful debts rose 82.6% from $46million a year ago to $84million, largely because of dairy sector woes.
Its Australian parent's accounts show $A522million of "new impaired'' New Zealand dairy assets in the first half, of a total of $A1.29billion of group assets across New Zealand and Australia.
A year ago, the BNZ had $A125million of new impaired assets, but a year on, including dairying's $A522million, the total has risen to $A609million.
An account note said the BNZ's dairy exposure included exposures assessed as "no loss based on security held''.
Other data notes the BNZ's dairy portfolio is 62% fully secured, 38% partially secured and 0.3% unsecured.
Dairying makes up 62%, or $NZ8.4billion, of the BNZ's $NZ13.6billion agri-business portfolio; agri being almost a fifth of BNZ's business.
Craigs Investment Partners broker Peter McIntyre noted the $A522million was "new impaired'' and covered by security, at present, and "not about to go west''.
"But this figure is significant ... It is probably one of the first times in recent years that we've seen a provision of this magnitude on a balance sheet,'' Mr McIntyre said.
The banking sector was still competitive and banks remained "under pressure'' to lend, he said.
"This shows how bank lending carries risks; all banks' balance sheets reflect their ability to get lending out,'' he said.
The BNZ saw its cash earnings fall 3.3%, or $14million, to $404million, from increased collective provisions mainly because of the dairy sector outlook, while its statutory net profit was down 10%, from $502million to $451million.
Earlier this week the ANZ reported a 9% decline in operating profit, to $1.08billion, which was followed by Westpac delivering an increased half-year profit of $483million.
Commenting on its agribusiness exposure, BNZ chief executive Anthony Healy said the banks's approach was "prudent''.
"BNZ's agri book is diversified, and asset quality remains sound.
"We commenced reviewing our dairy portfolio 18 months ago, working with customers as we took a ‘lower for longer' view of the sector.
"We have also doubled our collective provision for dairy to reflect this,'' he said in a statement yesterday.
Charges for "bad and doubtful debts'' increased $38million, or 82.6%, because of increased collective provision charges, which were mainly due to the outlook for the dairy industry.
While being a difficult time for many dairy farmers, the BNZ was well placed to continue supporting them with advice and financial support, Mr Healy said.
"From a financial management perspective, they're adjusting well, removing costs and, if they have to, selling non-core assets.''
The BNZ's net interest margin fell from 2.42% to 2.31%.
This was largely driven by lower deposit and lending margins and higher funding costs from heightened offshore market volatility, Mr Healy said.
The NAB's total cash earnings rose to $A3.3billion from $A3.1billion a year earlier, while net interest income climbed to $A6.6billion from $A6.2billion.
The Australian lender reported a statutory net loss of A$1.74billion related to discontinued businesses and kept its first-half dividend unchanged at A99c a share.
Mr McIntyre said the NAB result was "relatively solid'', with its $A3.3billion in cash earnings in line with expectations.
"The cash earnings growth of 5% from the Australian banking division is the key highlight, predominantly driven by margin improvement,'' he said.
NAB chief executive Andrew Thorburn said in a statement: "Our New Zealand banking business produced a solid result this period despite challenges facing the dairy industry.
"While we remain confident in the robustness of the underlying New Zealand economy, against a backdrop of sustained low milk prices, we have taken a proactive approach to provisioning for future dairy impairments,'' BusinessDesk reported.
New Zealand revenue rose 2% in the first half, with higher lending volumes partly offset by a lower net interest margin.
Mr Healy said housing demand was still high, in part driven by continuing strong migration, and the supply response was lagging, and there would continue to be upward pressure on Auckland house prices.
"We have arrested our declining market share in housing.
"We attribute this to our increased focus on growing our share of the housing sector through a range of channels. We re-entered the broker market last year,'' he said.
