Standing Committee on Appropriations 20 May 2020 Land Bank - PowerPoint PPT Presentation

Land Bank Standing Committee on Appropriations 20 May 2020 Land Bank Presentation 1

Contents 1. Introduction 2. Organisational Overview 3. Financial Performance Trends 4. Recent Developments / Liquidity Challenges 5. Immediate Corrective Initiatives 6. Medium to Long Term Strategy 7. Magnitude of the Challenge 8. Conclusions / Recommendations Land Bank Presentation 2 Land Bank Presentation 2

INTRODUCTION Land Bank Presentation 3

Introduction In summary, Land Bank is requested to brief the Standing Committee on Appropriations on the following: Magnitude of the Finance and Liquidity Challenges faced by Land Bank. • • The total value of the Land Bank defaulted loans and implications for Land Bank. • The reasons for the Bank’s current liquidity challenges – including timelines involved. • Alternative solutions and support available to government. Land Bank Presentation 4 Land Bank Presentation 4

ORGANISATIONAL OVERVIEW Land Bank Presentation 5

Organisational Overview About Land Bank Land Bank Presentation 6 Land Bank Presentation 6

Organisational Overview Contribution to the Agricultural Sector and the Economy • Land Bank is a significant player and contributor in the agricultural sector with a market share of 29% of South Africa’s agricultural debt. • As an integral part of the South African agricultural economy Land Bank’s fate has a significant direct impact on clients financed by the Bank, and indirect impact on the agricultural sector’s value chain. Land Bank Presentation 7 Land Bank Presentation 7

Organisational Overview Increasing Development and Transformation As at the end of February 2020, the value of the Bank’s Development and Transformational loans as a percentage of the loan book is approximately 20%. 50 12% 18% 20% 45 11% 40 6% 6% 35 6% 30 R billion 6% 25 4% 20 0% 15 10 5 0 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Feb-20 Transformation 0 0 0 0 1 1,7 2 2,3 2,5 4,9 5,5 7,9 8,9 Commercial 15,9 14,2 13,7 15,3 21,4 26,2 32,1 35,5 36,5 38,4 40,1 37,3 36,1 • In the last five years significant effort has been made to grow the Development and Transformational Loan Book – this book has grown by R6.6 billion . • Supporting Development andTransformation has proven to be a challenging task as a result of:  The cost of the Bank’s funding is based on commercial interest rates from the capital markets ; and  The strict financial covenants that the Bank has to adhere to. Land Bank Presentation 8

Organisational Overview Increasing Development and Transformation The Bank’s current Development and Transformation Book of R8.9bn makes up approximately 20% of the T otal Loan Book, consisting of R3.4bn of Development loans and R5.5bn of Transformation loans . Loan Book Split (R billion) 50,0 45,6 45,2 45,0 43,3 45,0 40,1 38,4 40,0 37,3 36,1 35,0 30,0 25,0 20,0 15,0 10,0 5,5 5,0 3,4 3,3 2,9 2,7 5,0 2,2 2,2 0,0 FY2017 FY2018 FY2019 Feb-20 Commercial Transformation Development Total Loan Book Land Bank’s definition of Development andTransformation: Development clients refers to smallholder farmers who are usually new entrants with an annual turnover of between R50,000 • and R1 million, and medium-scale commercial producers with an annual turnover ranging between R1 million and R10 million. • Transformation clients refers to agri-businesses with annual turnover above R10 million, undertaken by persons or entities that are: Wholly Black-owned; o Majority Black-owned (Black shareholding of 51% or more); or o Substantially Black-owned (Black shareholding of between 30% and 50% and a BBBEE Level of 1 – 4). o Land Bank Presentation 9

FINANCIAL PERFORMANCE TRENDS Land Bank Presentation 10

Financial Performance Trends Key Performance Metrics Summary FY 2016 FY 2017 FY 2018 FY 2019 Feb 2020 Loan Book (Closing) R 39.0bn R 43.3bn R 45.6bn R 45.2bn R 45.0bn Net Interest Margin 2.7% 2.6% 2.5% 2.1% 2.1% Operating Profit R 395.5m R 319.5m R 290.2m R 168.3m (R17m) 56.0% 54.4% 57.5% 62.4% 75.7% Cost to Income Ratio (Actual v Target) < 63% < 63% < 63% < 63% < 63% 8.8% 7.1% 6.7% 8.8% 10.7% NPL Ratio (Actual v Target) < 10% < 10% < 10% < 10% < 10% 18.8% 17.7% 17.3% 16.4% 15.9% Capital Adequacy Ratio (Actual v Target) ≥ 15% ≥ 15% ≥ 15% ≥ 15% ≥ 15% Liquidity Coverage Ratio 55.0% 85.0% 214.3% 549.8% 42.7% (Actual v Target) 60% 70% 80% 90% 79.0% 86.7% 108.6% 102.0% 96.8% Net Stable Funding Ratio (Actual v Target) ≥ 100% ≥ 100% ≥ 100% ≥ 100% ≥ 100% Liability Profile Current : 70 / 30 58 / 42 43 / 57 50 / 50 Short-Dated / Long-Dated 42 / 58 • The Key Financial Performance Indices have been relatively strong for the past four years with the Operating Profit and Non Performance Loans experiencing strain due to the challenging agricultural operating environment (effect of sector recession; drought; and diseases). • The Liquidity position of the Bank has been relatively very strong until FY20 when the impacts of the recent challenges were experienced. Land Bank Presentation 11

Financial Performance – Funding Matters Cost of Funding Change in margins: FY2016 - Feb 2020 12% 4% 11,2% 11,2% 11,1% 3,0% 11% 3,0% 3% 2,9% 10% 2,7% 10,6% 9,3% 3% 9,1% 9% 2% 2,1% 8,5% 8% 8,2% 7,6% 2% 7% 6,3% 6% 1% FY2016 FY2017 FY2018 FY2019 YTD Feb`20 CoF Lending rates NIIM As the Liability Profile mix shifted from 70% of short term funding in FY2015 to 42% in FY2020 the Cost of Funding • increased (from 6.3% in FY2016 to 9.1% in Feb2020). Additionally, the Bank has not concomitantly re-priced its loan book to effectively match the increase in Cost of • Funding. • Consequently, the Net Interest Margin has been significantly reduced, and is a subject of the Bank’s initiative to correct this negative trend. • The squeeze on margins poses challenges for the Bank in its developmental mandate given the cost of doing business in the developmental sector (including credit risk and ability to price at affordable rates). Land Bank Presentation 12

RECENT DEVELOPMENTS AND LIQUIDITY CHALLENGES Land Bank Presentation 13

Contextualising the Problem Leading to the current Liquidity Challenges 2015 2016 2017 2018 2019 2020 Land Bank Act, No. 15 of 2002 2019/11/05 2020/01/21 31 March 2020 2020/03/26 2020/04/28 Dual 2015 2016 2018 2019 Erratic Drought Drought Moody’s flags Moody's Moody’s COVID19 Moody’s Mandate Rainfall Land Bank for downgrades downgrades National Lock downgrades Established Commercial downgrade Land Bank's Sovereign debt Down Land Bank’s Agriculture; ratings ratings and Emerging / Environmental, Social Development Sector. Deteriorating cash 2017 2018 2018 2019 2019 COVID 19 and & Governance Avian Flu Listeriosis Foot & Mouth flow, access to funding associated Equitable Ownership & liquidity position lockdown is a Credit Risks (NPL’s) compromise Agrarian Reform significant risk to remain elevated Reduced Yield Food Security standalone viability the SA economy, HDI Ownership with job losses Liquidity Challenges / SA government's Herd Culling Trade Restrictions Land Redistribution Modest Capital Buffers imminent – there willingness and will be consequent HDI Development capacity to support Organisational food system impact Land Bank Leadership Land Access considerations Jun 2009 Jul 2019 Entrepreneurship (delayed CEO Technical appointment) Recession Remove Racial & Recapitalisation Application for Gender Discrimination of R3.5bn Shareholder Support Recapitalisation Sector Growth Size of Loan Book = Size of Loan Book = Knock-On Effect Productivity, R14.5bn Aug 2018 R45bn Profitability, Establishment Investment, innovation Feb 2020 of a Liquidity Commercial Agric Risk Fund Sep 2019 Board, recognising the liquidity challenge , Environmental wrote to the Minister of Finance and the Sustainability Minister responded with Deferral of the Fund Rural Development National Treasury’s approval of the utilisation Raising Programme Job Creation of R5.7bn guarantee. Food Security Land Bank Presentation 14

Liquidity Challenges Pre 1 st Downgrade (November 2019) On 5 November 2019 Moody’s placed Land Bank on review for downgrade / negative outlook due to: Weakening standalone credit profile. • The government’s capacity and willingness to support in case of need. • The weakening standalone credit profile predominantly driven by pressures stemming from: • Elevated credit risks evident from increased non-performing loans. o Declining capital buffers that will challenge its ability to meet some loan covenants while o fulfilling its developmental mandate and related loan growth targets. Environmental risks such as the sustained droughts, uncharacteristic hail in usually hail-free o areas, and increased frequency of disease outbursts, which may disrupt the ability of the Bank’s customers to repay their loans. Downside risks regarding the impact of the Land Reform Programme. o Land Bank Presentation 15