Land Bank 2006 Annual Report

Presentation: Portfolio Committee on Agriculture & Land Affairs

10 October 2006

Financial review

Xolile NcameChief Financial Officer

3

BUDGET 2005/6 COMPARED TO FORECAST 2005/6

* Mainly due to delay in incurring people costs

** Couldn’t collect on the debts given over to the debts collectors as some had prescribed

*** Restructuring, Commission on bad debts recoveries = R 186 m

Rm Rm

Budget 2005/06

VS Forecast

2005/6

Profit before impairments (2.6) 85*

Impairments (33) (600)

Bad Debts Recovered 290 75**

Net non operating Income (loss)

(182)*** 9

Net Profit / loss 72 (431)

4

Income Statement - Group

2006%

Change2005

R’m R’m

Net Interest Income 415 26 559

Non Interest Income 293 388 60

Operating expenses (445) 7 (415)

Net non-operating income 72 30 103

Bad Debt Provision (320) 50 (637)

(Net loss) / profit 15 (330)

5

Income Statement – Land Bank

2006 Budget

20062005

R’m R’m

Net Interest Income

Interest income non-performing loans

Net Interest Income

584

(172)

412

414

-

414

557

?

557Non Interest Income 293 413 301

Operating Expenses (439) (722) (416)

Net non-operating loss (71) 0 (252)

Bad Debt Provision (320) (33) (637)

Net loss (125) 72 (447)

Dividend from SAVVEM

Loss

-

(125)

-

72

240

(207)

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Key financial issues

Economy- wide Net Farm Income in the South African agricultural sector is down

by 28.3%

Group Specific International Financial Reporting Standards (IFRS) was

successfully rolled out to replace South African Generally Accepted Accounting Practice (GAAP)

Profits improved by R345m from a loss of R330m in 2005 to a profit of R15m in 2006.

Provisions for loan losses improved by R317m from R637m to R320m

7

Going concern

The last five years have taken their toll on the bank’s capital levels:

• For the financial year ended 2001, the Bank’s capital was at R3.4bn

• For the financial year ended 2006, the Bank’s capital was down to R1.096-bn

AC133 and IAS 39 has resulted in provisions for loan losses of R3.5bn and fair value adjustments for the LB01 Bond of R353m

R1.5bn letter of comfort has been extended to June 2007 Replacement of the letter of comfort with capital injection

8

NPL and Provisioning

2006 2005 2004

Total Gross loan book

R16.3bn R18.3bn R16.2bn

Non-Performing Loan (NPL) R1.7bn R1.7bn R3bn

NPL as a % of gross loan book 10.4% 9.3% 18.5%

Loan provision R1.4bn R1.2bn R1.2bn

Provision as a % of total loan book 8.6% 6.6% 7.4%

9

Equity to Total Assets Ratio

2006 2005 2004 2003

Equity to total assets 8.7% 7.3% 11.8% 14.5%

Equity to total assets adjusted for National Treasury

R1.5bn letter of undertaking16.4%

10

External Audit Issues affecting the Opinion

2005Nine issues were reported

2006Two issues were reported (re-reported)

- Going Concern

- Interest impairment calculation for the 2005 comparative

The year in review

Alan MukokiChief Executive Officer

12

Development Mandate

SMME, Agri BEE

No Security,

No own Contribution,

No market

no skill

Commercial Business

Consolidate

Compose

Insource Out Task

Scale up

CORE CONTEXT

Standardisation

Commoditisation

Differentiation

Innovation

Invention

13

Capacity of the current Capital

Current loan book R16bLand Bank’s Equity @ 20% CAD R3.2b20% Return on R3.2b Equity R640mOf this R640m, R320m for 10% growthR320m leveraged at 20% for R1.6b loans

14

Top 50 Client Statistics

Land Bank total Exposure in Rand ValueR12bTaxes paid past 3years(04,05,06)R600mVAT paid past 3 years R380mEmployment Tax paid R500mEmployment No. 10 000Procurement potential for SMME

development R18b

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The agricultural sector

• Financial position of farmers has been deteriorating since 2001, when depreciating rand pushed up producer prices

• The rand has since strengthened, bringing down producer prices – but input costs continue to rise

• Profit margins severely squeezed in the process• Farm incomes down by 28.3% in last

financial year• Expenditure up 5.4%• Producer prices down 2.2%

• Farmers therefore forced to cut input costs to the bone

16

The Bank’s approach

• Two key focus areas:• Our commercial business activities (our

context)• Our development activities (our core

business)

• Challenge: get the commercial business right, to enable us to deliver on our development mandate

• Shanduka (turnaround strategy) put in place to ensure this happens

17

Key internal achievements

SAP IT system in place to assist with:• Financial management• Core banking• Integrated loan origination and debt collection

Enterprise-wide risk management system in place Revenue and cost models improved Interventions planned to build the brand

18

Step Up

Disbursed R18million

Sizable portion of funds not used for agricultural purposes

Difficult to track development impact

MAFISA

Total Loans Disbursed-R19million

Enhance distribution and outreach through other channels

• Senwes

• Cape Agri

Development

Going forward: Our turnaround strategy

Alan MukokiChief Executive Officer

20

Our response to the current challenges

Our turnaround plan and is being implemented to ensure that:

• profitability is maintained going forward• sustainability is assured and • capital adequacy is significantly strengthened

The plan is the central feature of the 2006/7 corporate plan to ensure the viability and sustainability of the Land Bank

21

The turnaround plan

People – Ensure the bank has the properly skilled people in the right jobs, and there is proper selection, recruitment, training, development, coaching, mentorship and retention

Systems – Ensure the bank has proper information systems to assist management to have timeous relevant and reliable information to make management decisions

Risk – Ensure the enterprise-wide risks are properly monitored and managed

Capital – Ensure the bank has the right level of capital to perform its mandate and this capital is grown in a sustainable way

Revenue & costs – Design and implement strategies on revenue and costs to ensure quality, consistency and sustainability of results

Brand & Image – Ensure the bank is seen in a favourable way by its stakeholders

22

Systems

• SAP Finance module went live in November 2005 • Banking solution to be rolled out in the current financial year

23

Capital

• Discussions held with National Treasury and Department of Agriculture on capital injection

• In the meantime, letter of comfort to the amount of R1.5bn has been given to the bank as a guarantee to creditors should the bank’s liabilities exceed its assets

• Turnaround will not be successful without an injection of capital from the National Treasury as reserves will not be enough for the bank to successfully fund operations and growth

24

Revenue and costs

• Re-looking the Distribution Model • Dedicated credit department established

25

Brand and image

• New advertising agency has been appointed and briefed• New series of campaigns due to begin in coming months

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Thank you