Overview of presentation

Land Bank 2005 Annual Report

Presentation: Portfolio Committee on Agriculture & Land Affairs

12 October 2005

2

Overview of presentation

1. Introduction Lungile MazwaiChairperson

2. The year in review and development impact

Alan MukokiChief Executive Officer

3. Financial review Xolile NcameChief Financial Officer

4. Going forward Alan MukokiChief Executive Officer

The year in review and development impact

Alan MukokiChief Executive Officer

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Our Vision

To be the leading provider of world - class agricultural financial services to agriculture and related rural sectors in South Africa

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Our Mission:

Land Bank is an agricultural development finance institution which supports economic growth in South Africa through the provision of retail, wholesale project and micro-financial services to agriculture and related rural services.

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Our approach

• Land Bank is the only financial institution devoted entirely to agriculture

• We provide a specific set of services and products for emerging farmers

• We enjoy a very special relationship with the nation’s farmers:• Championing their progress• Cushioning their setbacks• Celebrating their success

7

External environment

A very difficult year for agriculture• Continued strong rand acted as a

brake on agricultural growth, impacting on farmers’ profit margins and risk

• Adverse weather impacted on crops and livestock

• Unfavourable commodity prices• Increasingly competitive

environment in agricultural finance

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Review of Operations

• Bank’s performance mirrors the difficult state of the agricultural sector

• Net loss of R330m, compared to profit of R247m in previous financial year

• Impairment losses of R678.4m, resulting in net loss of R330m

• Equity and reserves declined from R2.2bn to R2bn

However:

• Net Interest margin has increased by R25m

• R2.1bn growth in loan portfolio

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Operational overview

Lending by line of business

2004/5 2003/4 % growth

Retail 6 544m 6 999m -6.5

CFU 11 733m 9 139m 28.3

Step Up 96m 69m 20

Gross Loan Book 18 373m 16 207m -13.4

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Evolution of the Bank since 1998

• Pre-1998: Defaulters transferred to ACB; no effect on Land Bank balance sheet

• 1998-2002: New mandate (Strauss Commission); new Act; transformation begins to address development challenges

• 2002-2004: Re-engineering of business processes; some process improvements and change management

• 2005: Comprehensive turnaround strategy begins, with emphasis on banking and financial management systems

Developmental Impact

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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

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Loans to emerging farmers

• We continue to lead the sector with the number of development loans now at 129 352, compared to 61 014 in the previous financial year

• The total value of Step-up loans has increased to R96m, compared to R69m in the previous financial year

• The Bank continues to improve its reach in rural areas not serviced by commercial banks.

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Our objective: to achieve a sustainable presence, ownership or participation by previously disadvantaged South Africans within all levels of the value chain in the agricultural sector

Our approach:• To engage, inform and support implementation of

the AgriBEE framework, within the context of broad-based BEE

• To work towards the creation of an enabling environment for the empowerment of the historically disadvantaged

Supporting AgriBEE

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Our activities:• Funded BEE deals totaling in excess of R986m including

the following:• Afgri-Sizwe: R501m to fund acquisition of 26.7%

stake in Afgri Operations• Ushukela Milling: R485m to fund acquisition of

sugar milling operation• Made 28 properties-in-possession (9 000ha) available

for land reform • Supported the annual Female Farmer of the Year

awards

AgriBEE and Empowerment of Women

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Additional contributions to transformation

• Continued to support and fund youth farm projects of R3.5m in collaboration with Umsobomvu and NYC

• Advancing grants of R8m to support Chairs of Agriculture at tertiary institutions

• Allocating R3.5m towards bursaries of PDIs

• Mentorship’s and Learnerships for 80 students of which 42 are women

Financial review

Xolile NcameChief Financial Officer

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Income Statement

2005 % Change

2004

R’m R’m

Net Interest Income 559 5.7 529

Non Interest Income 41 77.3 181

Operating Expenses (359) 17.7 (305)

Net non-operating income 107 4.9 102

Bad Debt Provision (678) 160.8 (260)

Net loss / profit (330) 247

Cost to income ratio 54.8% 44.6%

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Operating profit before impairments

-1500000

-1000000

-500000

0

500000

1000000

1500000

2000000

1998 1999 2000 2001 2002/3 2004 2005

Impairement Losses Netprofit/(loss)for the year Netprofit/(loss)for the year ( Excl. Impairement loss)

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Sustainable Bad Debt Solution

• Health check of existing book by auditors• Separation of credit and sales function• Centralised credit decision making• Focus on financing viable businesses• Engaging MEC’s regarding providing provincial

challenges

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Equity to Total Assets Ratio

2005 2004 2003

Equity to total assets 9.6% 11.8% 14.5%

Equity to total assets adjusted for National Treasury & Dept. of Agriculture support shown below:

17.8%

Conversion of R 201m loan to equity

R 1.5bn letter of undertaking

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NPL and Provisioning

2005 2004 2003

Total Gross loan book R 18.3bnR 16.2bnR 16.3bn

Non-Performing Loan (NPL) R 2.6bn R 3bn R 4bn

NPL as a % of gross loan book 14.2% 18.5% 24.5%

Loan provision R 1.2bn R 1.2bn R 1.5bn

Provision as a % of total loan book 6.6% 7.4% 9.4%

Going forward – Deliver Bank’s Turn Around

Alan Mukoki - CEO

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Turnaround PointsCore Development Business

Commercial Equity

Employment Equity in Agri Business

Innovation and Invention

Development of Finance Schemes to enable and increase access by HDI’s

Schemes to develop skills in Agri by HDI’s

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Management

Recruit, attract and retain skilled and experienced management

Design and implement relevant programmes to train

and develop our management team to generate productivity and performance

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Management – (Continued)

Develop and implement a new performance management system, relevant to the achievement of the Land and Agricultural Development Bank’s objectives

and align the performance outputs of staff to those of the bank.

Design and implement (after approval by the board), a new reward and incentive programme for management and

staff, to align the interest of staff

Create an enabling, energizing and motivating environment in which our staff works ,eg check and manage morale issues

via staff climate audits, surveys on best company to work for, etc

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Systems

• Implement the new IT system architecture throughout the bank – Financial system finally goes live 15 Nov 2005 & Banking system on 1 April 2006.

• Manage the risk of failure of the new IT systems by resourcing and training our staff adequately

• Provide recognizable and comprehensible reports to the board on progress re the implementation of SAP

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Risk Management

• Develop and implement a bank wide enterprise risk management framework and adopt via board resolution.

• Develop the various board and sub committee charters

• Implement the new management structures to fulfill the ERMF.

• Recompose the risk policies for Credit, Asset and Liability Management Treasury, Market and Interest rate risk, Operational Risk, Compliance and get board and internal and external audit approval

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Revenue & Cost Model

• Develop both a revenue and cost model strategy appropriate to a DFI.

• Cost to income ratios, margins, interest and non interest expenses, in all our various segments, ie corporate, equity finance, retail and development.

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Capital

• Design and implement the turnaround strategy with Mckinsey and convince funders and the shareholder of the Landbank’s investment case.

• Manage the bank’s capital ratio within acceptable parameters.

• Improve or maintain the bank’s credit rating, eg Fitch rating, etc

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Thank you

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Funding

Land Bank Funding

Own Capital

Debt

Credit Rating Premium Charged above government bond

Land Bank AA- 0.73%DBSA AAA 0.40%

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Factors affecting cost of funds & Interest charged to Land Customers:

• Credit Rating• Quality of loan book• Profitability• Capital adequacy

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Balance Sheet Liquidity Profile

On Demand R'000

Within 1 Year R'000

1-5 Years R'000

Greater than 5 Years R'000

Totals R'000

2004/5Assets 2,198,444 11,901,088 1,169,191 5,200,408 20,469,131

Liabilities 1,734,776 12,754,684 2,179,071 3,800,600 20,469,131

Liquidity Mismatch 463,668 -853,596 -1,009,880 1,399,808 0

Cumulative Liquidity Mismatch 463,668 -389,928 -1,399,808 0 0

2003/4Assets 3,853,358 7,014,984 3,032,690 5,106,899 19,007,931

Liabilities 2,557,389 9,494,113 2,195,996 4,760,433 19,007,931

Liquidity Mismatch 1,295,969 -2,479,129 836,694 346,466 0

Cumulative Liquidity Mismatch 1,295,969 -1,183,160 -346,466 0 0