Presentation to the Portfolio Committee

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Presentation to the Portfolio Committee on
Agriculture and Land Affairs, 6 May 2008
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CONTENTS

• Background
• Purpose
• Key elements of our Corporate Plan
• Scanning the environment and building capacities
  
• Supporting values
• Operating principles
• Objectives
• Financial resources and sources of income (refer
  to
• budget presentation)
• Conclusion

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BACKGROUND

• Over the past five years the Land Bank has had
  low levels of capital and has been making losses
• Land Bank is currently not delivering effectively
  on its development mandate
• About R821m are development loans
• Funding development in the financial markets
  presents challenges for the Land Bank
• The Land Bank has lost its market share over the
  past five years due to the following
• Growth of the financing in the sector outpaced
  that of the Bank
• Constraints of financial resources
• Removal of Government subsidies and financial
  support to farmers

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BACKGROUND (Cont)

• Demand for agricultural finance has increased due
  to
• Improved farm incomes
• Rising input costs
• Expanding production

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PURPOSE

• The objects of the Bank are the promotion,
  facilitation and support of
• Equitable ownership of agricultural land, in
  particular the increase of ownership of
  agricultural land by historically disadvantaged
  persons
• Agrarian reform, land redistribution or
  development programmes aimed at historically
  disadvantaged persons or groups of such persons
  for the development of farming enterprises and
  agricultural purposes
• Land access for agricultural purposes
• Agricultural entrepreneurship
• Removal of the legacy of past racial and gender
  discrimination in the agricultural sector

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PURPOSE (Cont)

• enhancement of productivity, profitability,
  investment and innovation in the agricultural and
  rural financial systems
• Programmes designed to stimulate the growth of
  the agricultural sector and the better use of
  land
• Programmes designed to promote and develop the
  environmental sustainability of land and related
  natural resources
• Programmes that contribute to agricultural
  aspects of rural development and job creation
• Commercial agriculture
• Food security

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KEY ELEMENTS OF CORPORATE PLAN
Our vision is to promote, facilitate and support
the achievement of sustainable food production
and security, development of rural economies and
growth of the agricultural sector
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SUPPORTING VALUES

• Guided by Batho Pele
• Integrity
• Honest and ethical conduct in all of our
  interactions. Honoring the dignity and worth of
  all. Ensuring fairness and equitable access to
  our services
• Professionalism and Service excellence
• Executing all activities in a professional manner
  thereby ensuring that we exceed delivery
  expectations for quality, responsiveness and
  value to our customers.
• Accountability
• Taking personal ownership to meet commitments

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SUPPORTING VALUES

• Cost consciousness
• Using all our resources in the most cost
  effective manner
• Innovation
• Open and receptive to new ways of conducting
  ourselves and our business, seeking to
  continuously improve our service delivery

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Scanning Environment and Building Competencies
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ECONOMIC FACTORS

• OUTLOOK
• Slow down in international and local growth
• Increase in commodity prices
• Increase in input costs
• Increase in inflation
• Increase in interest rates
• Higher producer prices

12
Agriculture sector performance

• Current trends in agriculture
• To 2006, long-term agricultural profit margins
  declined despite overall growth in gross farming
  income
• In 2007 profitability improved, while production
  costs are also rising
• Removal of government intervention has exposed
  agriculture to inherent volatility
• Increasing consolidation and sophistication among
  commercial farmers
• Favourable opportunities for wheat, other grains
  (maize) and oil seeds
• Livestock improvement programme of DoA
• One municipality one product concept of DoA/DLA

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Food security and food prices

• Food is increasingly getting beyond reach for the
  poorest nations as consumers worldwide grapple
  with the spike in prices of basic commodities,
  attributable to
• Freak weather conditions
• Dramatic changes in the global economy, including
  higher energy prices, lower food reserves and
  growing consumer demand
• Changes in consumer needs and diet patterns
  influenced by changes in income levels and
  settlement patterns
• Increasing production costs

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LAND BANK PRODUCT AND SERVICE OFFERING RELATIVE
TO THAT OF THE COMMERCIAL BANKS

• BANK 1
• Transaction and
• savings account
• Complete suite of
• short, medium and
• long-term loans
• for production and
• mortgage finance.
• Revolving credit
• facilities for
• working capital
• finance
• Wealth creation,
• and estate
• planning products
• Commodities trading and hedging facilities
• Crop insurance and life insurance products

• BANK 2
• Transaction and savings
• accounts
• Production credit and
• term loans for inputs, land
• and fixed capital
• Silo certificate finance
• Revolving overdraft credit
• for working capital
• Investment profit CTS
• Crop insurance and life
• assurance products
• Grain trading and facilities
• International banking

• LAND BANK
• Short-term
• production loans
• Revolving short-
• term cash credit
• accounts
• Medium-term
• installment sale
• finance loans
• Medium term
• establishment loans
• Long-term mortgage loans
• Livestock financing

Land Bank has a very narrow product range that
consists of a simple debt products vs. a holistic
offering by commercial banks that become the
primary bankers for farmers

• Land bank terms are in
• general less stringent
• than commercial banks.
• Land Bank allows longer
• repayment periods on
• mortgage
• Financing norms outdated

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LAND BANK PRODUCT AND SERVICE OFFERING RELATIVE
TO THAT OF THE COMMERCIAL BANKS
Bank 1
Bank 2
Land Bank
Solutions
Reduce cost of funds through government support
and raising funds for dev separately,
MAFISA Implement an adequate IT system Hubs
and satellite offices Recruit relevant
resources in economics, agriculture science and
banking business.

• Competitive market related interest charges
• Transaction and service fees

• Competitive market related interest charges
• Transaction and service fees

• Interest rates currently priced above the rest of
  the market
• No transaction fees

Price

• Slow processing and turnaround time

• Quick processing and turnaround time

Service delivery

• Quick processing and turnaround time

• 20 specialist managers, 22 agricultural
  economists, 120 agri-bankers

• 53 agri-businesses specialists

• 28 agricultural experts
• 7 person research unit

Agric expertise
According to interviews with commercial
farmers Source Adapted from Team Analysis
(Mckinsey 2005)
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LAND BANK PRODUCT AND SERVICE OFFERING RELATIVE
TO THAT OF THE COMMERCIAL BANKS
Bank 1
Bank 2
Land Bank
Solution
Introduction of hubs or satellite offices within
reasonable proximity to target market 47
municipalities, partner with other local
municipalities Overhaul IT systems

• Leverages off wide retail branch network
• Very sophisticated and technology driven
  proposition, inc. internet banking, electronic
  banking (using custom software)

• Limited number of branches
• No internet banking, telephone or cell phone
  banking
• Inadequate and outdated system and loan processing

• Leverages off wide retail distribution network
• Technology-centric proposition, incl. internet
  banking, electronic banking, cell phone banking

Channels

• Low brand strength
• Negative publicity

Brand
Good brand
Good brand
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Historical Performance 2005 2007
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COST OF FUNDS
COST OF FUNDING

• The total Cost of Funding (turquoise line)
  reflects the weighted average of Land Banks
  short, medium and long term portfolios. Although
  our spreads have recently been put under
  pressure, increases in market rates also
  contributed to the rise in Cost of Funding.

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OPERATING PRINCIPLES
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OPERATING PRINCIPLES

• We operate on the principles of
• Accessibility
• A network of 27 Branches
• Direct and indirect lending to agriculture
• Long term mortgage loans
• Short and medium term production loans
• Cash credit facilities to Agri-businesses and
  co-ops
• Forming alliances and partnerships
• Cooperatives and agri-businesses (wholesale
  funding)
• Permanent staff of 613 excluding vacancies
• Supporting emerging farmers
• Targeting new markets
• Including former homelands

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STRATEGY

• Stabilise the Business
• Deliver on development
• Review the funding model

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OBJECTIVES (SHORT TO MEDIUM TERM)
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STABILISING THE BUSINESS
PRIORITIES 2008/9
MITIGATION 2008/9

• Management stability - Filling critical
  vacancies, including specialists
• Restore health of staff culture, morale and
  performance
• Improve credit granting monitoring processes,
  and policies

• Source Senior staff Appoint interim consultants
  to fill critical areas.
• Develop and Implement a change management
  program.
• Ensure consistent communication and better
  employee interrelations.
• Design, develop/acquire and implement an
  appropriate risk rating system
• Ensure adequate competency levels to execute
  credit risk management.
• Enhance credit risk management systems
• Accelerate predictive modeling, application
  scoring and risk rating.

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STABILISING THE BUSINESS
PRIORITIES 2008/9
MITIGATION 2008/9

• Improve internal controls and governance
• Build capacity to manage risks associated with
  development funding

• Implement Enterprise Risk Management Framework
• Review Delegation of Powers
• Form partnerships with Co-ops and other service
  providers
• Internal capacity of development specialists in
  alignment with DoA extension officers and ARC

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STABILISING THE BUSINESS
PRIORITIES 2008/9
MITIGATION 2008/9

• Interventions to address key non-performing loans
  taking place to recover outstanding debts
• LDFU Awaiting Senior Counsel opinion regarding
  legal matters and recovering the outstanding
  debt 15 May 2008
• Continuing to support commercial agriculture

• Restructure high value non-performing loans
• Maintain support to commercial farmers

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STABILISING THE BUSINESS
PRIORITIES 2008/9
MITIGATION 2008/9

• Managing operating costs
• Overhaul IT infrastructure (12 - 18 months)

• Review spending on consultants
• Costs are being managed down
• Instill culture of budget control
• Implement core banking solution
• Customer Relationship Management system
• Risk Rating system

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STABILISING THE BUSINESS

• PROGRESS TO DATE
• Liquidity position of the bank stabilized
• Interventions to address key non-performing loans
  taking place to recover outstanding debts
• Stabilization of the Finance department taking
  place
• External audit firms

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Employee Relations Update

• Sixteen (16) cases in total
• General Managers Four (4)
• Senior Managers Eight (8)
• Specialists One (1)
• Junior Managers Three (3)
• Cases finalized Seven (7)
• Found guilty / dismissed
• GM Risk Fraud
• GM HR Gross insubordination/negligence
• Snr Manager Retail Dishonesty
• Snr Manager IT x 2 Fraud
• Snr Manager LDFU Gross Misconduct
• Snr Manager CFU Gross Misconduct
• In Progress

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Critical Vacancies

• GM Risk
• GM HR
• Credit Head Corporate Banking
• Head Internal Audit
• Head of Retail
• Senior Manager Finance
• Contingency plan in place to ensure continuity of
  functions
• Short term contracts
• Consultants on retainer

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• DEVELOPMENT

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MINISTERIAL PRIORITIES

• The Bank must also contribute to the
  implementation of Land and Agrarian Reform Policy
  (LARP), which has been initiated to accelerate
  agricultural development through a delivery
  mechanism that provides a one-stop-shop for
  agricultural and other support services close to
  farming and rural communities through (for the
  next two years)
• Redistribution of 5 million hectares of
  white-owned agricultural land to 10,000 new
  agricultural producers
• Increase Black entrepreneurs in the agri-business
  by 10
• Provide universal access to agricultural support
  services to target groups
• Increase agricultural production by 10-15
• Increase agricultural trade by 10-15

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CONTRIBUTION TO AGRICULTURAL DEVELOPMENT

• A key element and priority of this corporate plan
  is refocusing the Land bank onto the development
  mandate
• Financing emerging farmers along the value chain
• Providing non-financial support to ensure success
• Continuing to support commercial agriculture
• Success on this development mandate is dependent
  on government support/grants
• The Land Bank will create business centres that
  will focus on emerging farmer support (As per the
  Strauss Commission Report)
• Business Centre 1 Development Finance
• Business Centre 2 Commercial Finance
• Increase reach inline with the 47 district
  municipalities

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PERFORMANCE INDICATORS

• Grow development Book by R3 billion
• Profitability
• Cost to income
• After restructuring costs
• Non performing loans

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FUNDING

• Recapitalisation
• Government guarantees
• Donor funding
• DoA/DLA Grants

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CONCLUSION

• One-stop-shop
• Stabilising the bank
• Alignment with the DoA/DLA, and other
  stakeholders ARC, DFI
• Focus on Presidential priorities, Apex priority 7
• Focus on increasing agricultural production
• Long term strategy is to deliver on Land Banks
  mandate