Land Bank Corporate Plan 2005/06 Presentation: Portfolio Committee on Agriculture & Land Affairs

Overview of Presentation Corporate Plan Overview The Turnaround Plan Financial Objectives Non Financial Objectives Questions and Comments

Land Bank Vision and Mission To be the leading provider of world-class financial services to agriculture and related rural sectors in South Africa Land Bank Mission Land Bank is an agricultural development finance institution that supports economic growth through the provision of retail, wholesale, project and micro-financial services to agriculture and related rural services NOMHLE CANCA The Land Bank has been in existence for over 90 years. The last few years have seen a fairly dramatic modernisation of the Bank’s operations, which have brought it directly in line with government’s priorities for the agricultural sector. The Bank takes its lead from the Strauss Commission of Inquiry into rural financing, and has outlined a vision of being the leading provider of world-class agricultural financial services to agriculture and related sectors. To ensure it achieves this, the Bank’s mission statement clearly outlines the range of services it provides to the sector in support of economic growth – highlighting the importance of retail, wholesale, project and micro-financial services.

Land Bank Accountability The State is the only shareholder, represented by the Minister for Agriculture and Land Affairs Our activities are governed by the Land and Agricultural Development Bank Act, 2002 (Act no. 15 of 2002) and financial management guidelines provided by the Public Finance Management Act (Act no. 29 of 1999) In terms of accountability, it is important to note the legal framework in which the Bank operates, and the fact that the Bank’s activities are governed by the Land Bank Act that was passed in 2002. The Bank’s management and board are directly accountable to the Minister, and we appear before yourselves at least once a year as a means of ensuring Parliamentary oversight and transparency around the Bank’s activities.

Land Bank Strategic Framework Our programmes are aligned with government’s key strategic programmes in the agricultural sector: Agricultural Sector Plan Integrated Sustainable Rural Development Programme Comprehensive Agricultural Support Programme (CASP) Shareholder Compact To ensure the Bank plays a direct role in growing the economy, we have ensured that its strategic focus supports key elements of Government’s own plans for the sector – such as the ISRDP, the Agricultural Sector Plan and Shareholder Compact. In this way, we ensure that the Bank’s funding activities support growth and development in the agricultural economy, as well as facilitating the entry of new farmers and farming groups such as women and the youth The Acting CEO of the Bank, George Oricho, will talk you through this in detail in the next section, including but not limited to strategic objectives and our achievements against targets…

The Land Bank Corporate Plan 2005/06 George Oricho GM Strategy

Land Bank Priorities Implement more effective banking and financial business systems Implement processes and actions to ensure best practice and compliance with AC133 Reposition the Bank to grow the commercial and development books Increase focus on financing BEE transactions, in terms of the Agri-BEE framework To conclude the presentation, I’d like to talk you through the eight key priorities that have been outlined for the Bank in the current financial year, which we believe will enhance its role as the key delivery agent for agricultural finance. Most importantly, from an efficiency and corporate governance point of view, the Bank will be continuing with the implementation of its new banking and financial systems, and in particular implementing processes and actions that ensure full compliance with AC133 and other accounting standards. On a broader level, it will continue to reposition itself and its products to ensure it addresses the needs of both existing and future clients – and, in particular, that it is geared to serve both commercial and emerging farmers. In addition, it will continue to contribute to the transformation of the sector by funding black economic empowerment transactions, in terms of government’s Agri-BEE framework, such as the Pamodzi and Gledhow transactions mentioned by Mr Oricho.

Land Bank Priorities Completing the Business Process Review by November 2004, to ensure: Improved productivity; Streamlined operations; and Enhanced customer service Consolidate the management team CEO candidate identified -- appointment process close to finalization Senior management positions to be filled by November 2004 Continue to support Government’s priority programmes Land reform Agricultural credit scheme Food security To ensure it maintains its strong customer focus, the Bank is bedding down the final phases of the BPR process, with a view to completion by November this year. Alongside this is the consolidation of the Bank’s management team. We have identified a candidate for the CEO position, and the appointment process is close to finalisation. At the same time, a number of key management positions have been advertised and are due to be filled before the end of the year. Finally, the Bank will continue to play a central role in facilitating the roll-out of government’s priority programmes in the sector, and to support the key areas of land reform and food security through the provision of finance and other services.

Important Economic Developments Drought and delayed rains in Western Cape has a major negative impact on the agricultural sector Strong rand causes great difficulty for agricultural exporters such as wine and citrus producers Grain prices are extremely low, especially serious for maize producers Carryover stocks in wine and maize sectors will continue to put downward pressure on prices Sugar industry is benefiting from strong international sugar price GEORGE ORICHO As a development finance institution, our activities are directly linked to the country’s economic performance. Let me talk you through some of the key economic indicators for the period under review: Firstly, as you will see, economic growth was slightIy sluggish, with growth of just 1.4% during the last financial year. This was primarily due to a lull in the manufacturing sector and, crucially for us, negative growth of around 10% in the agricultural sector. We cannot underestimate the impact on the sector of drought in the south-western parts of the country, and delayed rains in the north, which had a significant impact on crops and production. This, coupled with the strong rand, had an impact on producer prices in the sector.

Land Bank Strengths Land Bank has a well established brand name Excellent relationships have been established with Provincial Governments Staff has thorough knowledge of agriculture A tailored range of products are available at competitive rates & fees Bank is regarded as loyal to the agricultural sector, friend in good and bad times Branch offices offer local decisionmaking

Land Bank Weaknesses Retail has relatively high delivery costs Limited product range in a single, high risk sector Lack of satisfactory computer information system Insufficient outreach in deep rural areas Turnaround times are excessive

Land Bank Opportunities Client base will be broadened through MAFISA, AgriBEE and other shareholder initiatives Footprint can be extend through co-op and agribusiness network BEE acquisitions are business opportunities Can develop innovative modern products for old and new markets Land redistribution initiatives offer new possibilities New tailored information system will increase market and service opportunities

Land Bank Threats Loss of preferred status through revisions to the Land Bank Act Loss of staff expertise Workforce that lacks tools, motivation, training Bad debts resulting from adverse economic or climatic conditions Expectations that are not achieved in reasonable timeframe International competitors in the face of increased variability in net farm income and increased cost of debt

The Land Bank Turnaround Plan

Commercial Loan Book, Trend Line and March 2005 Target

Development Loan Book, Trend Line and March 2005 Target

Arrears Amounts, Trend Line and March 2005 Target

Non Performing Loan Balances, Trend Line and March 2005 Target

Return on Assets, Trend Line and March 2005 Target

Net Interest Margin, Trend Line and March 2005 Target

Efficiency Ratio, Trend Line and 2005 Target

Capital Adequacy, Trend Line and March 2005 Target

The Capital Adequacy Issue Land Bank capital has been reduced significantly due to bad debt write-offs and the adoption of a new accounting standard known as AC133 This reduction impacts the financial ratios used by investors to assess the credit worthiness of the Bank Erosion of capital results in a loss of investor confidence in the Bank’s ability to withstand any future financial shock

Sources of Potential Shock Prolonged or severe drought, Financial failure of one or more large borrowers Persistent low commodity prices A large drop in land values used as security for loans Adverse consequences resulting from additional changes in accounting treatment Continued strong rand

The Capital Adequacy Issue Historically Land Bank’s capital adequacy has been kept above 15% In the past two years the ratio has fallen well below 15%. To provide sufficient cushion for possible future adverse events and to restore investor confidence in the financial strength of the Bank, a prudent capital adequacy level would be at least 20%

Land Bank Role in Agricultural Transformation The BEE transactions and other empowerment projects being financed or currently being considered for financing by the Bank’s CFU business is approaching R3.7 billion The current Retail book to start up farmers amounts to R663 million Step-Up adds another R74 million in loan volume

Land Bank Role in Agricultural Transformation Since the Bank serves as one of the instruments of Government’s effort to encourage and support black economic empowerment in agriculture, it is important that the Bank’s capital adequacy position be sorted out as a matter or urgency. A higher capital adequacy ratio will improve the credit rating and dampen investor fears regarding the risk of lending funds to the Bank.

The Capital Adequacy Issue An appropriation of R2 billion will increase capital adequacy ratio to nearly 20% Is adequate to shore up Bank’s financial strength and restore investor confidence A capital injection will require Bank to implement a turnaround plan to ensure: profitability is maintained sustainability is ensured capital adequacy is maintained

The Turnaround Plan Improving Management Capacity Skills and experience Organisational Structure Training and development Selection, recruitment and retention of skills Reward, recognition and incentives Performance management; Culture and values Employment equity Developing appropriate business models

The Turnaround Plan Enhancing Bank Revenue Model Pricing model Net interest income Non interest revenue Creating new loan products Creating non interest sources of revenue Increasing client satisfaction Understanding competitive environment and our clients

The Turnaround Plan Controlling Costs Cost to income ratio, operating efficiencies and increasing productivity Loan book quality (Bad Debts) Funding costs Non interest costs Expense reduction

The Turnaround Plan Installing Information Systems and Processes Implementation of Banking Solution Reliable management information Action plan management information Improve client interface and integration Enabling environment to manage risk and compliance

The Turnaround Plan Managing Risk Market risk Interest rate risk Enterprise wide risk management ALCO process Credit risk, liquidity, market, operating, Banking risks and returns, profitability, liquidity, and solvency

The Turnaround Plan Managing and Protecting Capital Capital planning Return on capital, economic value added Development programme Engage treasury Capital injection

The Land Bank Financial Objectives

Loan Growth

Business Efficiency

Loan Quality

Profitability

Capital Adequacy

The Land Bank Non Financial Objectives

Non Financial Indicators

Questions and Comments

Thank You