Land Bank 2016/17 Annual Report

Meeting report

Remarks by the Land Bank Board Chairperson
Mr Mabotha Moloto, Board Chairperson, Land Bank, gave the context for the Bank’s annual report. The Bank viewed good corporate governance as an imperative. There is a significant correlation between financial sustainability and corporate governance, such that the Bank would not compromise on its corporate governance structure. The Bank is largely reliant on institutional investors such that sound corporate governance was key to financial sustainability. The Bank's mandate, as well as its development objectives are aligned to global commitments and national policy imperatives. The Bank went through a liquidity crisis back in 2015 due to short-dated debt, which gave rise to an asset and liability mismatch. Government, as the major shareholder, had to bail it out through guarantees. However, the challenge had been somewhat addressed and short-term debt had been brought down to less than 50% of its portfolios. Subsequently, the Bank invested in its risk management architecture. Institutional consolidation post the 2015 restructuring included: giving effect to the corporate strategy, ongoing investment in modernisation of the risk management architecture, and attracting and investing in the best talent. He assured the Joint Committee and investors that the Land Bank would maintain its adherence to the best standards of corporate governance.

Land Bank 2016/17 Annual Report presentation
Mr Tshokolo Nchocho, Chief Executive Officer, Land Bank, placed the financial results in context by highlighting key perspectives in the agricultural sector. The sector was still recovering from the two years of drought, and was currently in recession. Pressures had continued on the poultry industry to an extent that few assets in the Bank’s portfolio came under distress. An industry-wide decline in quantities of animals (livestock units) had resulted in upward pressures on meat prices. There had been pressures on the financials of the Land Bank Insurance Company (LBIC) as drought led to higher claim ratios, which saw lower levels of premium write-ups. However, export performance had continued to perform well and the agricultural export value recorded an increase from R64 billion in the previous year, to R79 billion.

The Bank had to be evaluated in terms of its financial performance and developmental impact. Currently, it was self-financing and not relying on government for grants. The last time there was an injection from government into the Bank was back in 2009. Since then, the Bank was raising funds in the region of R4-5 billion year on year on the strength of its balance sheet. It aspired to become both a high developmental impact as well as high earning institution in order to underpin its financial sustainability. The imperatives for an upward trajectory in financial sustainability included: investing in the agricultural sector prudently; effective structuring of credit risk; robust portfolio management; access to funding; and managing margins and costs in the transactions it finances. He commented on the mid-year incident with Futuregrowth asset managers. The incident was unfortunate because Futuregrowth took a decision to lump the Bank with other state-owned enterprises (SOEs), some of which had significant governance and structural challenges. However, the Bank’s response was swift and effective, and on the back of transparency on its governance, policies and structures, funding relations with FutureGrowth had been restored. The Bank continued to maintain unqualified audits.

There had been comprehensive revisions to the Bank’s domestic medium term note (DMTN) programme, and its National Scale rating was maintained at investment grade. Substantial capital raising capacity of over R7 billion had been lent to agricultural sector during the year under review. The Bank’s developmental impact outcomes during the year under review were highlighted as follows: R4.8 billion new disbursements (excluding revolving facilities) into the sector wherein economic estimates indicated that 15 360 new jobs were created; and 3 500 jobs were maintained in the poultry industry on the backdrop of flexible terms provided by the Bank towards poultry farmers. At the beginning of the year, the Bank set targets to advance a target of R2 billion to facilitate inclusion. Subsequently, R2.4 billion growth was recorded in its loan book to the development sector and the Black Brokers Development programme was established. The programme was meant to facilitate inclusion such that the Bank’s increasingly extended its insurance business to black insurance brokers. Also, a special facility was created such that the R100 million disbursed under the Drought Relief Facility was priced lower and with extended grace periods. The facility was not a grant, but a loan facility with concessionary terms. The Bank was also making efforts to integrate small and emerging farmers into the mainstream through joint ventures /investment partnerships. It was hoping to scale the programmes up, coupled with equity empowerment financing. The Bank was also working on better use of blended financing techniques especially for small farmers to enhance growth and inclusivity.

Mr Bennie van Rooy, Chief Financial Officer, Land Bank, presented the Bank’s annual financial results. He noted that there was much acknowledgement that the Land Bank was a successful SOE in the South African context.
The Bank’s performance during the 2017 financial year was impacted by additional costs incurred in relation to the organisational review as undertaken during financial year 2016. Although these costs were not significant, a “like-for-like” comparison was required to fully appreciate the results achieved in financial year 2017. The Bank has a strong asset portfolio that generates sustainable returns, and, as a Group, generated healthy profits. The Bank extended R41 billion worth of loan during the financial year under review. Consolidation of the Bank’s earnings base resulted in 11% growth of the gross loan book. This, together with more appropriate risk-based pricing resulted in an increase in net interest income of 10.8%. On its operating expenses, excluding R31.1 million as a continuation of once-off costs relating to the organisational review conducted in financial year 2016, operating expenses marginally increased year-on-year. Cost-to-income ratio decreased from 56.0% to 51.4%.

The Bank’s investor relations strategy was bearing fruit. Renewed investor confidence was evident with the Bank seeing increased support from existing funders as well as new investors/ funders. It has a well-diversified investor base across local debt and capital markets, as well as foreign funding relationships with banks and multilaterals. On funding strategy, the Bank had made great strides in extending its maturity profile, thereby reducing refinancing risk and improving general liquidity levels. The extension of the maturity profile had been done in a well-coordinated, responsible and cost-effective manner, protecting the Bank’s net interest margins. Its liquidity position had been vastly improved with the introduction of longer-dated funding, reducing call bond exposures, as well as keeping utilisation of committed and uncommitted facilities to a minimum. The Bank had furthermore voluntarily prepaid some loan exposures which were maturing in a 12 month period, and that were expensive or included negative “rating triggers”. As at 31 December 2017, the Bank had R1.8 billion cash on balance sheet with access to a further R1.8 billion and R0.5 billion in committed and uncommitted facilities respectively.

Mr Nchocho said the Land Bank Group’s priorities for financial year 2019 to 2021 were to: increase the number and value of transactions that promote transformational and inclusive growth in the sector; ensure the long-term financial sustainability of the Group; promote a culture of ethics and good governance; maintain its focus on improving its risk management practices; strengthen its relationships with stakeholders; improve institutional capability and continuing to invest in the skills and information infrastructure required by the organisation; support the sector’s endeavours to adapt and mitigate climate risk and embed the organisation’s environmental and social strategies.

Discussions
Ms P Mabe (ANC) noted that the presentation had not made reference to the Auditor-General’s (AG) recent findings. She thus felt the Bank’s annual report was incomplete. She noted that the Bank had extended loans amounting to R161 million to 262 female farmers. She asked about the demographic composition and distribution of these farmers within the country.

Ms T Tobias (ANC) wanted to know what the Bank was doing to assist the poultry industry, which was evidently susceptible to losses due to disease outbreaks. She observed how the ostrich industry had been recently affected. There was need for strategies to circumvent such challenges. She believed the Bank should not operate as a commercial bank if its core objectives were of a developmental nature. There was need for a model which would emphasise liquidity rather than profitability of the Bank. Also, how were smallholder farmers benefiting from the Bank? Most models tend to benefit anchor farmers and not necessarily emerging farmers.

Mr A Lees (DA) congratulated the Bank for its successful turnaround within a short space of time. This was commendable and the Bank was an outlier amongst SOEs. He asked if it was concerned about risks associated with the current drought-spell in many areas around the country. How did the livestock feeding scheme fit in the banking model? He noted that a bulk of its funding was not guaranteed by government. He believed the Bank had to reduce government guarantees to nil so as to reduce the burden on taxpayers.

Mr O Terblanche (DA) said the Bank was a shining example. He asked about bad debt and how it was going to be recovered. How many successful independent farmers had the Bank assisted in the last financial year?

Mr M Chabangu (EFF) asked about the role played by the Bank in alleviating poverty as a result of drought especially in communities which could not afford loans. In KwaZulu-Natal, most workers in the poultry industry lost their jobs due to the proliferation of imported poultry products. What role was the Bank playing in assisting such workers? How was the Bank assisting local farmers in homelands?

Mr F Shivambu (EFF) commented that the motion on expropriation of land without compensation had been recently adopted by Parliament. A clear framework was in the process of being formulated and the Bank had to take note of that. What would be the implications of land expropriation and how much funds had the Bank lent its clients for the acquisition of land? Who were the Bank’ beneficiaries and in what sectors were they operating in? What was the Bank’s contribution towards changing the faces of food producers in South Africa? How did the Bank deal with cases of emerging farmers who approach the Bank for loans but do not have collateral? He sought clarity about the agreement the Bank had with the Public Investment Corporation.

Ms S Shope-Sithole (ANC) said good corporate governance was crucial. However there was need to assist rural women as part of the Bank’s funding model. She expressed concern that the Bank appeared before the Joint Committee with a delegation consisting of males only. Transformation was key and the Bank must also be seen to be transforming.

Mr T Motlashuping (ANC) said a speedy response to the land expropriation issue by the Bank would assist. He asked if the Bank was embarking on a drive to ensure that the unemployed youth are the foremost beneficiaries to the jobs created by it. Were the previously disadvantaged and emerging farmers a priority in its lending framework?

The Chairperson asked if the Bank’s CEO was part of the CEO Initiative. He noted that the Initiative had pledged to open up internship opportunities as part of its youth empowerment scheme.

Mr Moloto replied that women were well represented within the Bank. The board was constituted by one male, himself, and the rest of the board members were women. At the level of the executive, there were three women. The Bank took empowerment initiatives very seriously, to an extent that an empowerment equity investment framework had been adopted. The Bank insisted that there should be a trust for workers as part of its conditions for equity investments. On the recent developments around the land expropriation debate, the Bank took note of the discussions and would adjust and deal with the matter accordingly. He asked to submit the Bank’s official position in writing after consultations with the full board and executive.

Mr Nchocho indicated that the AG’s report identified an issue in the Bank’s procurement framework, and recommended that the Bank should take up the most affordable quotes in compliance with the Broad-Based Black Economic Empowerment framework. The flagged issue was technical in nature and had been rectified.
The AG also found that one appointed official had fraudulently acquired his police clearance and had not declared a criminal record. The official in question had since resigned. Overall, the AG’s report was satisfactory. The poultry industry, which came under significant pressure due to the burden of diseases had improved but remained susceptible. The Department of Agriculture, Forestry and Fisheries (DAFF) was currently running programmes relating to helping the industry manage disease burdens. The capabilities lie with DAFF and the Bank could only serve its clients through technical assessments and making recommendations about technical infrastructure in poultry farms as part of its financing conditions. The Bank had done significant work with its client base but found it difficult to intervene in the entire industry. On the need to balance financial and developmental objectives, the Bank was supposed to finance itself and pay its way through so that it does not be find itself in a position where it would require bailouts from Treasury. There was need for the Bank to generate certain levels of profitability and net earnings. However, this did not diminish the importance of its developmental objectives. The Bank should be judged on the basis of both dimensions. The Bank operated like a commercial bank purely for funding purposes because there were certain benchmarks required by commercial funders such that it was forced to maintain robust balance sheets. However, the Bank was still devising means to ensure more subsidised loans are extended to small and emerging farmers. The Bank was also concerned about the ongoing drought in affected areas such as the Western Cape. There was necessarily no direct correlation between the impact of drought and the Bank’s balance sheets. The impact would depend on the specific exposure but its focus was to ensure farm losses were minimised. The Bank had ring-fenced funds for drought relief to ensure continuity of operations and production by farmers with such concerns. The R161 million extended to 262 female farmers was for the current financial year. This was a small number in the context of R41 billion, but was a starting point. It would furnish the Joint Committee with a detailed breakdown of the demographic composition and distribution of said beneficiaries. The Bank’s development and transformation matrices were continually under review. On whether the Bank was involved in poverty alleviation drives in rural areas; this was the scope of DAFF and the Department of Rural Development and Land Reform. The only vehicle at the Bank’s disposal was the R400 million drought relief special facility- a debt financing instrument with concessionary terms. The Bank did finance farmers having permissions to occupy (PTOs), rather than title deeds, in former homelands.
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Mr Nchocho indicated that when he joined the Bank in 2014, of the R34 billion loanable funds available at that time, only R2 billion had been extended to companies with significant black ownership. However, this was changing as the Bank had mapped a transformation path and had set itself a three year target from virtually nothing. However, there were significant challenges affecting new and emerging farmers, such as access to land and marketing channels. Emerging farmers needed to be assisted to penetrate markets. The Bank had recently piloted a model in the sugarcane market where a fixed-term buyer off-take arrangement had been structured within its production finance framework. Proper scoping of funding, ensuring that emerging farmers receive as much technical support as possible through co-opting and capability sharing with established farmers was crucial. The Bank ran a comprehensive management portfolio to undertake these functions. He indicated that he was part of the CEO Initiative as the co-chairperson of the initiative’s agricultural work stream.

Mr Shivambu indicated that 87% of the Bank’s loanable funds were going to white people. The Bank was part of the problem as it was reproducing inequalities which defined the apartheid era. The issue had to be dealt with in a different platform.

The Chairperson said Members were interested in seeing concrete outcomes. He thanked the Bank for the fruitful and robust engagement.

The meeting was adjourned.