Land Bank Annual Financial Results

Meeting report

AGRICULTURE AND LAND AFFAIRS PORTFOLIO COMMITTEE
10 September 2004
LAND BANK ANNUAL FINANCIAL RESULTS

Chairperson:

Land Bank presentation
Land Bank Annual Report 1 April 2003 - 31 March 2004 (offsite link)

Land Bank website

SUMMARY
The Committee was briefed by the Land Bank on its Annual Report. The Bank provides financial services to agriculture and related rural sectors in South Africa.

Drought and delayed rains had a major impact on the agricultural sector. The strong Rand resulted in a drop in producer prices. As a result gross farm income decreased by 4.3% and net farm income by 17.8%. Consequently the total farm debt increased by R2.7-billion to R30.9-billion.

The Bank had recorded a net profit of R247 million compared to a R1.4 billion loss last year. The number of loans granted grew by 14% during the reporting year. A total of 165 877 clients have benefited from the Bank's micro-finance programme since inception in April 1998. During the reporting period, a total of 38 104 new clients joined the programme. The Development loan book grew by 5.3% confirming the Land Bank's position as the major player in this sector. The reporting period for the 2003 Annual Report was 15 months compared to 12 months in the current Annual Report. Had the Bank been comparing equal financial years the decline in operating profit to R404 million from R574 m, for instance, would have been a little less.

MINUTES
The Land Bank presented its Annual Report, and were represented by Mr C Kasikayi (Acting General Manager), Mr G Oricho (Acting CEO), Mr H Moeketsi (General Manager: Marketing) Mr J Modise (Chairperson: Audit Committee) Ms N Canca (Non-Executive Director) and Mr M Gwangwa (Land Bank Treasury Department).

Ms Canca provided an overview. The Bank aims to be the leading provider of world-class financial services to agriculture and related rural sectors in South Africa. Its mission it be 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

She said that the State was the only shareholder of the Bank and is represented by the Minister for Agriculture and Land Affairs. The Bank's activities are governed by the Land and Agricultural Development Bank Act, 2002 and financial management guidelines provided by the Public Finance Management Act. Its programmes are aligned with government's key strategic programmes in the agricultural sector:

Mr Oricho gave a review of the financial year. He said that the South African economy grew by 1.4% in year ended 31 March 2004. The growth was sluggish due to negative contributions by manufacturing and agricultural sectors. Drought and delayed rains had a major impact on the agricultural sector. The strong rand resulted in a drop in producer prices. As a result gross farm Income decreased by 4.3% and net farm income by 17.8%. Consequently the total farm debt increased by R2.7 billion to R30.9 billion. However, due to the effects of lower interest rates increase, in total farm debt has not had a huge debilitating effect. The Bank assisted farmers with debt consolidation and rescheduling.

Mr Oricho said that the Bank had recorded a net profit of R247 million compared to a R1.4 billion loss last year. The number of loans granted grew by 14% during he reporting year. A total of 165 877 clients had benefited from the Bank's micro-finance programme since inception in April 1998. During the reporting period, a total of 38 104 new clients joined the programme. The Development loan book grew by 5.3% confirming the Land Bank's position as the major player in this sector. Arrears as a percentage of the loan book dropped from 9.6% to 6.2% due to last year's write-off and improved collection. Total provisions as a percentage of loan book also were reduced from 9.4% to 7.4%. The introduction of new revenue streams has led to non-interest income going up 339%-from R41 million to R180 million.

Mr Oricho outlined how the Bank has performed against its targets. In terms of efficiency ratio the bank had targeted 35% but managed to achieve 43%. The Bank had planned to grow its Development Loan Book by 66% but managed a mere 5.3%. The total loan book growth was -0,3 5 as opposed to the targeted 17.4% as a result of write-offs that the Bank had to effect during the reporting period. However, the Bank continues to lead the sector with its development book. The rate of default in development loan book has dipped substantially. The Bank has continued to improve outreach in rural areas not serviced by commercial banks.

Mr Oricho said that the Bank's activities resulted in the creation of approximately 60 000 new sustainable jobs in the agri-economy. Significant BEE (Black Economic Empowerment) transactions were concluded. The Bank also funded various community development initiatives. The National Youth Development Programme was formed in partnership with the National Youth Commission and Umsobomvu, to assist young aspirant farmers. The Bank has disbursed more than R5-million in loans to four farms, which are being leased with an option to purchase.

Mr Jacob Modise gave context to the financial statements so as to allow member to better appreciate the statement as opposed to last year's statement. He also dealt with issued noted in the Auditor General's report.

Mr Modise said that the Bank changed its year to end on 31 March from 31 December in order to comply with the Public Funds Management Act. The reporting period for the 2003 annual report was 15 months compared to 12 months in the current annual report. Had the Bank been comparing equal financial years the decline in operating profit to R404 million from R574 m, for instance, would have been a little less. The best thing to note is that the Bank managed to make some profit under the period under review. The bad debts written-off have been handed over to debt collectors. The accounting system used also presented some problems. The AC133 requires significant system capabilities that the Bank does not have. The Bank was consequently unable to comply with AC133. He said that the Auditor General qualified the Bank's results because it could not fully comply with AC133. The number published would have been higher had the Bank not made adjustments related to AC133.

Mr Kasikayi focused on financial performance of the bank. He said that the net interest income had gone down to R529 million and the operating income down to R709 million compared to R882 million and R923 million respectively. The non-interest income went up to R180 million from R41 million in the last financial year. The loan impairments impact on profitability improved by R1 556 million and R260 million. Overall the group returned a profit of R247 million.

Ms Canca rounded up the presentation by presenting the Bank's priorities in the next years. These include implementing more effective banking and financial business systems and increasing focus on financing black economic empowerment in terms of Agri-BEE framework.

DiscussionThe Chair asked if the Bank had managed to remove legacies of apartheid and gender discrimination. He also asked for an indication of the total sum of money that had gone to previously disadvantaged communities. He said that this is necessary in order to check if the existence of the Land Bank is still relevant. He said that he did not support the Agricultural Credit Scheme going to the Land Bank.

Mr Oricho replied that the issue of the deracialisation of land ownership is very important and the Bank has a role to play in this regard. In terms of land reform programmes, the bank has developed specific products to help new entrants into the agricultural sector. Within the last year the Bank managed to disburse over R1 million. The Bank would do more to assist the Department if it had the necessary capacities. The Bank has a policy to make any land available to it for land reform. In terms of the restitution programme, the Bank has an agreement with the Restitution Commission in terms of which the Bank gives support to those who get the land back. If the Bank had specific allocations from the government to assist with the implementation of land reform programmes, it would do more. There is only so much that the Bank could do given its capacity constraints.

Mr Modise added that the Bank has the infrastructure necessary to facilitate land reform. The Bank remains relevant and could play a major role. The problem is not that the Bank is not having the necessary impact. The issue is capacity restraints.

Ms Canca added that the Land Bank feels that it is best placed to utilise the Agricultural Credit Scheme. She admitted that the impact of the Bank was limited. However, this does not mean that the abilities of the Bank are also limited. The Banks remain relevant and had worked tirelessly to ensure delivery of some of the government's goals. She felt that the Bank should not be excluded from the Scheme.

Dr E Schoeman (ANC) said that the use of AC133 was confusing. The Department had given its statement with and without the application of AC133. He asked for how long the Bank would continue to give two sets of figures. With regard to bad debt, he said that the problem could be that the Bank had made less provision during the financial year under review. In the year under review the Bank made provision for R1.196 billion compared to R1.529 billion in 2002/03. He got a sense that if the provision was a bit higher it would have wiped out all of the Bank's profits.

Mr Modise agreed that the AC133 created confusion. The whole investment community is still trying to understand it. Commercial banks also show results including and excluding AC133. The comparison would not continue once the Bank becomes fully compliant with AC133. With regard to provisioning, he said that the Bank had made more provision than would have been required if the Bank was fully compliant with AC133. The profits are what they are and should not have been any different.

Mr Kasikayi added that Bank aims to comply with AC133 by March 2005. The introduction of new banking and financial systems would be complete by 1^st April 2006. This would improve financial management and customer services.

Dr Schoeman said that negative feedback was being received from the both the Makhathini Flats and Keiskammahoek projects. He asked if the Bank was monitoring the situation.

Mr Oricho agreed that some projects are not doing as expected. There is a need to get real and lasting solutions to the problems.

Mr J Bici (UDM) noted that the Bank had made a profit of R247 million as compared to a massive loss of R1.4 billion last year. He asked what kind of miracles the Bank had performed to achieve such results within a year. He said that the drop in arrears was not because of the Bank's efficiency but write-offs. He asked if the Bank had any mechanisms to ensure that the arrears do not build up again. He also asked how the Bank planned to achieve its targets.

Ms Canca replied that the Bank was challenged to meet the target it had set itself. She agreed that the Bank was way off the mark in meeting the targets. The Bank is currently transforming itself to ensure effective delivery of its mandate.

Mr Oricho replied that the drop in arrears could partially be explained by the fact that the bad book had been written off. The bank has also introduced a recovery strategy to ensure that people make regular repayments of their loans. The Bank hopes to keep acceptable and sustainable levels of arrears. On the failure to reach targets, he said the question is whether the targets were realistic. The fact that there was no adequate contribution by applicants made it difficult to achieve some targets. The Bank has to be realistic about the kind of targets that it sets and the basis for the targets should be clear. The Bank is also affected by competition from commercial banks.

Mr Modise added that nothing had changed in the Bank even though the Bank made massive losses last year. The reason the Bank made a loss is that the board took a decision to make an extra provision. They looked at the loan book and decided who was not likely to pay and made extra provisioning based on that. This year no extra provisioning was made because the loan book was cleaned up. Hopefully there would be no need for write-offs in the near future.

Mr T Ramphele (ANC) asked how the Bank planned to improve on the issues listed in the Auditor General's report. He also asked how much the Bank spent on personnel. He said that the Auditor General's report raised serious institutional problems. He asked how the Bank would address them.

Mr Modise replied that the Bank spends R161 million on salaries. In total personnel costs amount to R187 million. The bulk of the personnel are at the branches. The Bank has to be efficient given the size of its personnel.

Mr Bici asked who the Bank competes with in the agricultural sector. He thought that financial institutions were not that much involved in farming.

Mr Oricho replied that commercial banks seemed to be targeting the Land Bank's top clients. They offer them comparable prices but also include services that the Land Bank cannot offer.

Mr Moeketsi added that commercial banks are also poaching some of the Banks top staff.

The Chair felt that even if commercial banks recruit staff from the Bank this should not have negative impact unless clients also follow individuals.

Mr P Holomisa (ANC) asked what types of loans were irrecoverable and who were the debtors. He asked the presenters to indicate who the main culprits were between people from previously advantaged and those from previously disadvantaged communities. He indicated that there were farmers who owe the Bank and were willing to assist the Bank with properties for land reform. He asked if there were any such properties available to the Bank.

Mr Oricho replied that the development book shows a reduction in the arrears rate. The bulk of the book is commercial and the bulk of arrears related to commercial institutions. On supporting land reform, he said that the Bank get properties from those who are unable to pay from time to time. Sometimes the Bank makes the properties available on a lease basis to new entrants.

Mr Holomisa asked what kind of support the Bank would offer to the implementation of the Agricultural Credit Scheme, and what strategy the Bank used to attract and retain clients. He also asked why the Bank was losing clients even though its money is cheaper than that of commercial banks.

Mr Oricho replied that the Bank has placed adverts on television so as to raise awareness. With regard to the Agricultural Credit Scheme, Mr Oricho said the Bank is ready to assist with infrastructure regardless of whether the Scheme is given to the bank or not.

Mr Moeketsi added that the Bank also used print media to create the necessary awareness. Although the Bank is losing some of its clients, out of the total agricultural debt the Land Bank holds approximately 54% of the debt.

Mr Masithela said that most of the people who are supposed to be helped by the Bank are in rural areas. Such people have no television. The Bank should re-look at its marketing strategy.

The meeting was adjourned.