Land Bank Corporate Plan

2005/06

Presentation: Portfolio Committee on Agriculture & Land Affairs

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Overview of Presentation

Corporate Plan OverviewThe Turnaround PlanFinancial ObjectivesNon Financial ObjectivesQuestions and Comments

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Land Bank Vision and Mission

Land Bank VisionTo be the leading provider of world-class financial

services to agriculture and related rural sectors in South Africa

Land Bank MissionLand 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

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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)

Land Bank Accountability

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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

Land Bank Strategic Framework

The Land Bank Corporate Plan

2005/06

George OrichoGM Strategy

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Land Bank Priorities

1. Implement more effective banking and financial business systems

2. Implement processes and actions to ensure best practice and compliance with AC133

3. Reposition the Bank to grow the commercial and development books

4. Increase focus on financing BEE transactions, in terms of the Agri-BEE framework

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Land Bank Priorities

6. Completing the Business Process Review by November 2004, to ensure: Improved productivity; Streamlined operations; and Enhanced customer service

7. Consolidate the management team CEO candidate identified -- appointment process close

to finalization Senior management positions to be filled by November

2004 8. Continue to support Government’s priority programmes

Land reform Agricultural credit scheme Food security

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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

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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

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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

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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

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Land Bank Threats

Loss of preferred status through revisions to the Land Bank Act

Loss of staff expertiseWorkforce that lacks tools, motivation, trainingBad debts resulting from adverse economic or

climatic conditionsExpectations 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

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17,93516,445

15,11115,21814,80114,653

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1999 2000 2001 2002/3 2003/4 Jan-05

Year

Lo

an

Vo

lum

e (

R m

)

March 2005 Target 16,835

Commercial Loan Book,Trend Line and March 2005 Target

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2,535

1,0961,042

451413317

-500

-

500

1,000

1,500

2,000

2,500

3,000

1999 2000 2001 2002/3 2003/4 Jan-05

Year

Nu

mb

er

of

Lo

an

s (

R m

)

March 2005 Target 1,775

Development Loan Book,Trend Line and March 2005 Target

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Arrears Amounts, Trend Line and March 2005 Target

1,490

1,009

1,561

2,551

1,506

749

-

500

1,000

1,500

2,000

2,500

3,000

1999 2000 2001 2002/3 2003/4 Jan-05

Year

Nu

mb

er

March 2005 Target Less than 4% of total book

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Non Performing Loan Balances, Trend Line and March 2005 Target

3,003

3,001

3,376

4,939

4,0103,148

-

1,000

2,000

3,000

4,000

5,000

6,000

1999 2000 2001 2002/3 2003/4 Jan-05

Year

Lo

an

Ba

lan

ce

s

March 2005 Target7% of Loan Portfolio

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Return on Assets, Trend Line and March 2005 Target

3.0%2.5%

1.9%

1.3%0.4%

-8.1%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

Year

Pe

rce

nt

Re

turn

on

As

se

ts

1999 2000 2001 2002/ 2003/4 Jan-05

March 2005 Target 2.4%

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Net Interest Margin, Trend Line and March 2005 Target

2.1%

3.3%

4.3%4.6%

4.9%

5.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1999 2000 2001 2002/3 2003/4 Jan-05

Year

Ma

rgin

March 2005 Target 4.3%

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Efficiency Ratio, Trend Line and 2005 Target

95.0%

43.0%37.8%

36.9%34.7%

28.0%

31.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1998 1999 2000 2001 2002/3 2003/4 Jan-05

Year

Pe

rce

nt

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Capital Adequacy, Trend Line and March 2005 Target

21.7%

12.0%

12.9%14.6%

21.8%

19.0%

16.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1998 1999 2000 2001 2002/3 2003/4 Jan-05

Year

Pe

rce

nt

March 2005 Target 17.7%

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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

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Sources of Potential Shock

Prolonged or severe drought,Financial failure of one or more large borrowersPersistent low commodity pricesA large drop in land values used as security for

loans Adverse consequences resulting from additional

changes in accounting treatmentContinued strong rand

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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%

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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Loan Growth

Loan Growth Mar. 2004 Mar. 2005 Mar. 2006

Retail (15.0%) (5.6%) 7.1%

Wholesale 13.9% 16.6% 0.2

Development 13.2% 22.9% 19.1%

Step Up 1.5% 4.1 15.2%

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Business Efficiency

BusinessEfficiency

Mar. 2004 Mar. 2005 Mar. 2006

Cost to incomeratio

43% 108% 86%

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Loan Quality

Loan Quality Mar. 2004 Mar. 2005 Mar. 2006Non performingloans

18.5 16.9% 12.1%

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Profitability

Profitability Mar. 2004 Mar. 2005 Mar. 2006

Net interestmargin

4.3% 1.8% 2.4%

ROA 0.6% -5.8% 0.4%

ROE 5.5% -125.3% 7.1%

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Capital Adequacy

CapitalAdequacy

Mar. 2004 Mar. 2005 Mar. 2006Mar. 2006 with capitalinjection of R2 billion

Capital Ratio 9.8% 4.6% 5.1% 16.4%

The Land Bank Non Financial

Objectives

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Non Financial Indicators

Non-Financial Indicators Target - 2005/6

Development ProgramExpand outreach, loan volume, gender access, supportservices, household income and jobs in rural communities andagricultural businesses

Employee relations Improve job satisfaction based on survey results

Client relations Improve client satisfaction based on survey results

Safety and Health Promote better health and safety for clients and staff

Environment Make loan policies and Bank practices environmentally friendly

Transformation Lead financial institutions in AgriBEE initiatives

HIV/AIDS Implement program that demonstrates Bank commitment

Questions and Comments

Thank You

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