Presentation to the Portfolio Committee on Agriculture, Forestry, and Fisheries:

9 July 2009

Index

Land Bank in context

State of the Bank in 2008

Consequences of the above

The turnaround strategy

Turnaround progress report

Development

Conclusion

Annexure - Development

Land Bank in Context

The Land Bank Act 15 of 2002

Section 1.2 (1) mandates the bank to promote, facilitate,and support the following:

• Equitable ownership of agricultural land• Agrarian reform, land distribution or development programmes • Land access for agricultural purposes• Agricultural entrepreneurship• Removal of the legacy of past racial and gender discrimination

in the sector• Rural development and job creation• Commercial agriculture, and• Food security

Mandate has not been achieved

Reasons for failure to achieve mandate objectives:

• Instability in leadership and management• Misalignment between Board and Management• April 2007 to June 2008: 6 CEO’s & 4 Chairs of Board • Executive management (12) only 4 permanent• At senior management level 39 positions with 23 vacant

State of the Bank in 2008

Audit findings

Damning Audit findings (192 page report) in the followingareas (incl.):

• Weak\non existence of controls• Land for development• Breakdown in payroll system• Breakdown in procurement system• Deteriorating IT environment (personnel and systems)• Poor records of audit trails• Poor monitoring and collection of arrear loans• Non-compliance with legislation• Funds under administration• Numerous special investigations of suspicious fraudulent

transactions

Critical Vacancies (July 08)

Vacant posts• GM Credit• GM Risk• CFO• GM Operations• Credit Head – Corporate Banking• Head – Internal Audit• Head of Retail• Senior Manager Finance

Employee Relations (July 08)

Seventeen (17) disciplinary cases in total Cases Finalized = 13

Nature of misconduct ranged from the following:

• Dishonesty

• Misrepresentation

• Gross Insubordination

• Negligence/ Gross Negligence

• Fraud

In progress 4 and nature of misconduct ranged from:

• Fraud and or misrepresentation

• Gross Negligence

• Contravening provisions of PFMA

State of the Bank: Consequences

Funding and lending activities

Bank funding•Equity – (R1bn)•Injection – (R700m)•Investor funds – (R13bn)

Bank on lends funds•Retail clients (R3.2bn)•Commercial clients (R10.2bn)

Surplus cash•Commercial banks

Profit = Lending rate – cost of funds

Profit sufficient to fund•Risk•Cost of operations•Growth in capital

Funding and lending activities

Investor funding

Dependent on LB risk being acceptable

Risk profile depends on:

Investor confidence

Sustainable return on investment

Investor confidence dependent on

Adequate return on investmentFuture sustainability

Low probability of default

If positive investor confidence

Attract more funding available to on lend

Increased profits - grows capital

Less dependency on shareholders

If negative investor confidence

Call up funding

If insufficient cash surplus, market panic

Market panic - run on the bank (investors recall all funds)

Bank insolvent - government rescue required

Loan book quality

If good qualityPositive investor confidence - more funding

Margins realised

Loan repayments

Book grows

If bad quality

Loan impairments

Losses

Negative investor confidence - withdrawal of funding

Declining liquidity

Declining loan book

Increasing NPL’s

Cost of NPL’s

The Turnaround Strategy

Government had to intervene to restore confidence and address going concern uncertainties

Land Bank turnaround strategy - timeframes

Sep 10Sep 09 Mar 11 Sep 11 Mar 12Mar 09 Mar 10Sep 08

Clean-up

Stabilisation

Sustainability

Break even

More emphasis

on cleanup to enhance

controls

More focus on

stabilisation

Increasing focus on

sustainability

Time

Effort

Phases of the turnaround strategy - definition

The clean-up process involves addressing audit qualifications and related issues:

• 7 qualifications• 12 other matters• Management letter

(185 pages)• Conditions of

government guarantee• Scopa resolutions

The sustainability initiative aim to normalise operations and enhance the banks focus on its core business of development mandate

The stabilisation efforts are intended to stabilise the bank financially and functionally:

• HR• IT• Liquidity• Balance sheet• Cost to income• LDFU

Clean-up Stabilisation Sustainability

Turnaround Progress Report

Progress report – clean-up

• Dealt with 7 qualifications

• Dealt with 12 other matters of emphasis

• Dealt with management letter issues

Awaiting Auditor General to finalise the audit

Progress … Stabilisation (HR)

• 5 of 8 executive positions occupied

• Interviews for 3 more in 1 to 2 weeks time

• 68 critical positions filled

Progress … Stabilisation (IT)

• HR and Finance SAP configuration fixes completed

• Decision taken that SAP implementation is best for LB

• Appointed CIO regarded as a SAP expert

• Downsizing SAP as automated core banking solution

Progress … Stabilisation (funding and liquidity)

Monthly Cash Balances from March 07 to March 09 (R'm)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Mar07

Apr May Jun Jul Aug Sep Oct Nov Dec Jan08

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan09

Feb Mar Apr May Jun 07Jul09

Months

Progress ... Stabilisation (balance sheet)

Intensify efforts to recover non-performing loans to improve the balance sheet

Key performance indicator Actual (unaudited)

Collection on non-performing loan book Collected R541 million

Maximise corporate finance unit (CFU) pre-legal recoveries

Recovered R157million

Maximise pre-legal retail recoveries Recovered R376 million

Maximise LDFU recoveries R14.7 million recovery.Guarantee of R53 million inplace.R130 million letters of intent.

Progress... Stabilisation (balance sheet)

Excluding LDFU

Progress... Stabilisation (Increasing repayments by development clients)

0

20

40

60

80

100

120

140

160

180

Mill

ions

Total development collections

Progress... Stabilisation (capital improving)

-

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

Land Bank Equity 1999-2008Excl Guarantee

Equity expected to improve

Progress... Stabilisation (improving cost-to-income)

Improvements due cost reduction

Progress... Stabilisation (cost reductions)

Marketing costs 30

Professional fees 12

Personnel costs 12

Travel and other costs 6

60

Progress... Sustainability (loan book stabilising)

Total Loan Book (R'bn)

12

13

14

15

16

17

18

Development as core to the business

Development

Area of Intervention Progress Report

Meet objectives of the mandate of the bank

Development adopted as core to the business of the bank

Formalisation of development policy Policy approved

Mainstreaming of development Development impact parameters approved

Implementation of development pilot projects

Projects being considered for approval

Development financial targets

Commercial Development

Retail Development

Corporate Clients Development

Total Development

2010 200,000,000 250,000,000 450,000,000

2011 250,000,000 600,000,000 250,000,000 1,100,000,000

2012 250,000,000 120,000,000 250,000, 000 1,700,000,000

Total Growth 500,000, 000 200,000,0000 750,000,000 3,250,000,000

Conclusion

•Shareholder approval of the turnaround strategy and development policy led to the approval of R3.5bn guarantee

•To maintain the benefits of the turnaround the following needs to be done:

• Grow the loan book

• Maintain low level and increase recovery of non-performing loans

• Maintain a sustainable level of cost-to-income ratio

• Preserve capital (balance sheet)

• Implement the development mandate

Conclusion (continued)

•Accordingly Land Bank is undertaking the following projects:

• Appropriate pricing model

• Appropriate credit model

• Appropriate products for the target market niches (specifically rural development)

• Review of branch network

• Alignment with Provincial government strategies

Thank you

Annexure - Development

39

Objective and purpose

The objective of the Bank is to entrench development as core to its businesses

The purpose of the policy is to operationalise development by:

• Generating thrusts to mainstream development within the Bank

• Facilitating transformation programmes in the Bank• Introducing and supporting innovation in agriculture • Building a foundation for sustainable agricultural

development

40

Problem statement

Banks failure to establish policy to enable the following:

• Definition of development• Development monitoring• Development quantification

Historical absence of systematic management of risk

• Unstructured development financing, and• Lending

Need for Policy

• Tool to enable bank to implement development mandate appropriately

Objective of policy

• To entrench development as core to the business

41

What informs the Policy

Political imperatives in the sector Deregulation of the sector in 1994 Strauss Commission recommendations Amended 2002 Land Bank Act NT review of DFI’s Need to address market failure in the sector Bank risk appetite Alignment with shareholder objectives Need to define target markets, develop products and procedures Need for a policy to guide the bank in positioning its operations within

predetermined risk The above require the bank to realign its products, services,

processes, infrastructure, and capacity

42

Objectives of realignment

To meet expectations of shareholder To address the financial market failure To prioritise development as core to business To manage expectations for innovative products against the bank’s

sustainability To inculcate the culture of responsible lending To address expectations for the Bank to provide non financial services To re-define Land Bank development products

43

Operational policy on development

Strategic goal and market position

• The Land Bank to be a fully integrated agricultural development finance institution with a regional footprint that promotes, facilitates and supports agricultural and rural development.

44

Target market space The Bank has identified market space for development which

includes:

• Financing agri related activities• Support to land reform programmes• Spectrum from individuals to cooperatives• From empowerment clientele to commercial (emerging,

commercial)• Support for innovative ideas to enticing commercial

agriculture into development

45

Identified target market niches (TNMs)

Target market space be serviced through TNMs (see funding presentation for details):

• Indirect funding of emerging entrepreneurs via direct funding of large corporate clients (priority)

• Indirect funding of emerging entrepreneurs via the direct funding of newly established co-operatives as well as via existing commercial infrastructure (priority)

• Direct funding of emerging entrepreneurs (priority)

• Direct funding of emerging entrepreneurs, particularly groups such as trusts and communities, via the funding of inter alia enterprises that utilize land now available under the national land reform initiative (priority)

46

Identified target market niches (TMNs)

• Direct funding of the participation by emerging entrepreneurs in commercial primary or secondary agriculture (such as food processing)

• Direct funding of the acquisition by emerging entrepreneurs of shares in existing and/or expanding enterprises

• Direct funding and/or support of focused rural development enterprises or initiatives

47

Development impact parameters (DIP’s) Market niche or delivery products to be assessed on the basis of DIP’s (see

mainstreaming presentation for details) DIP’s include among others:

• Development of emerging entrepreneurs• Generation of employment opportunities• Access to land• Creation of BEE ownership• Creation of BEE management• Creation of WYD participation• Alleviation of poverty in high priority regions• Contribution to food security• Introduction of innovative ideas in agriculture

This to be reported to the Board Audit Committee

48

Proposed funding model to support development