Land and Agricultural Development Bank of South Africa

1
Land and Agricultural Development Bank of South
Africa

• Organisational and Operational Alignment
• Presentation to the Portfolio Committee
• 19/02/2008

2
Background

• This document serves to provide a framework of
  the Land Banks Turnaround Strategy
• The development of turnaround plan was in part
  to fulfil the conditions set forth by National
  Treasury for capital injection and provision of
  guarantee requested by the Land Bank
• It was also a reaction to
• The issues that the external auditors had raised
• Management assessment of the Banks position
• Fitch Ratings assessment

3
Progress

• While significant progress has been made on the
  turnaround objectives, the Land Bank cannot
  provide significant detail on progress in this
  particular report, as its year-end figures are
  still in the process of being finalised.
• These figures will be available after
  year-end (March 2008). Further detail on progress
  will be consolidated and presented following the
  release of these figures.

4
Turnaround FactorsNational Treasury
Revision of Banks focus
Funding Model
Turnaround Issues (National Treasury)

• Stabilise the business
• improve financial position
• - Lowering high level of impairment

Operational Financial Strategies to achieve New
Vision
5
Turnaround Factors Fitch Rating Agency

• Non performing loans (NPL) ratio deteriorated to
  10,6 at FYE06 (FYE05 6,7). The Agency
  considered the NPL ratio to be potentially
  understated, for instance problematic borrower
  not classified as non-performing at FYE06.
  Consequently, the Agency considered coverage
  ratio to be low in light of the banks trend of
  poor recoveries and realisation rates
• Loan loss Provisions At FYE06 Land Bank recorded
  significantly lower impairment charge of R319,8m
  (FYE05 R637,4m) primarily as a result of IFRS
  adjustment of R172m which excluded suspended
  interest from non-performing loans. The Agency
  though still felt that the asset quality remains
  weak and the Agency anticipated that a longer
  track record of improved credit processes will be
  required before provisions are normalised at this
  level
• The largest 20 exposures accounted for 45 of
  gross loan exposure at FYE06, with the banks
  largest obligor representing 15,3 of total
  exposure and 230 of the banks capital.

6
Turnaround FactorsManagement

• Delivery of the development mandate
• People and systems
• Risk management
• Brand
• Income/cost
• Low levels of capital

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Turnaround focusACCUMULATED DEFICIT PERFORMANCE
(1)

• Key contributing factors to accumulated deficit
  deteriorated performance
• Financial Level
• High personnel cost - adequacy of this cost in
  relation to skills and
• core competency, elusive.
• The retard collection of debt and interest on
  loans afforded.
• The managing of non-core function assets.
• The consistent investment in share, other funds
  etc., in absence of
• surplus/ profits.
• Inadequate funding/revenue models to determine
  costs and
• required funding.

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Turnaround focusAccumulated Deficit Performance
(2)

• Operational Inefficiency Level
• Inefficient processes and models in respect of
  development funding
• An inadequate enforcement process of debt
  collection, credit management and revenue
  management
• Lack of development plans and programmes
• Inadequate systems integration
• Weak management, adjustment and updating of
  approval system and policies
• Inadequate security management
• Inefficient and/or lack of models in respect of
  service level determination forward and demand
  planning, and networking
• Inadequate risk management strategy and
  application
• Lack of team integration, operations and support
  business units resulting in a lack of strategic
  and business focus
• Poor expenditure and revenue controls, procedures
  and support systems
• Weak governance control
• Lack of adequate information technology systems
  over core business activities.

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Core function of Land Bank (new business model)

• The Bank developed a business model to answer the
  mandate question. The new business model has the
  following components
• Focus on development ensuring graduation of
  emerging farmers into commercial farmers
• Enhancing the role of cooperatives and local
  agencies
• Linking farmers with markets
• Working with complete agricultural value chain
• Risk management
• Making development profitable
• Commodity focus
• Farmer support
• Partnership and collaboration
• Advisory support
• Making development impact
• Financial sustainability
• Agricultural information and innovation

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Process on development of the turnaround plan

• Following development of the new business model,
  the Bank engaged the process of developing its
  turnaround plan
• Scoping of project
• Review and assess current policies procedures
• Engagement with senior management
• Align Processes Procedures to Policy
  Legislation
• Mapping of Processes Procedures (Operational)
• Analysis of information
• Report and recommendation
• Presentation to senior management and board
• Presentation and engagement with National
  Treasury
• Development of a detailed implementation plan and
  budget

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Turnaround Strategy (1)

• Organisational alignment
• Policy
• Budget
• Business Units
• Skills audit Human Resource capital and
  personnel cost
• Revenue generation assessment
• IT platform and business processes
• Integration of systems and processes
• Management reports
• Client data base

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Turnaround Strategy (2)

• Partnerships and Co-operative governance
• Networking
• Agri-Unions
• SETA
• Local Provincial Government etc.
• Holistic Operational Risk Management Programme
• Cost of Funding
• Bad debt management strategy
• Credit risk (including concentration risk)
• Batho Pele/service delivery
• Review branch network
• Pilot Projects on development sustainability
• Development Initiative Strategy
• Project scoping
• Focus Areas
• Project implementation
• Time frames on capital investment return

13
Implementing The Plan

• To implement the turnaround strategy an
  Operations Plan has been drawn to integrate the
  strategy into daily activities of the Business
  Units of the Bank by
• Team of senior officials from the various units
  within the Bank
• Developed a holistic integrated project plan with
  time frames, accountability, etc.
• Developed an activity plan
• Regular integrated project meetings

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Sustainability
Alignment of Core function to New Business Model
Development
Quick Wins
Organisational Alignment
Debt Collection
Pilot Projects
Co-operative Governance
Integrated IT System (Monitored Indicators)
Risk Strategy
15
Financial Survival Plan

• Before the Land Bank can focus on the
  implementation of its turnaround plan and
  realignment of its business plan we first need to
  concentrate on a financial survival plan
• Maintain the funding
• Halt the flow of bad loans
• Contain expenses

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Key Thrusts to Stabilisation

• Identify immediate operational issues to
  stabilise the bank from
• Long-term strategies aimed at refocusing the Bank
  as a DFI while ensuring long-term financial
  sustainability
• Provide clear strategies for exit from situations
  of concentrated risk
• Improve revenue and reduce operational costs
• Alternative funding

17
Expected outcomes

• Business Efficiency (Cost to income ratio)
• Mar. 2007 - 81
• Mar. 2008 - 85
• LOAN QUALITY (NON PERFORMING LOANS)
• Mar. 2007 - 15.30
• Mar. 2008 - 11.70
• PROFITABILITY
• ROE-
• Mar 2007 - -9.89
• Mar 2008 - -7.80

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Expected Outcomes

• CAPITAL RATIO
• Mar. 2007 - 5.95
• Mar. 2008 - 6.37

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Performance indicators for development

• The accountability indicators to these outcomes
  rests on
• The sustainability of the Development Programme
• Employment creation
• The establishment of Emerging Farmers
• Conclusion of Agri-BEE deals
• Percentage growth in the development loan
• book over three years
• Performance of the development loan book
• Networking with related stakeholders
• Provision of advisory service
• Geographic spread

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Performance indicators for Development

• NEW FUNDING
• Mar.2008 - R300m
• Mar. 2009 - R1,0b
• Mar. 2010 - R2,0b