Credit information Results and Asset slides IN RESPECT OF THE - - PowerPoint PPT Presentation

Preliminary unaudited credit information 1

Credit information – Results and Asset slides

IN RESPECT OF THE LIABILITY SOLUTION OF THE LAND AND AGRICULTURAL DEVELOPMENT BANK OF SOUTH AFRICA

14 September 2020

Disclaimer: The March YE 2020 and June Q1 2020 results in this presentation are preliminary and unaudited.

Preliminary unaudited credit information 2

• 1. Governance and financial overview at 31 March 2020
• 2. Asset information at 31 March 2020
• 3. Financial results Q1 ending 30 June 2020 and asset information

Outline

Please refer to https://landbank.co.za/Pages/Investor-Relations.aspx for the latest Integrated Group Report for the year ending 31 March 2019 and 30 Sept 2019 Unaudited Interim Results as well as other relevant investor information

Preliminary unaudited credit information 3

Governance

Executive Authority Accounting Authority Exco Accountable to Board Shareholder Minister of Finance Board of Directors Risk and Governance Committee Audit and Finance Committee Credit and Investments Committee Social & Ethics Committee Executive Committee All Board Committees are accountable to the Board Board Committees

• Enterprise Risk Management

Framework, Governance Architecture, Risk Appetite and Tolerance Framework

• Approve the Bank’s Risk Management

Plan

• Review and Monitor the management
• f all Risks in the organisation
• Internal and External

Audit matters

• Accounting policies

and methodologies

• Financial matters
• Monitor, review

and oversee all Social, Ethics and Environmental matters

• Review and recommend credit

policies, frameworks as well as prudential limits and guidelines

• Review and approve or

recommend credit facilities in line with Delegations of Power

• Monitoring
• Dr. S Cornelius
• Ms. SA Lund
• Ms. D Hlatshwayo

Deputy Chairperson

• Mr. MA Moloto

Chairperson

• Ms. M Makgatho
• Mr. M Makgoba
• Ms. M Dlamini

EM: Human Capital

• Mr. F Stiglingh

EM: Post Investment Management Services

• Mr. S Soundy

EM: Strategy & Communications

• Dr. L Magingxa

EM: Agri Economics

• Ms. K Mukhari

CFO

• Ms. U Magwentshu

EM: CB&SI Mr Lwandiso Makupula Acting EM: CDBB

• Mr. S Sebueng

EM: Legal services

• Mr. M Rakgalakane

MD: Land Bank Insurance company

• Mr. A Kanana

CEO * – K Mukhari has not been formally appointed to the Board Human Resources Committee

• Monitor, review

and oversee all Human Capital matters Mr Sakhumzi Diza CRO

Note: The Company Secretary and Head of Internal Audit are standing invitees in the Executive Committee, appointed by the Board and are non-voting members of the Executive Committee

• Ms. D Motau
• Ms. K Mukhari(*)
• Ms. T Ngcobo
• Adv. S Coetzee

Mr A Kanana

• Ms. N Mtetwa

Directors - Term Ended/Resigned

Preliminary unaudited credit information 4

Governance

All Board appointments are governed by the Land Bank Board Charter which is informed by: 1) the King Report on Governance for South Africa, 2016; 2) the Land and Agricultural Development Bank Act, 15 of 2002 (The Land Bank Act) 3) The Public Finance Management Act, No 1 of 1999 (PFMA) Executive Committee changes

• Appointment of Ms. Dorothy Kobe: General Manager Treasury effective from 17 August 2020
• All appointments into vacant positions are in accordance with the provision of the Land Bank recruitment policy
• Mr Sakhi Diza was appointed as Chief Risk Officer, effective 17 August 2020

Appointments to Board Key management changes

• Mr Ayanda Kanana was appointed as Chief Executive Officer, effective 1 March 2020.
• The appointments complied with the provisions of the Land Bank Recruitment Policy and Land Back Act for the CEO
• The Minister of Finance appointed the CEO as Executive Director effective 1 March 2020
• Ms Khensani Mukhari joined the Land Bank as CFO on 03 February 2020

Preliminary unaudited credit information 5

Financial Overview

Salient Features – Group Year End Results

1) Net interest income continues to decline due to margin compression and due to inability to pass on funding cost increases 2) Refer slide 6 for non performing loan and impairment analysis 3) Capital and reserves declined due to the loss for the year as well as direct adjustments to equity 4) The cash position dropped significantly due to a reduction in ability to refinance as credit ratings started falling 20-Mar 19-Mar % change YonY ZAR’m ZAR’m Net interest income 794 1 174

• 32%

Impairments

• 1 810
• 316

472% Operating expenses

• 713
• 699

2% Profit / (Loss) from Continuing Operations (incl R300m inter-co dividend eliminated in Banking operations)

• 1 948

46

• Banking Operations
• 1 882

8 Profit from operations after inter-company dividends from LBIC

• 1 582

8 Dividend income from LBIC

• 300
• Insurance Operations
• 66

38 Cash 723 3 213

• 78%

Investments 2 157 3 182 Net loans and advances 42 651 44 173

• 3%

Total assets 47 275 52 068 Capital and reserves 3 640 6 257

• 42%

Liabilities 43 636 45 811

• Funding liabilities

41 284 44 258

• 7%
• Other liabilities

2 352 1 553 Total equity and liabilities 47 275 52 068

• 9%

Preliminary unaudited credit information 6

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 NPL provisions as a & of NPL NPL ratio (%) NPL ratio NPL provisions as a % of NPL Linear (NPL ratio) Linear (NPL provisions as a % of NPL)

Non Performing loans & impairments

• Management commissioned an independent review of Land Bank’s credit book to assess the adequacy of the provisioning level.

This resulted in an additional R1.0bn being raised as a general portfolio overlay, including the potential impact of Covid-19

• The trend in NPL’s can be seen in the graph (bottom left). The trend in non-performing loan coverage has been decreasing.

With the above additional credit provisioning the March 2020 provisioning has now increased to levels of pre FY2015

FY20 FY19 FY18 Non Performing Loans NPL % (IFRS 9) 11.4% 8.8% 6.7% Trend NPL’s versus Provisioning to NPL’s Capital and reserves reconciliation (R’m)

* – Non-listed equity holding is largely driven by the Land Bank investment strategy, with limited portion of this portfolio also coming through distressed positions where debt is converted to equity in a restructuring process. Land Bank has written these holding down to estimated realizable value

Opening Bal. 1 April 2019 6 257 Operating loss

• 1 948

Impairments to equity holdings (*)

• 669

Closing Bal. 30 March 2020 3 640

Preliminary unaudited credit information 7

• 1. Governance and financial overview at 31 March 2020
• 2. Asset information at 31 March 2020
• 3. Financial results Q1 ending 30 June 2020 and asset information

Outline

Please refer to https://landbank.co.za/Pages/Investor-Relations.aspx for the latest Integrated Group Report for the year ending 31 March 2019 and 30 Sept 2019 Unaudited Interim Results as well as other relevant investor information

Preliminary unaudited credit information 8

Introduction

Agriculture’s prominent, indirect role in the economy is a function of backward and forward linkages to other

• sectors. Purchases of goods such as fertilisers, chemicals and implements form backward linkages with the

manufacturing sector, while forward linkages are established through supplying raw materials to the manufacturing

• industry. About 70% of agricultural output is used as intermediate products in the sector. South Africa’s agriculture is

therefore a crucial sector and an important engine of growth for the rest of the economy, and as one of the major funders in the sector (currently funding 29% of loans in the agricultural sector), Land Bank remains a main thread within the social-economic tapestry of the sector. The sector has experienced severe challenges (i.e. drought, poor market conditions and disease outbreaks) over the last decade, and being the only specialist development finance institution focused on the agricultural sector means Land Bank was not immune to these challenges. If it was not for the Bank’s investments in agricultural technical changes over the last 10 years, internal strong governance and risk management structures, as well as investment in enhancement of credit and risk management processes and systems, we believe the Bank would not have been able to deal with most of these challenges. As the world moves towards the fourth industrialisation, which will bring about accelerated technical change, specialisation and productivity, it is important that the agricultural sector continues to be supported financially by Land Bank to ensure that:

• Farmers are resilient to ongoing challenges (i.e. unpredictable climate and market conditions),
• South Africa remains a food secure country,
• Farmers remain part of the country’s industrial development strategy, and
• Agricultural sector continues to contribute to the country’s socio-economic development agenda.

Preliminary unaudited credit information 9

Loan book overview – 31 Mar 2020

1) The Land Bank loan book consists of 20% Development and Transformation clients and 80% to Commercial clients. 2) The loan book is split between 3 segments, namely (i) Commercial Development & Business Banking segment (CDBB) – including Wholesale Funding (WFF), (ii) Corporate Banking & Structured Investments segment (CB&SI), and (iii) Intermediary Channel Partners / Service Level Agreement strategic partners (SLAs) – each segment has some development exposure but the SLA book is mostly commercial loans 3) As highlighted in below, the loan book is skewed towards SLAs (60%), followed by CB&SI (23%) and CDBB (18%) respectively. SLAs are mainly co-operatives with large national footprint, they ensure that farmers have easy and reliable access to finance, essential farming inputs and food storage facilities Development (Historically Disadvantaged Persons / Smallholder Entrepreneurs with annual turnover of <R10m) R2.7bn Commercial (Medium sized Non-BEE clients) R5.3bn *Transformation (Clients who meet the definition of Transformation – serviced through Structured Investments in CB&SI) R5.7bn Commercial (Non-BEE Corporate clients) R4.6bn Development (Smallholder entrepreneurs serviced through the Wholesale Finance Facility. This book has a negative carry / running at a loss) R1.0bn CDBB R8.0bn CB&SI R10.3bn SLA R27.0bn Total gross loan book R45.3bn Commercial (Non-BEE clients serviced through SLAs) R26.0bn * Transformation clients are defined as businesses with an annual turnover of >R10m:

• Wholly Black-owned;
• Majority Black-owned (Black shareholding of 51% or more); or
• Substantially Black-owned (Black shareholding of between 30% and 50% and a BBBEE Level of 1 – 4).

Preliminary unaudited credit information 10

SLA strategy going forward

• As part of the credit and concentration risk management, the Bank is in the process of insourcing a portion of the exposure

managed by SLAs. This programme will result in approximately R5,3bn additional loans being managed and administered in- house by Land Bank provincial and head office structures by March 2021. This will result in reduced SLA concentration as well as enhancement to Land Bank systems and client/portfolio management structures. Our ultimate goal is to ensure that this insourcing process has minimal impact on client service and food production

• Repricing negotiations of the SLA book has commenced with the increase in Land Bank’s cost of funding being used to

increase the pricing of new production and short term loan to customers

• The SLA partners have been instructed not to take on any new customers/farmers during this period of stabilisation at Land

Bank

• Disbursements have been constrained to ~50% of collections received. Reduced disbursements are also taking place across

all Land Bank divisions.

• SLA Insourcing - R5,3bn (R3.6bn insourced as at June 2020; with a further R1,7bn by March 2021)
• The exclusivity arrangement between SLA partners and Land Bank where SLA partners were required to obtain financing only

from Land Bank is in the process of being waived so that SLA partners can source alternative commercial funding for farmers

1 2 3 4 5

Preliminary unaudited credit information 11

Maturity Profile 31 Mar 2020

Maturity profile of Gross loan book 2020 % 2019 % Short-term (includes Revolving, Production & Monthly facilities) 15 057 33% 14 739 33% Medium-term 5 936 13% 6 762 15% Long-term 24 338 54% 23 709 52% 45 331 45 210

• The short-term loans mainly relate to revolving & production loans
• These loans are normally settled after harvest (during the first and second quarters’ – April to September) and

re-drawn for crop preparation / planting (from the end of the second quarter)

• The medium-term loans represent instalment sale financing on agricultural equipment, vehicles, implements &

livestock and medium-term establishment loans for commodities like fruits and nuts (average tenor of 5 -10 years)

• The long-term loans represent mainly mortgage loans and also fixed-term loans (average tenor of more than 10

years and up to 25 years)

Preliminary unaudited credit information 12

Segmentation 31 Mar 2020

Loan Book segmentation and credit provisions

Expected Credit Loss Provisions:

• Increase in provisioning in FY2020 to factor in the impact of COVID-19 and the results of the independent loan book review
• Factors included in the book review was the valuation of collateral or security held by Land Bank and the recalibration of credit loss models

based on recent non-performing loans and loss information

• The comparative 2019 ECL provision was R745m as per 2019 annual financial statements

Loan book concentration: Corporate Banking and Structured Investments:

• The largest concentration risk sits in this portfolio with the largest 4 corporate names accounting for 40% and largest 10 names accounting for

70% of the total CBSI portfolio balance Service Level Agreement Partners:

• Single obligor limits in this portfolio is capped at R100m per obligor unless specific credit approval is obtained through the Bank’s credit

committees. ZAR’m Gross loans Expected Credit Loss (ECL) Net loans Corporate Banking and Structured Investments 10 322 (462) 9 860 Commercial Development and Business Banking 8 021 (846) 7 175 Service Level Agreement Partners 26 988 (1 372) 25 616 45 331 (2 680) 42 651

Preliminary unaudited credit information 13

Geographical Split 31 Mar 2020

• North West
• Suidwes SLA loan book was affected by a significant deterioration in loan book quality stemming from extended droughts in the NW which severely

affected maize and grain producers.

• Dryland grain farmers in this region are significantly exposed to climate risks, affecting their production yields and ultimately their revenues and

repayment ability.

• This region also has significant exposure to livestock farming - High Feed costs, Foot and mouth disease, restrictions on sale and auctions, higher

mortality and lower calving rates have all significantly contributed to loss of revenue for these farmers’ in the drought stricken region

• Gauteng:
• Below average rain falls affected maize and grain producers. Meat processing industry affected by the foot and mouth disease outbreak. The large

non-performing portion relates mostly to the Gauteng development book

• In Gauteng the majority of the loans relate to corporate loan exposures where head offices are based in Gauteng – these are generally performing

loan exposures. Loan Performance* Province in ZAR ’m Total Total Stage 1: Preforming Stage 2: Under- performing Stage 3: Non-performing Eastern Cape 2 485 5% 2 254 46 184 Free State 5 056 11% 3 624 561 870 Gauteng 12 521 28% 10 828 421 1 272 KwaZulu-Natal 1 093 3% 741 164 188 Mpumalanga 1 904 4% 1 277 404 223 Northern Cape 7 953 18% 7 228 317 408 Limpopo 5 585 12% 3 446 1 424 716 North West 4 711 10% 2 804 770 1 137 Western Cape 4 024 9% 3 705 141 178 Gross loan book 45 331 100% 35 907 4 247 5 177

Stage 1: Performance loans. These exposures are up to date with repayments / instalments Stage 2: Underperforming loans. These exposures ae in arrears 30 – 90 days Stage 3: Non-performing loans (NPL). These exposures are > 90 days in arrears or being in liquidations

Preliminary unaudited credit information 14

Sector Distribution 31 Mar 2020

• Financial services is made up of direct loan facilities provided to the SLA partners to fund their own businesses and working capital

requirements.

• Despite the concentration in Grain, Land Bank will continue to focus on Grain particularly in the development book to drive diversification
• f the customer base in the Grain sector.

Agricultural Sector ZAR 'm Corporate Banking and Structured Investments Commercial Development and Business Banking Total Stage 1: Performing Stage 2: Under- performing Stage 3: Non- performing Direct Direct and SLA Agri-Business 449 771 1 220 708 340 171 Agro-processing

• 504

504 415 11 78 Citrus 337 582 919 795 75 49 Cotton

• 293

293 214 39 40 Dairy

• 757

757 369 60 329 Deciduous fruit 370 362 732 637 33 62 Equipment

• 64

64 55 3 7 Feedlot 43 25 68 55

• 12

Financial Services 1 049 1 927 2 976 2 614 78 284 Flowers

• 4

4 4

• Fodder
• 245

245 173 12 60 Game

• 220

220 132

• 89

Grain 5 438 18 861 24 299 19 538 2 696 2 065 Inputs

• 54

54 33 3 18 Inputs supplier 27 67 93 34 3 56 Irrigations scheme

• 253

253 226 27 Livestock 220 4 840 5 060 3 608 302 1 149 Logistics

• 272

272 272

• Nuts

217 237 453 403 13 37 Ostriches 4 54 59 28 5 25 Other 371 668 1 039 761 247 30 Pork 40 23 62 42 9 12 Poultry 402 412 815 738 1 76 Subtropical Fruit

• 137

137 97 9 31 Sugarcane 633 537 1 170 962 129 80 Table grapes

• 427

427 346 9 73 Tea

• 28

28 24

• 4

Timber 504 486 990 950 9 31 Tobacco

• 152

152 77 34 40 Vegetables

• 937

937 642 113 182 Wine 227 801 1 029 955 14 60 Total 10 331 35 000 45 331 35 907 4 247 5 177

Preliminary unaudited credit information 15

Collateral taken on advances

The Group has the following assets held as security against its loan portfolio:

ZAR’m March 2020 March 2019 Biological assets 1 655 3 359 Commodities 284 695 Debtors 1 706 5 262 Guarantee 276 544 Land and buildings* 48 991 48 423 Office equipment and computers 299

• Plant and equipment

2 867 1 534 Shares and investments 4 285 3 594 Stock 1 221 1 631 Trademarks 15 17 Vehicles 103 121 Suretyship 6 153 1 612 Other 4 930 3 883 Total 72 785 70 675

• The amounts above reflect the forced sale value of collateral, the collateral policy of Land Bank is that collateral is valued at inception and in three year

intervals

• The above table shows total collateral at a portfolio level. At client level, some customers are over and others under collateralised. Limiting the collateral

to a maximum of 100% of exposure reduces overall collateral level to 80% on the SLA book at forced sale values. On this same basis Stage 3 level i.e. Non – performing loans collateral level reduces to 71% of outstanding loan balance for the SLA book.

• At 31 March 2020, the % ECL provision coverage is c.29% (based on the non-performing and under-performing loan balance) therefore the collateral shortfall

indicated above is mitigated by the high level of provisioning against non-performing loans (if the ECL provision is applied fully to the stage 3 loan balance the ECL provision coverage would be c.50%)

Preliminary unaudited credit information 16

• 1. Governance and financial overview at 31 March 2020
• 2. Asset information at 31 March 2020
• 3. Financial results Q1 ending 30 June 2020 and asset information

Outline

Please refer to https://landbank.co.za/Pages/Investor-Relations.aspx for the latest Integrated Group Report for the year ending 31 March 2019 and 30 Sept 2019 Unaudited Interim Results as well as other relevant investor information

Preliminary unaudited credit information 17

Financial Overview

Salient Features – June Quarter Land Bank Group Results*

1) Net interest income continues to decline due to margin compression and due to inability to pass on funding cost increases 2) Impairments lower than prior year quarter based on 31 March 2020 provision made 3) Cash levels improved from 31 March 2020 based on the restrictions imposed on disbursements 4) Net loan and advances decreased due to increased credit provisioning at 31 March 2020 and reduction in disbursements June 20 June 19 % change Q on Q Net interest income 134 234

• 43%

Impairments

• 45
• 136

Operating expenses

• 143
• 142

Profit / (Loss) from Continuing Operations 4

• 114
• Banking Operations
• 86
• 90
• Insurance Operations

90

• 24

Cash 1 973 5 616

• 65%

Investments 2 279 2 021 Net loans and advances 40 815 43 679

• 7%

Total assets 46 655 53 932 Capital and reserves 3 599 6 708 Liabilities 43 056 47 224

• Funding liabilities

41 501 46 116

• Other liabilities

1 555 1 108 Total equity and liabilities 46 655 53 932

*Summarised extracted lines of financial information

Preliminary unaudited credit information 18

Loan book overview 30 Jun 2020

1) Net loans and advances decreased to R41.5bn, from the R42.7bn reported at 31 March 2020 mainly due to a reduction in the SLA loan book. 2) The total loan book has been negatively impacted with the restricted disbursements due to liquidity challenges that the bank is faced with. 3) Disbursements have been constrained to 50% of customer collections to preserve liquidity. 4) All remediation solutions are in progress with implementation expected to start during September 2020. This includes a clear disbursement strategy including:

• Interim release of exclusivity arrangements with SLA partners;
• Addressing client/farmer access to alternative funding from commercial banks;
• Development of a clear security/collateral management focus and/or capability to efficiently deal with sharing and management of

collateral where clients are funded by more than one financial institution. Development* R2.7bn (FY20: R2.7bn) Commercial R5.3bn (FY20: R5.3bn) Development* R5.7bn (FY20: R5.7bn) Commercial R5.0bn (FY20: R4.6bn) Development* R0.9bn (FY20: R1.0bn) CDBB R8.0bn (FY20: R8.0bn) CB&SI R10.7bn (FY20: R10.3bn) SLA R24.9bn (FY20: R27.0bn) Total gross loan book R43.6bn (FY20: R45.3bn) Commercial R24.0bn (FY20: R26.0bn)

*Please refer to slide 9 for the definition of the Development and Transformation portfolio's

Preliminary unaudited credit information 19

Capital Adequacy Ratio – Banking

Illustrative CAR post the R3bn equity injection from National Treasury (expected in September 2020):

Pre as at June 2020 Post as at June 2020 ZAR’m ZAR’m Banking level Total available capital (excl guarantee) 3 074 6 074 National Treasury guarantee 2 410 2 410 Total available capital (incl guarantee) 5 484 8 484 Risk weighted assets 48 095 48 095 Tier 1 capital adequacy 11.4% 17.6% Q1 21 FY20 FY19 FY18 Capital Adequacy Ratio 11.4% 11.8% 15.6% 17.3%

• The R3bn expected equity injection by National Treasury returns the capital levels to levels at end March 2018
• For the above pro-forma calculation, the R3bn has been allocated towards reducing liabilities

Preliminary unaudited credit information 20

Non-Performing Loans

NPL’s as at June 2020 (per management accounts) R'm % Segment Performing Under- performing Non-performing Total NPL CB&SI

7,509 2,538 636 10,683 6.0%

CDBB

5,132 615 2,247 7,994 28.1%

SLA

18,831 2,439 3,593 24,863 14.5%

Grand Total

31,472 5,592 6,476 43,540 14.9%

% Weighting

72.3% 12.8% 14.9%

• NPL % has increased from 11,4% at 31 March 2020 to 14,9% at 30 June 2020
• The ECL provision at 30 June 2020 is R2,724m which represents 23% of Non-performing and under-performing loans (At

31 March, this level was c.29%). The NPL % will increase as the overall book reduces over time

• The Suidwes book is the biggest contributor to the NPLs, mainly due to persistent droughts, disease outbreaks and poor

agricultural conditions in the North-West province. COVID-19 has also resulted in an increase in the NPL level

• Ongoing management of NPLs include continued impact analysis to rehabilitate, enhanced collection efforts and the

introduction of the COVID-19 relief fund

• Agricultural sector is already showing good signs of improvement both at production level and market conditions. These

improve the chances of a turnaround for distressed farmers.

Preliminary unaudited credit information 21 Land Bank Presentation 21

Disclaimer

No independent verification of the statements and information set out in this presentation has been made. The March YE 2020 and June Q1 2020 results in this presentation are preliminary and unaudited Nothing in this presentation should be construed as legal, financial, accounting, tax or other advice and relevant persons should determine for themselves the relevance of the information contained in this presentation. By participating in this presentation or by accepting any copy of the slides presented, you agree to be bound by the foregoing limitations. Certain information set forth in this presentation contains “forward-looking statements”. Forward-looking statements are provided to allow potential investors the opportunity to understand management’s beliefs and opinions in respect of the future so that they may use such beliefs and opinions as one factor in evaluating a transaction. Any forward looking statements included in this presentation has not been reviewed or reported on by Land Bank’s external auditors

Disclaimer

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www.landbank.co.za