Land Bank 2004 Annual Report Presentation: Overview and Highlights

1. Land Bank 2004 Annual ReportPresentation: Portfolio Committee on Agriculture & Land AffairsCommittee Room S 26, 1st floor, NCOP Wing10 September 2004

2. Overview of presentation

3. Group overview Nomhle Canca Chairperson: Land Bank Finance, Credit, & Economic Committee

4. Our vision and mission Our vision • To be the leading provider of world-class financial services to agriculture and related rural sectors in South Africa Our mission • 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

5. Accountability mechanism • 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)

6. Our strategic framework • 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

7. The year in review George Oricho Acting Chief Executive Officer

8. Economic developments in 2003/4 • The South African economy grew by 1.4% in year ended 31 March 2004 • Growth was sluggish due to negative contributions by manufacturing (-2.2%) and agriculture (-10.3%) • Drought and delayed rains had a major impact on the agricultural sector • Strong rand and resulted in a drop in producer prices

9. Economic developments in 2003/4 cont • As a result: • Gross farm income decreased by 4.3% • Net farm income decreased by 17.8% • As a result of factors above, total farm debt to increase by R2.7-billion to R30.9-billion • primarily due to the effects of lower interest rates increase in total farm debt has not had a huge debilitating effect • In addition, the decline in interest rates provided some relief to farmers • In addition, the Bank assisted farmers with debt consolidation and rescheduling

10. Highlights of the Land Bank’s year • The Bank is back into profitability, as promised last year – a net profit of R247-million (compared to a R1.4-billion loss last year), despite a difficult business environment • Number of loans granted grew by 14% from 89 967 in 2002/3 to 102 527 during the reporting year • Development loan book grew by 5.3% to R1.096-billion: a total of 61 014 loans in this sector, compared to 59 875 last year – confirming the Land Bank’s position as the major player in this sector

11. Highlights of the Land Bank’s year cont • Arrears as a percentage of the loan book dropped from 9.6% to 6.2% due to last year’s write-off and improved collections • 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

12. Highlights of the Land Bank’s year cont • New branch model piloted in 9 branches, and is in the process of being rollout to all 27 branches. • The need to generate efficiencies such as the introduction of new management information systems. • Enhance our ability to service our clients • Improve loan turn-around times

13. How we performed against our targets

14. Our development book • We continue to lead the sector with our development book currently standing at R1.096-billion • Significant progress has been made in financing LRAD projects -- R106-m in special mortgage loans were approved (240 accounts) • Rate of default in development loan book has dipped substantially (from R223m to R166m) • The Bank has continued to improve outreach in rural areas not serviced by commercial banks, by wholesale to provincial banks and expanding the number of satellite offices

15. Step-up loans • A total of 165 877 clients have benefited from the Bank’s microfinance programme since inception in April 1998 • During the reporting period, a total of 38 104 new clients joined the programme • A total of R169-m was disbursed over the same period

16. Step-up loans cont

17. Step-up loans cont • Financing was provided to 77845 women out of 123 564 clients resulting in 63% female client base • We continue to monitor repayment levels and develop new approaches, to ensure satisfactory repayment levels

18. Funding job creation and BEE • Land Bank’s activities resulted in the creation of approximately 60 000 new sustainable jobs in the agri-economy • Significant BEE transactions were concluded, including: • Foodcorp: R800-m loan to Pamodzi Investments for acquisition of Foodcorp agri-processing company • Foodcorp restructured and refinanced R800m • Gledhow Sugar Mill: R335-m financing for BEE and worker consortium acquisition of sugarmill and over 12 000 hectares of land. Gledhow will source sugarcane from emerging farmers, and its activities currently benefit more than 1 000 farmers. First black-owned sugar mill - component of land reform

19. Our impact on development • Community development initiatives were funded, including: • Makhathini Flats: R269-m facility approved to fund irrigation scheme, which has potential to turn the area into the principal cotton-producing area. More than 1 000 farmers will be established and more than 5 000 jobs created, benefiting more than 30 000 people • R9-million was allocated to CSI initiatives, including: • Training and development grants to a range of projects, such as: • Buhle Farming Academy (Mpumalanga) • Keiskammahoek Dairy Project (Eastern Cape) • Tshivase Agri Dam (Limpopo) • Xihoko Primary School Vegetable Garden (Limpopo)

20. Our impact on development (continued) • Other CSI initiatives included: • Capacity building at a number of institutions, including: • NAFU • Agricultural Business Chamber • 40 bursaries for agricultural students, of whom 19 are women • Research grants to several tertiary institutions, including: • University of Fort Hare • University of Zululand • University of the Free State • University of North West • University of the North • University of Venda • University of Pretoria

21. Funding youth development • The National Youth Development Programme was formed in partnership with the National Youth Commission and Umsobomvu, to assist young aspirant farmers • Four farms have been allocated to date: in the Free State, Western Cape, Northern Cape and North West • Land Bank has disbursed more than R5-million in loans to the four farms, which are being leased with an option to purchase

22. Background & AG Report Mr Jacob Modise Chairperson: Land Bank Audit Committee

23. Background • Difference in reporting periods • AC133 • New revenue sources • Turnaround in equity markets • Loan impairments

24. Difference in reporting periods • Year-end changed to 31 March from 31 December in the prior period in line with PFMA • Reporting period for 2003 annual report was 15 months compared to 12 months in current 2004 annual report

25. Difference in reporting periods (continued) - pro-forma results

26. AC133 compliance and adoption • SA GAAP aligned with International Accounting Standards • Compliance requires significant system capabilities • Group’s systems in the process of being modernised. Therefore full compliance to AC133 not possible • PFMA requires financial statements to be prepared in accordance with SA GAAP • Auditor-General required to confirm that SA GAAP complied with, failing which opinion to be qualified

27. Impact of AC133 on Income Statement ( R’m)

28. Impact of AC133 on Balance Sheet

29. New revenue streams With the adoption of AC133, fair valuing financial instruments resulted in a gain of R58m.

30. Turnaround in equity market resulted in a turnaround of investment income of R242-m

31. Loan impairments excluding AC133

32. Auditor-General Report: Emphasis of matter items

33. Financial performance Income Statements Net interest income Interest margin % Efficiency ratio Loan book quality

34. Income Statement Highlights • Net interest income down to R529m (2002/3 : R882m) • Operating income down to R709m (2002/3 : R923m) • Non interest income up to R180m (2002/3 : R41m) . • Net operating Profit before Provisions down to R404m (2002/3 : R574m) • Efficiency ratio of 43.0% (2002/3: 37.8%) due to margin squeeze. • Loan impairments impact on profitability improved by R1 556m to R260m (2002/3 : R1 776m) • Group returned to profit of R247m (2002/3 : -R1 429m)

35. Group income statement

36. Group income statement: pre-AC133 adoption

37. Net interest income Net Interest Income down by 25% or R177m to R529m compared to prior year annualised. (2002/3 annualised : R706m)Impacted upon by 550bps reduction and AC133 adoption

38. Non-interest income Non interest income up 445% or R147m to R180m (2002/3: R33m annualised) mainly due to increase in account administration fees(R81m) and AC133 financial instruments fair value gains (R58m)

39. Operating income Operating Income decreased by 4% or R30m to R709m compared to prior year(2002/3 annualised : R739m)

40. Operating profit before provisions Operating profit before impairments down by R56m or 9.7% from prior year’s annualised R460m

41. Net interest margin • Net interest income margin down 100 basis points to 3.3 % (2002/3 :4.3%) • Margin squeeze as a result of reduction of repo rate over the year by 550bps and • AC133 on treasury instruments negative impact of R227m • Pre- AC133 net interest margin is 4.7% which is slightly higher than previous year • Effective margin management mechanism minimised the impact of repo rate reductions.

42. Efficiency ratio Squeeze on margins resulted in an efficiency ratio of 43% (target : 35%) against prior year’s of 37.8%.Pre-AC133 efficiency ratio of 34.7% is below target and better than prior year.

43. Loan book quality • Impairments charged to income is R260m compared to R1,776bn in FY:2002/3 • Total provisions for both specific and loan impairments is R1,196bn compared to R1,529bn for FY:2002/3 • Provisions as a % of total loan book is 7.4% (2002/3 : 9.4% ) • Arrears as % of total loan book has improved improved by 35% to 6.2% (2002/3: 9.6%)

44. Financial position Highlights and key ratios Summarised balance sheet Loan provisions The Group’s funding Cash position and liquidity mismatch

45. Balance sheet highlights • Net loan portfolio increased by R280m or 2% to R15.010bn (2002/3: R14.730bn) • Increase in gross short term lending by 12.3% or R1,0bn largely from wholesale finance to co-operatives • Improved liquid cash assets by R955m or 92.9% to R1.985bn • Decrease in long/medium term funding of 14.2% from prior year’s R5,3bn • Conversely, increase in short term borrowing of 14.3% or R1,3bn to R10,7bn • Decline in capital adequacy ratio (CAD) from 14.5% to 12.9% due to growth in asset base and adoption of AC133 • Significant improvement in ROA from -8.1% to 1.3%

46. Summarised group balance sheet

47. Provision as a percentage of loan book Provision as a % of loan book has decreased to 7.4% from 9.4%.Provision at 31 March 2004 are R1.196bn (2003 : R1.530bn)

48. Impairment charge to income Impairment charge to income improved to R260m against R1,7bn in FY:2002/3

49. Capital adequacy ratio (CAD) • Decline in capital adequacy ratio (CAD) from 14.5% to 12.9% due to growth in asset base and adoption of AC133 • Pre-AC133 CAD for the group is 15% which is an improvement on prior year. • Pre-AC133 CAD for the bank is 12.1% compared to industry benchmark of 10%. Post-AC133 CAD is 9.8%

50. Cash position and liquidity • Healthy cash reserves of R1.984bn compared to R1.029bn prior year. • Cashflow from operating improved to R386m compared to an outflow of R132m prior period • The board is reviewing various options to improve the matching of its liquidity positions.