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- The Land Bank has been struggling to fulfil its loan obligations on time since 2020 and has received state assistance on several occasions.
- According to the latest financial results, the Land Bank had made several capital repayments in the previous year or so, reducing total debt by almost 43% (June 2022).
- The rising number of non-performing loans of some partners in the agreement led to less income, and in some cases losses.
- Between the end of March 2021 and the end of March 2022, the Land Bank’s corporate and commercial loan book shrank by 35%.
- Although the Land Bank is still a major player in the South African agricultural environment, it needs to ramp up its performance to remain relevant going forward.
The Land Bank has frequently made headlines in recent years, albeit for the wrong reasons. Since 2020, the bank has been struggling to fulfil its loan obligations on time and has received assistance from the state on several occasions. Staff in critical positions were also lost, which destabilised the bank. Add to this the steps the bank is taking against clients in a bid to collect overdue debts, and you have the makings of a major challenge.
While the annual report for 2022 shows improvement in certain areas, the bank still is far from being on more solid ground.
State of affairs
According to the latest financial results, the Land Bank had made several capital repayments in the previous year or so, reducing total debt by almost 43% (June 2022).
They’ve also made progress in developing new initiatives. One of these is a GIS (geospatial information system) product to ensure alternative sources of income. These ‘non-interest income’ initiatives do not appear to be operational yet but are expected to come into effect in future. It appears that the development of online platforms to serve existing and new customers also received attention.
The current financial statements received a clean audit – something that was not achieved in the previous two financial years. This is due to the large-scale improvements made to the bank’s internal control measures, which in turn points to an acceptable level of management at the bank. The board prioritised this improvement following the previous two years’ qualified audits.
Moreover, the statements mention a R1,3 billion profit compared to a loss of R920 million in the previous financial year.
In-house client management
The Land Bank mentioned in a previous report that it had ended its service delivery agreements and that existing clients, which were previously managed by the bank’s partners but were funded on the Land Bank’s balance sheet, would transfer back to the bank to be managed directly.
The previous business model was introduced in 2011 – partners included Obaro, Suidwes Landbou and Unigro which acted as middlemen. These middlemen were agents for the Land Bank and, inter alia, issued loans, managed the debt book, managed client relationships, and collected loan repayments on behalf of the Land Bank. The Land Bank in turn earned administration and margin fees.
The rising number of non-performing loans of some partners in the agreement led to less income, and in some cases losses. The Land Bank therefore decided to transfer the clients that were part of the service delivery agreement back to the bank, so that they can be managed in-house. The first clients were transferred during the 2021 financial year. Clients of Unigro, which was the bank’s largest service delivery agreement partner, were transferred to Land Bank during October 2021.
It is also mentioned that the bank experienced various challenges over the last year that need addressing.
The current cost of the bank’s funds points to an unsustainable funding model. The Land Bank’s future economic and financial viability depend on remedying the bank’s funding model. Such a model will consist of a balanced mix of own capital, external funding and commercial loans. As indicated in the last report, the cost-to-income ratio stood at nearly 96% and needs to be reduced quite substantially to be considered sustainable.
The bank is still considered a defaulter and it was hoped that discussions between the Land Bank, creditors and the treasury would be concluded by the end of 2022.
There was in increase in non-performing loans during the last financial year; this drove the non-performing loan percentage up, which was highlighted by a shrinking debt book. For the 2022 financial year, non-performing loans rose to 47,7% from 32,5% the previous year. It has shown an upward trend the last few years (it was 7,1% in the 2017 financial year).
Disbursements to corporate and commercial clients are on a negative trajectory, according to the report, with many clients choosing to transfer to other financial institutions. This, despite the reassurance the Land Bank gave clients that their short-term (production and working capital) facilities will be serviced to ensure that there are no disruptions as the planting season approaches.
In addition to the challenges already mentioned, staff in critical positions are being lost due to the bank’s financial situation and prevailing uncertainty.
Shrinking commercial loan book
Between the end of March 2021 and the end of March 2022, the corporate and commercial loan book shrank by 35%. This, according to the report, can be attributed to the bank not approving any new facilities due to its underperformance and liquidity challenges. Planned repayments and early settlements meant that cash reserves were replenished, but also that gross borrowings were decreasing. Many clients that were part of the service delivery agreements transferred to the Land Bank, but then left.
Available data (Figure 1) indicates how the Land Bank’s contribution to the financing of total agricultural debt in South Africa stagnated as total agricultural debt continued to rise. Percentage-wise there was a downward trend, with the effect of the 2021/22 financial year not yet known. In contrast, commercial banks started playing a greater role, while the contribution of agricultural co-operatives remained fairly constant.
Figure 1: The Land Bank’s contribution to the financing of total agricultural debt. (Source: DALRRD, 2022)
Furthermore, the annual report mentions the Land Bank’s efforts in retaining top-performing clients and meeting their financial requirements so their businesses can stay afloat. The bank’s ability to improve its debt collection is also under scrutiny. It can therefore be concluded that clients in arrears can expect more action from the Land Bank, as the bank wants to ensure its continued existence.
The way forward
The Land Bank’s board finalised its five-year plan to get the institution back on track. The first phase is the stabilisation phase (running between the 2022/23 and 2023/24 financial years) during which attention will be paid to immediate priorities and stability for the subsequent phases.
Priorities for this phase include:
- Establishing a workable plan to pull the bank out of its default position by way of a liability solution.
- Strengthening the bank’s executive team by appointing a permanent chief executive officer and filling system roles.
- Issuing loans, focussing on development clients, and preserving the quality of the bank’s loan book, as well as correcting non-performing loans.
Furthermore, the bank also aims to improve its overall performance and put in place sound internal control measures to achieve clean audits in future.
The second phase will take place during the following two financial years and will focus on the consolidation of the ‘liability resolution’ (in other words, getting the bank out of its default status). Aspects to receive attention include more improvements to business performance, based on the previous phase, and adherence to the terms of the repayment agreement. The implementation of more digital solutions to support client service is also foreseen.
It further aims to build strategic partnerships to provide operational support as well as pre- and post-financing support to development clients. Lastly, with the approval from shareholders and government structures, an appropriate financing structure for the bank will be drawn up.
The third phase is the growth phase and the plan is to show positive, tangible performance results.
Although the Land Bank is still a major player in the South African agricultural environment, it needs to ramp up its performance to remain relevant going forward. The latest annual repost shows positive signs, but there is still a mountain to move in terms of overhauling the bank.
Because a large portion of the Land Bank’s loans are held by non-performing clients, it can be expected that steps will be taken against these clients. – Dr WA Lombard, Stockfarm
For more information and references, email Dr WA Lombard at LombardWA@ufs.ac.za.