The Auditor-General was unable to confirm whether the Land Bank was a going concern following the release of its latest annual results last week.
Auditor-General Tsakani Maluleke issued a “disclaimer of opinion” over the bank’s annual results, citing a lack of evidence to reach a conclusive audit.
Maluleke said she could not express an opinion on the financial statements of the state-owned enterprise (SOE) because she was “unable to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these consolidated and separate financial statements”.
Adding to this, Maluleke said she was not able to confirm whether the SOE’s financial statements were generated in accordance with international accounting standards and that the bank’s management failed to provide evidence that the bank was a going concern.
“The entity incurred a loss of R2.4 billion. The entity’s cash and cash equivalents had significantly decreased by R2.6 billion as at year end, and the entity was unable to meet the repayment obligations due to a liquidity shortfall,” said Maluleke.
She added: “I was unable to obtain sufficient appropriate audit evidence that management had properly accounted for expected credit losses.”
The Land Bank’s gross loan book is at R45.1 billion. Its nonperforming loans almost doubled to 18.1% from 9.6% in 2019. Nonperforming loans have soured because farmers have not serviced them for more than 90 days. The bank’s financial statements show that its cash reserves fell almost 80% to R700 million, down from R3.2 billion the previous year.
In response to the Maluleke’s audit opinion, the Land Bank admitted that its submissions did not adequately resolve all the issues brought up by the Auditor-General, adding that this was because of challenges such as loss of corporate memory due to resignations of key employees, inadequate documentation of processes and expected credit loss models.
According to Olga Constantatos, Future Growth’s head of credit, at the onset of the Land Bank crisis in April last year, roughly 27% of agricultural debt in South Africa was supported by the Land Bank, making it a significant role-player in South Africa’s agricultural sector.
The Land Bank had posted positive financial results over the previous five years.
The SOE said that, said before the credit rating downgrade in January last year, its credit rating by Moody’s Investors Service had remained stable since 2017, with its issuer rating at Baa3 and national scale rating at Aa1 – high grade – signalling a relatively sound and well-managed business.
However, the bank’s capital structure has always posed potential risks as the loan assets portfolio is entirely funded through debt raised from the capital markets.
According to the Land Bank, the ratings downgrade in January last year signalled the beginning of events that compounded the liquidity crisis that led to the default position that it experienced with some of its creditors.
The bank was placed on review in November 2019 with a negative outlook by Moody’s, and the concerns raised here were alluded to in the ratings downgrade two months later. This included rising solvency pressures, low earnings, reliance on volatile debt and capital markets, government’s financial challenges and the prolonged period of uncertainty ahead of the appointment of a new CEO.
Following the downgrade, some investors reduced their exposure to the bank and some facilities the bank had were frozen.
The bank’s board wrote to Finance Minister Tito Mboweni in February about the bank’s liquidity challenge, and he responded with Treasury’s approval of the utilisation of the R5.7 billion guarantee.
The bank went into default in April.
In May, the board chairperson, Arthur Moloto, said no amount of reengineering of the balance sheet would save the bank without recapitalisation from Treasury, and it requested an additional capital injection that was acknowledged by Mboweni in his medium-term budget policy statement in October.
The Land Bank also requested government’s support for in efforts to address the current default position to conclude its debt restructuring and liability solution and strengthen its balance sheet going forward.
The bank received an equity injection of R3 billion in September and in October, during the medium-term budget policy statement, Mboweni mentioned an additional R7 billion over the next three years.
Constantatos said the risks of the Land Bank not functioning effectively were dire and included a possible increase in food inflation as the country becomes increasingly reliant on imported goods.
“In the current Covid-19 crisis and with global supply chains being disrupted, supply side risks are real. In the absence of adequate funding from the Land Bank and certainty about the timely resolution of the current situation, emerging farmers don’t have access to the capital needed to transition into established commercial farmers,” she said, adding that the Land Bank played a critical role in growing and broadening the South African commercial farming base, thereby securing the current and long-term food security of the country.
The Land Bank said a “remediation plan” has been adopted by the board to address the Auditor-General’s findings. It said the plan includes steps that are in the process of being implemented.
- Improvement and calibration of the expected credit loss model with accurate data sets;
- Review of policies and standards of operations to address the weaknesses identified in the management of collateral, modifications, staging and risk rating;
- Detailed remediation review on an account-by-account level on all the underlying data to validate the accuracy of information to a satisfactory level, and implement effective data controls across all portfolios;
- In addition to the component of the service level agreement improvement plan, which deals with the improvement of credit management controls and reliable data management in the portfolios that are managed by the bank’s service level agreement intermediary partners, a decision has been made to insource the management of two of the bank’s service level agreement partners following the termination of these two agreements;
- Given that most of these weaknesses were associated with the inconsistent policies and relatively weaker governance oversight across the different service level agreement portfolios, the bank believes that the insourcing of these portfolios will present it with the opportunity to directly instil the appropriate management controls on these portfolios;
- The methodologies to determine expected credit loss will be harmonised across the various loan book portfolios to ensure consistent treatment as required by accounting regulations;
- The recruitment of team members will ensure adequate quantitative modelling; and validation capabilities/skills are being prioritised; and
- The board is considering what consequence management steps may need to be taken.