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Previous turnaround strategies not actioned until now Reports- McKinsey 2005 Comments extractedLand Bank Comments Create partnerships to access opportunities and fully support clients Focus n the Agri value chain & play a role in the consolidation of the sector, focus on aftercare Provide corporate Banking, investment Banking and retail Banking businesses Move to development whilst maintaining capacity in the commercial space DFI 2007 Stick to mandate laid out in 2002 Act to address development as core, Exit LDFU Target short-term turnaround activities Implement clean-up & stabilisation quick-wins Align stakeholders around strategic priorities Develop partnerships at all levels Avoid competing with commercial Banks Address market failure Land Bank ExCo 2007 Fix cost: income funding dynamics Diversify funding sources, increase revenue & reduce costs Deal with legacy issues Clean-up & Stability Implement new business model Future strategy on sustainability to address development as core Improve organisational health and people capacity issues org structure to be informed by strategy, Performance management systems to enhance productivity Focus on development as core product offering Mainstream development into CFU & Retail Upgrade IT systems Efficient IT systems required to enable faster delivery and turnaround times Implement risk management Integrate enterprise-wide risk management, ensure statutory & regulatory compliance, Identify & quantify relevant strategic & operational risk Revitalise brand Positioning LB in the minds of stakeholders Core focus Enablers
Citation preview
Land Bank
Presentation to SCOPA November 2008
Issues with what Land Bank has been doing (strategy)
Issues with how Land Bank has been doing it (execution)
1. Limited progress on Development objective
2. Lack of adherence to mandate of Land Bank Act of 2002 on LDFU strategy
3. No clear funding and financial stability strategy
4. Operating model uncompetitive, high cost and directly competing with better- positioned commercial Banks
5. People and capacity issues unresolved
6. Previous turnaround strategies not sufficiently actioned
7. Substantial evidence that core business and management processes not in place, leading to a qualified audit and other sources of challenge
8. The organisational structure has contributed to lack of accountability
Declining loan book & High NPL’s 27% employee turnover for 2007/08 vs.
industry benchmark of 7-9% Capital adequacy at 11.18% as at
March 2008
The current situation at Land Bank has led to a crisis point which we now have to manage
Implications
Informing and assuring stakeholders
Tracking and governance Recovery milestones Support required from stakeholders
The Assurance
Previous turnaround strategies not actioned until now Reports-McKinsey 2005Comments extracted Land Bank Comments
Create partnerships to access opportunities and fully support clients
Focus n the Agri value chain & play a role in the consolidation of the sector, focus on aftercare
Provide corporate Banking, investment Banking and retail Banking businesses
Move to development whilst maintaining capacity in the commercial space
DFI 2007
Stick to mandate laid out in 2002 Act to address development as core, Exit LDFU
Target short-term turnaround activities
Implement clean-up & stabilisation quick-wins
Align stakeholders around strategic priorities
Develop partnerships at all levels
Avoid competing with commercial Banks
Address market failure
Land Bank ExCo 2007
Fix cost: income funding dynamics Diversify funding sources, increase revenue & reduce costs
Deal with legacy issues Clean-up & Stability
Implement new business model Future strategy on sustainability to address development as core
Improve organisational health and people capacity issues
org structure to be informed by strategy, Performance management systems to enhance productivity
Focus on development as core product offering
Mainstream development into CFU & Retail
Upgrade IT systems Efficient IT systems required to enable faster delivery and turnaround times
Implement risk management Integrate enterprise-wide risk management, ensure statutory & regulatory compliance, Identify & quantify relevant strategic & operational risk
Revitalise brand Positioning LB in the minds of stakeholders
Cor
e fo
cus
Enab
lers
ABSA 'Agri-Business'Standard Bank 'Agri-Plan' Land BankProducts Transaction and savings account
Complete suite of short, medium and long-term loans for production and mortgage
Revolving credit facilities for working capital finance
Vehicle and asset finance Wealth creation and estate planning
products Commodities trading and hedging
facilities Crop insurance and life assurance
products
Transaction and savings accounts Production credit and term loans for
inputs, land and fixed capital Silo certificate finance Revolving overdraft credit for working
capital Investment profit CTS Crop insurance and life assurance
products Grain trading and helping facilities International Banking
Short-term production loans Revolving short-term cash credit
accounts Medium-term instalment sale
financial loans Medium-term establishment loans Lon² 耀 term mortgage loans Livestock financing LBIC – Insurance services
Price Competitive market-related interest charges
Transaction and service fees
Competitive market-related interest charges
Transaction and service fees
Low service fees, but Land Bank interest rates currently priced above rest of the market especially on long term loans against the industry norm
Service delivery
Quick processing and turnaround time Quick processing and turnaround time Poor systems and slow loan processing pace
Significant internal bottlenecks in processes
Agriexpertise
20 specialist managers, 22 agricultural economists, 120 agricultural Bankers
53 agricultural business specialists 28 agricultural officers across 27 branches ( need to review)
4-person AERIS unit (Insufficient)
Channels Leverages off wide retail distribution network
Technology-centric proposition including internet Banking, electronic Banking, cell phone Banking
Leverages off wide retail branch network
Very sophisticated and technology driven, including internet Banking, electronic Banking (using custom software)
No internet Banking, telephone or cell phoneBanking (Explore)
People Soft system is inadequate in loan processing (Need for proper MIS)
Operating model uncompetitive, high cost and directly competing with better-positioned commercial Banks
•Limited revenue streams•Limited product diversity•Limited opportunity for cross subsidisation
. . . culminating in qualified audit opinion
IT Systems procurement control breakdown & irregularities
Procurement and payroll control breakdown, documentation shortcomings and irregularities
LDFU mandate and legality Control breakdown,
documentation shortcomings and irregularities of funds administered on behalf of DoA
Lack of robust operational procurement & HR policies
Failure to respond to previous audit findings and recommendations
Failure to implement SCOPA resolutions
Irregular fruitless and wasteful expenditure
PFMA non-compliance reportable matters
Weak governance structure
. . . consistently indicate poor operating and management processes . . .
Key themes
Breakdown of controls particularly in relation to procurement and payroll
Sources of evidence . . .
Substantial evidence that core business and management processes not in place, leading to a qualified audit
Cumulative audits
Management letter
Internal audit reports
Forensic investigations
SCOPA resolutions
Portfolio Committee undertakings
Conditions on Government guarantee
Consolidation of policies
Irregular expenditure, e.g., procurement policy non adherence
Fruitless expenditure, e.g., travel and subsistence, consulting fees
Moratorium on collection of debts
Lack of available information for auditors
Lack of other policies
Poor governance structure
Lack of HR policy
Number of 'special investigations' ongoing
Lateness and material changes on financial statements
Absence of approval of payments to previous CEO and acting CEO
Absence of effective declaration of interest system
IT system implementation irregularities
Development mandate not adhered to
Partnering and stakeholder relations strategy
Sector consolidationStrategy for intermediaries (for on lending/wholesaling)Joint venturesSyndicationPost funding/handholding support services
Land Bank must effect a turnaround across the board to respond to this context
'Our operating model and execution capabilities need to change to enable us to deliver against this purpose in an economically prudent and financially robust way'
Governance, Compliance & Risk management
Integration of Enterprise-wide risk management Statutory & regulatory compliance Identify & quantify risk
Elements of execution
Funding & financial sustainability strategy
Improved Liquidity ManagementDiversified Sources of fundingRevenue generationCost containment
People and skills strategy
Attraction AcquisitionDevelopment &Retention of talent
Management system strategy
Performance managementprocessesConsequence managementManagement information systemsBusiness process automation
Operating model strategy
Wider footprintOperational efficiencyTurnaround timeQuality managementProject orientated approachSeamless-end-to end lending processesPost funding support
'We need to change to become development-focused to deliver on our mandate to support poverty eradication and food security, and focus on un-banked sector of society whose only alternative is a Land Bank supported investment'
Development as core to businessStrategic Intent
Strategic execution – the pillars which enable us to deliver the purpose
Legacy issues (Clean-up & Stabilisation)Stop the Bleeding
Description Impact
We have made early progress on getting to a policy framework
Integrate Land Bank’s business into development and ensure Development impact in jobs, output, trade
Job creation and preservation Entrepreneurship Focus on areas of economy where
market failure has occurred Integration and consolidation of
agricultural sector
Mainstream
Assist emerging farmers and new entrants by upholding land and agrarian reform principles
Economic access and ownership of HDIs
Broad-based black economic empowerment
Contribution to rural and broader economy
Contribution to success of government programmes
Transformation
Adjust products and services to withstand volatile markets, suit agri-business and meet specific needs of the sector
Participation extended throughout agricultural value chain Innovation
Lay foundations for long-term development success through capability building, advocacy and partnerships
Rural development Targeted programmes for resource –
poor regions of the country Foundation
Strategic purpose ‘Development’
Principles
Intervention and programme ideas
Leverage funding for agriculture and rural development
Support government priorities in land and agrarian reform
Ensure sustainable development Promote and enhance
partnerships Mainstream Development
throughout business Identify, quantify and monitor
Development impact Alleviate poverty and advocate
food security
Establish an Agricultural Development Function to provide guidance (and funding) for the Bank
Launch an Emerging Farmer Support (incubation) programme to help farmers grow into commercial
• 5-7 years incubation per farmer• Discounted interest rates, training and extension
support• Programme life expectancy 10-15 yrs
Provide Development indicators for funding assessment for existing and new business
Establish Development management system • Board level, management level, Development forum at
operational and branch level• Charter for Committee and Board• Support team to guide the Board
Introduce a Development monitoring system to track and communicate progress in development impact
Partner with other institutions• To leverage funding• To arrange non-financial services
Establish a ‘Land Bank Development Foundation’ • Consolidate CSI programmes• Focus on capacity building, farming community
projects, basic farming infrastructure, advocacy
In addition we have identified some principles and early ideas around initiatives which will begin to move us in the right direction
Strategic purpose ‘Development’
Development as core to business plan
Short to medium term (0-7 Years):• Partnerships with Agribusiness and other stakeholders• Hand-holding and aftercare services
Medium to long term (7years and longer)• A DFI with a wider footprint across the country• One-stop agricultural shop
Development progress report
Land Bank Turnaround strategy approved by the Board with Development as core to the business
Formulated a Development policy framework Established a Development Committee Identified pilot projects Communicated to Branches Engaged other stakeholders such as investors, Banks,
clients, Departments (now targeting farmer organisations) In the process of establishing partnerships
The Turnaround Plan
Land Bank operating within government guidelines, regulations and policy, reducing the risk
To deliver a transformed Bank in the long term with development being core to the business
Stabilise the core operations, management systems, human capital and funding
Build a foundation for sustainability
Movement towards future strategy
Timeline
The Turnaround Plan
Phase I: Clean-up
Phase III: SustainabilityPhase II: Stabilisation
Mar 09- Sep 09Sep 08 – Jul09 Sep 09 - tbd
Objective
Change the fundamental value proposition and focus of Land Bank and introduce a Development orientation
Put in place execution foundations to help ensure overall effectiveness for the long term health of Land Bank
Clean-up based on audit reports, forensic audits, SCOPA resolutions and investigations
Priority activities
Note: Some of the work on stabilisation and clean-up will happen in parallel
Phase I – Clean-up
Phase II – Stabilisation
Phase III – Sustainability
Objective: Land Bank operating within Government guidelines, regulations and policies
Focus on cleaning up based on audit reports, forensic audits, SCOPA resolutions and investigations
Anticipated timing: Sept 08- Sept 09
Three phases of turnaround
2008 Audit report matters (qualifications & other)
Management letter Internal audit reports SCOPA resolutions Forensic
investigations recommendations
Policy shortcomings Conditions of the
Gov Guarantee Portfolio committee
undertakings
IT HR Credit Risk Treasury Operations (CFU
& Retail) Internal Audit Legal Communications AERIS
HR Capacity IT-Procurement and
HR Funding Dynamics Balance Sheet Cost to Income
Ratio LDFU Norms and
Standards
Clean up Stabilisation Sustainability
SystemsProcesses
Stab
ilisa
tion
People
Cle
an u
p
Sust
aina
bilit
y
Turning the Land Bank around
Overall approach and nature of the clean up
Facilitate and track progress of:
1. Verification of transactions ito validity, completeness, accuracy and PFMA compliance.
2. Construction of a paper audit trail to support transactions and the 2008/2009 external audit process.
3. Identification of shortcomings and possible irregularities.
4. Corrective action ito documentation and authorisation shortcomings.
5. Resolution of possible irregular and fruitless and wasteful expenditure.
Facilitate and track progress of:1. Update of existing and drafting of
new policies & procedures.2. Implementation of new &
improved approved policies, procedures and controls.
3. Monitor and control of adherence to improved procedures.
4. Maintenance of a paper audit trail for the full financial period (until 31 March 09)
5. Items 3 to 5 under past column.6. Independent assessment of
clean up and improved processes by internal audit.
7. Early establishment of a working relationship with AG & SCOPA.
History (1 April 08 to current) Present & Future (FYE and beyond)
Immediate priority of the clean up
Immediate priority: Audit report matters Objective: “Cleaner” audit report for 31 March 2009 year end
Qualification: LDFU, new system costs capitalised, procurement & payments, payroll & funds under administration
Qualification: Non compliance with legislation (PFMA for irregular & fruitless and wasteful expenditure)
Other matters:• Ineffective governance (audit committee, internal audit, late submission of AFS,
non implementation of audit findings & SCOPA resolutions).• Manual work created by inappropriate banking module.• Non compliance with legislation, addressing: (late submission of corporate plan &
shareholder compact, declaration of interests, moratorium on development loans, payments to the former CEO’s).
• Ineffective performance management of strategic objectives• Forensic investigations completed and in progress
Payroll projects status
Project StartedSubstantial
progress% of
completed Target date
Employee file: GAP analysis 1 April to 31 October 2008 95% 15-Dec-08
Employee file : Address documentation and authorisation shortcomings in respect of GAP analysis 31-Jan-09
Payroll: GAP analysis 1 April to 31 October 2008 50% 15-Dec-08
Payroll: Address documentation and authorisation shortcomings in respect of GAP analysis 15-Feb-09
Declaration of interest by all employees 95% 28-Nov-08
Declaration of interest: Independent verification (selective) 31-Jan-09
Qualification verifications (including employment history) 31-Jan-09
PAYE: Risk assessment Scoped 15-Dec-08
PAYE: SARS voluntary disclosure 31-Jan-09
PAYE: Quantification of exposure 31-Mar-09
Contractors: Documentation audit trail from 1 April 2008 for PAYE assessment 70% 21-Nov-08
Bonus calculation linked to performance management system 30-Jun-09
Leave pay validation 31-Mar-09
Directors emoluments validation and recalculation (since appointment of new board) 70% 21-Nov-08
Procurement projects statusProject Started
Substantial progress % Completed Target date
Vendor and sundry payments for qualified accounts: 1 April to 31 October 2008 80% 30-Nov-08
Vendor and sundry payments: Address documentation and authorisation shortcomings in terms of GAP analysis 31-Jan-09
VAT remediation project (SARS interaction, apportionment risk, sustainable solution) Scoped
31-Mar-09
Other audit report matter projects status
Project StartedSubstantial
progress % Target date
Funds under administration - facilitate control adequacy assessments by IA1. Mafisa2. Agri BEE3. Other
1. 2.3.
No disbursements until such time as processes and
controls strengthened with independent assessment by internal audit
Fruitless & wasteful expenditure process and identification: 1 April to 31 October 2008
15-Dec-08
Fruitless & wasteful expenditure quantification: 1 April to 31 October 2008
31-Mar-09
Phase I – Clean-up
Phase II – Stabilisation
Phase III – Sustainability
Objective: Stabilise the core operations, management systems, human capital and funding. Build a foundation for sustainability
Focus: Put in place execution foundations to help ensure overall effectiveness for the long term health of Land BankAnticipated timing: Mar 09 – Sept 09
Stabilisation
HR ITCost to incomeLand for Development Finance Unit (LDFU) FundingBalance Sheet
IT
Implement a performance management system
Recruitment: Fill critical vacancies
Ensure an accurate SAP HR system
Organisational Structure:• Align organisational structure
strategy
Ensure an adequate SAP Finance & Procurement system
• Audit history• Compliance to PFMA
SAP Banking assessment
Implement SAP- Segregation of duties e.g. order & payment.
HR
Funding Dynamics
Increase net Income
• Enhance existing revenue streams
• Add new revenue streams
Reduce Cost of Funds
Reduce Operational Expenses
Assess Critical Cost Increases• To enhance product offering
• To improve service delivery
Additional Income
Improve Liquidity Position
Lengthen Maturity Profile
Minimise short term refinancing risk
Increase Roll-overs and Issue New Funding
Cost to Income Ratio
Determine Land Bank’s legal standing on LDFU contracts
Re-assess valuations Segment loan book Complete disposal of the book
Take legal action
Action
Why divest
Mandate issues
AFS qualification
Financial instability Reputation risk
Now in negotiations across the board
Early resolution probable for some loans
25% of the book expected to be settled in current fiscal year
Total book expected to be collected by end of March 2010
LDFU disposal strategy
There is a rigorous process in place to work through the disposal
Non Performing Loans: Context & Progress
Balance Sheet
Action area Recoverability
CFU
LDFU
RETAIL
LEGAL
Low High
Context/Progress
Transfer of some assets in progress
Probability to recover
LB already intervene to dispose
Others being refinanced
Restructuring
Portfolio segmented Arrangement Auction Settlement Insolvencies
Progress on StabilisationAction area Progress to date
HR
IT
Cost to income
Funding Dynamics
Blue print for performance management system developed 35 of the 114 critical positions filled. Intention to fill all critical positions by June 2009 SAP HR system fixed Organisation structure pending approval of the strategy by the Minister
All weaknesses on the SAP HR & finance systems have been plugged Appointed a service provider to assess the SAP system Propose external process for validation
Major cost contributors identified, isolated and are being managed Maintained costs within the approved budget Cost to income ratio improved to 73% as at September 2008
Liquidity position at R2.6 Billion Maturity profile extended beyond 3 months up to 1yr Minimised refinancing risk 100% rollover rate & new issues Increased investor confidence, appetite & amounts invested
LDFU
Balance sheet
Negotiations for settlements with all clients taking place 1st account to be settled soon 2 more accounts to may be settled before the end of financial year
Biggest non performing loan being settled Declining impairments (see un-audited financial results 30 September 2008) Already seeing positive impact on the Bank’s equity
Phase I – Clean-up
Phase II – Stabilisation
Phase III – Sustainability
Objective: To deliver a transformed Bank in the long term and focus on development as core to the business
Focus Change the fundamental value proposition and focus of Land Bank and introduce a Development orientation
Sustainability is guided by six strategic imperatives emanating from the corporate plan
Clean-up , Stabilise& Sustain the
Business
2. Improve service delivery and stakeholder engagement
1. Implement Development as core to business
4. Enhance HumanCapital
5. Implement systems solutions, drive research and innovation
6. Ensure Sound Governance, Risk Management and Compliance
3. Maintain Financial Sustainability
28
Sustainability is guided by six strategic imperatives
Implement Development as core to business
Improve service delivery and stakeholder
engagement
Maintain financial sustainability
Develop and enhance human
Capital
Systems, technology research & innovation
Corporate Governance & Risk
management
Stabilise , Grow
& Transform the
Business
2. Ensure quality and improve service
delivery(efficiencies)
1. Implement the business model on
development
4.Develop/enhencehuman capital
(enhancing management capacity)5. Implement
systems solutions, embrace
technology and drive research,
development and innovation
6. Ensure sound corporate
Governance, risk
management And compliance
(including processes
and policies)
3.Maintain
financial sustainability
(manage costs and revenue)
Addressing issues of the core mandate as per the Land and Agriculture Development Bank Act No 15 of 2002. Participating in areas of market failure, contributing to poverty eradication, rural development and land reform.
Optimise processes, organisational efficiency and effectiveness & ensure visibility with stakeholders, beneficiaries and interest groups
Addressing issues Manage and reduce operational costs and increase revenue. Exercise financial prudence, ensure adherence to PFMA and related Regulations.
Ensure the attraction, acquisition, development and retention of relevant, adequate personnel
Ensure adequate Management Information Systems for the core business
Minimise & risk issues and introduce controls
The Land and Agricultural Development Bank
Financial Results –Financial Results – 30 September 200830 September 2008
Income statement for the period ended 30 September 2008 Actual Actual
Sep-08 Mar-08
R’000 R’000
Interest income 984,154 1,893,984
Interest expense (662,700) (1,385,616)
Net interest income 321,454 508,368
Impairment of loans 66,565 (189,671)
Income from lending activities 388,019 318,698
Non-interest income 38,866 108,545
Fair value gains (35,468) 59,468
Operating Income 391,417 486,710
Balance sheet as at 30 September 2008Sept-08
R’000Mar-08R’000
Cash at bank 1,957,892 1,443,992
Trade and other receivables 7,401 6,418
Repurchase agreements 264,439 177,896
Derivative assets 45,944 103,336
Loans 12,397,352 14,102,136
Market making assets 24,254 104,033
Intangible asset 9,423 11,114
Investments 191,878 195,188
Investment property 78,616 79,474
Property and Equipment 148,830 154,130
Total assets 15,126,029 16,377,716
Retained earnings 1,840,750 1,709,658
Bank overdraft - 324
Derivative Liabilities 45,365 63,484
Repurchase agreements - 5,116
Trade and other payables 214,412 136,470
Funding 12,053,658 13,485,606
Funds under administration 746,069 752,149
Provisions 23,835 22,969
Post retirement obligations 201,940 201,940
Total equity and liabilities 15,126,029 16,377,716
Thank You!!!