Wrap Text
Financial Statements
LAND AND AGRICULTURAL DEVELOPMENT BANK OF SOUTH AFRICA - ANNUAL FINANCIAL
STATEMENTS FOR THE YEAR ENDED 31 MARCH 2012
DATED: 28 MARCH 2013
Global economic performance has continued to be strained despite various measures adopted to stave
off the looming recession. Several countries adopted austerity measures in a bid to revive their
economies but failed to achieve sustained recovery. Although there was a glimmer of hope earlier in the
year, it was soon replaced by economic gloom amid fears of some countries in the Euro zone slipping into
recession posing major concerns and uncertainty in the markets.
The South African economy too has not gone unscathed and remained under pressure in line with the
global trends. Locally there has been an increase in unsecured lending, generating concerns over a
potential credit bubble. The South African Reserve Bank has maintained the repo rate unchanged at
5.5% since November 2010 in an effort to stimulate growth across the various industrial sectors in the
country. The low interest rates over the years have resulted in a number of investors shrugging off the
money market for better returns elsewhere.
The Land Bank has endured low interest yields over the past two financial periods in line with the static
repo rate at 5.5% since late 2010. Significant growth in the loan book owing to a number of strategic
initiatives has however contributed immensely to the interest revenue, thereby eclipsing the effects of the
depressed lending rates. As the Land Bank’s revenue base is heavily dependent on interest income it
remains sensitive to movements in the repo rate. Government has continued to support the bank through
recapitalisation and other initiatives that
support emerging farmers. During FY2012, the Land Bank received R750.0 million as part of the
recapitalisation bringing the guarantee amount to R1.0 billion as at 31st March 2012. Post year end,a
further R200.0 million was received on the 30th of April. It is anticipated that the Land Bank will continue
to receive further recapitalisation and guarantees in the medium term in light of its strategic role in
development and food security. The various support mechanisms from Government as well as the bank`s
own initiatives implemented through the successful turnaround strategy have seen the Land Bank`s core
earnings improve.
Amidst the sustained challenging economic environment, the Land Bank Group achieved a profit of
R161.4 million compared to the restated profit of R265.0 million reported in the prior year. (The
restatement relates to a valuation error identified post year end on a funding liability (floating rate note)
that had been understated by R22.7 million and the prior year profit overstated). Overall, the group`s
profit declined by 39.1% in the period under review. However, when excluding the R137.5 million
impairment write-back effected in FY2011 on the back of a cash guarantee from the Department of Rural
Development and Land Reform, the group`s profit increased by R33.9 million (26.6%). The increase in
profit is mainly attributable to the significant growth in the loan book equally matched by a well-managed
borrowing plan, which saw the cost of funding being maintained within reasonable levels. The bank`s total
gross loan book increased by 46.8% to R22.4 billion (2011: R15.3 billion), of which the performing portion
grew by 54.5% to R21.0 billion.
The group`s banking operations contributed R107.0 million (2011: R177.2 million) when excluding the
intergroup dividend of R100.0 million (2011: R50.0 million). When adjusted for the R137.5 million
impairment release relating to the guarantee from the Department of Rural Development and Land
Reform, the banking operations` contribution increased by R67.3 million (in excess of 100%). The
insurance business`s contribution declined to R55.1 million (2011: R88.5 million) owing to the depressed
market conditions that saw a decrease in investment returns and premium income.
Internal performance targets
The Land Bank Group submits a Corporate Plan to National Treasury each year. The Plan contains key
performance and strategic targets. The key financial performance targets that were set for the current
financial year are as follows:
2012
2012 2012
Actual Target
Gross interest margin 45.0% 39.0%
- continuing operations
Net interest margin 3.7% 3.4%
- continuing operations
Cost-to-income ratio 77.1% 93.1%
- continuing operations
Capital adequacy 30.1% 20.0%
- including Government guarantee
Loan book quality 6.4% 10.5%
(Non-performing book as % of total book)
Actual performance achievement compares favourably to key targets set in the Corporate Plan. The cost-to-income
and the non-performing loan book ratios significantly surpassed the set targets. Capital adequacy declined to 30.1%
(2011: 42.6%) due to increased funding liabilities in response to the funding requirements of the loan book which
increased in excess of 50%. Capital adequacy still remained above the 20% level required by National Treasury.
Banking operations
Total net income for the year from the group’s banking operations was R207.0 million (including
the intercompany dividend of R100 million), compared to R227.2 million reported in the prior year. Excluding the prior
year impairment write back of R137.5 million, the banking operation`s net profit increased by R117.3 million (in
excess of 100%). Operating income from banking activities increased by 2.8% to R708.3 million (2011: R688.9
million) while operating expenses increased by 14.0% to R543.5 million (2011: R476.6 million) owing mainly to
increased staff costs and amortisation expenses.
Salient features
2012 2011 Variance
Rm Rm
Net interest income 673.1 511.1 32%
Impairment release 3.6 125.1 (97%)
Non-interest income 31.6 52.7 (40%)
Investment income 125.8 80.6 56%
Fair value losses (12.7) *(11.5) (10%)
Operating expenses (543.5) (476.6) (14%)
Non-trading capital items 23.0 37.6 (39%)
Discontinued operations (44.6) (45.3) 2%
Other comprehensive loss (25.8) (19.6) 32%
Cash and cash equivalent (own) 1,787.1 2,003.9 (11%)
Loans and advances 21, 555.6 14, 299.2 51%
Funding liabilities 17, 864.9 *11, 877.7 50%
* Restated - The restatement relates to a valuation error identified post the FY2011 year-end on a funding liability instrument
(floating rate note) that had been understated by R22.7 million and the profit overstated by the same amount.
Net interest income
Net interest income increased by 31.7% to R673.1 million for the year under review. This increase is
largely attributable to the significant growth in the loan book generating more interest revenue, as well as
the containment of borrowing costs related to funding the book. The Land Bank’s perception in the market
has improved over the years allowing for a more diversified investor base as well as relatively affordable
funding. The capital injection from Government also contributed towards the reduction in funding costs.
Impairments
2012 2011 Variance
Rm Rm
Net impairment releases (3.6) (74.6) (95%)
Adjustment to LGD 1 - (50.5) (100%)
Total releases (3.6) (125.1) (97%)
21 Loss given default reduced from 15% to 5% in 2011. No adjustment has been made for the current year under review.
Net impairment releases for the current financial year amounted to R3.6 million compared to the net
release of R125.1 million recorded in the previous financial year. The release in the current financial year
is mainly attributable to the improvement in the bank`s nonperforming loan book. Concerted collection
efforts as well as work out and restructuring initiatives on nonperforming loans in the prior years has had
a positive impact on the impairments culminating in more sustainable impairment movements. Prudent
credit policies that have been implemented should see the bank`s impairments trend stabilise in the
foreseeable future. The R74.6 million released in the prior year was mainly driven by the cash guarantee
from the Department of Rural Development and Land Reform.
Non-interest income
2012 2011 Variance
012 Rm Rm
Administration fees 18.7 32.9 (43%)
Investment property rentals 7.5 6.8 10%
Other 5.4 13.0 (58%)
Total 31.6 52.7 (40%)
Non-interest income declined by 40% to R31.6 million (2011: R52.7 million) for the year under review.
During the same period, the bank stopped charging certain penalty fees on arrear accounts in compliance
with new legislation passed by the National Credit Regulator (NCR), which had a negative effect on non-
interest income. It must be noted however, that the decline in non-interest income is also as a result of
the improvement in non-performing loans. The Land Bank has begun implementing policies that seek to
increase non-interest income. The impact of the diversification of income strategy will show in the short to
medium term.
Investment income
2012 2011 Variance
Rm Rm
Unrealised fair value gains 16.6 22.3 (26%)
Dividends 104.6 53.8 94%
Interest 4.6 4.5 2%
Total 125.8 80.6 56%
Included in the dividend income is a R100.0 million dividend (2011: R50.0 million) from Land Bank`s
wholly owned subsidiary LBIC. Fair value gains decreased by 26% whilst interest income increased
marginally by 2%. Depressed market conditions have continued to subdue the performance of
investments.
Fair value losses
2012 2011 Variance
2012
Rm Rm
Held for trading
Swaps (6.1) (6.3) 3%
Market-making assets (0.5) (1.1) 55%
Designated through profit or
loss
Promissory notes (5.8) (4.1) 93%
Floating rate notes (0.3) *- (100%)
Total (12.7) *(11.5) (10%)
* Restated - The restatement relates to a valuation error identified post theFY2011 year-end on a funding liability
instrument (floating rate note)that had been understated by R22.7 million and the profit overstated by the same
amount.
Fair value losses on trading and funding instruments amounted to R12.7 million compared to the R11.5
million losses reported in the prior year. The fair value losses are attributable to the movement in the re-
pricing of floating rate notes that respond to the movement in JIBAR.
Operating expenses
2012 2011 Variance
2012
Rm Rm
Notable movements
Staff costs 342.9 305.8 12%
Amortisation computer software 13.1 3.2 +100%
Professional fees 29.5 28.9 2%
Legal fees 24.2 7.9 +100%
Other operating expenses 134.6 130.8 3%
Total 543.5 476.6 14%
Total operating expenses increased by 14.0% to R543.5 million (2011: R476.6 million). The table above
highlights the most notable movements in operating expenses for FY2012 (Note – comparable
information may be different from that previously reported). Staff costs increased to R342.0 million from
R305.8 million in the previous financial year. The increase is mainly a result of the salary increases
effected during the course of the financial year, as well as filling of critical vacancies. The increase in
amortisation costs is a reflection of the bank`s increased ICT capacity. Software development relating to
the SAP Core Banking module as well as other Risk Management systems that were capitalised
contributed to the increase in amortisation costs. Included in legal fees are provisions for transaction
costs that relate to the acquisition of new business. During FY2012, the bank initiated a process of
acquiring new loans and some legal costs were incurred to ensure that all the pertinent angles are
covered. Some of these costs will be recovered once the transactions are effective and business has
gained traction.
The expense categories that comprise “other” operating expenditure are disclosed in Note 28 to the
Annual Financial Statements.
Non-trading and capital items
2012 2011 Variance
2012
Rm Rm
Reversal of Impairments on
- 35.2 (100%)
intangible assets
(Loss)/ profit on disposal of
investment property and property (5.7) 15.0 (+100%)
and equipment
Non-current assets held for sale
0.9 (11.2) +100%
fair value adjustment
Fair value adjustment to
investment property, land and 27.8 (1.4) +100%
buildings
Total 23.0 37.6 (39%)
Non-trading and capital items decreased by 39% to R23.0 million from R37.6 million in the previous
financial year. The reversal of the previously impaired SAP Banking module in FY2011 contributed
significantly to the R37.6 million reported then. The year under review was positively impacted by the fair
value adjustment on investment properties and land and buildings that contributed R27.8 million
(2011:R1.4 million loss).
Discontinued operations
The loss on discontinued operations marginally decreased to R44.6 million from the R45.3 million
reported in the prior year. This loss relates primarily to the funding costs of the LDFU loan portfolio. The
LDFU operation was discontinued in the 2009 financial year as the loans granted fell outside the
operating mandate of the bank. Management has been actively pursuing the disposal of these assets on
favourable terms to the bank. Commendable progress has since been made as the bank has managed to
conclude a number of settlement agreements in this regard. Since its reclassification as a discontinued
operation, no interest income has been accrued or recognised on this book.
Financial Report
Other comprehensive income
2012 2011 Variance
20122012 Rm Rm
Actuarial loss on postretirement
(30.6) (21.4) (43%)
medical aid liabilities
Revaluation of land and buildings 4.7 1.8 +100%
Total loss (25.8) (19.6) (32%)
The bank provides a post-retirement medical aid benefit to those who were either employees or
pensioners of the bank as at 1 December 2005. This fund functions primarily as a defined benefit scheme
and therefore the bank is liable for fully funding the scheme. The fund liability is subject to an annual
actuarial valuation. The current year’s actuarial loss increased to R30.6 million (2011: R21.4million).
Management is in the process of weighing up options of removing the liability from the books in a manner
that is not detrimental to those covered by the scheme and the bank`s financial position. Land and
buildings are re-valued annually in terms of the bank’s accounting policies. The current year increase in
the value of the bank’s land and buildings amounted to R4.7 million (2011: R1.8 million) and is in line with
the relatively stagnant property market.
Cost-to-income
The cost-to-income ratio for continuing operations was 77.1%. This compares favourably to the Corporate
Plan target of 93.1% as well as the 82.2% achieved in the prior financial year. The improvement over the
previous financial year is primarily attributable to continuous stringent cost control measures and focused
revenue growth.
Cash and cash equivalents
Cash and cash equivalents decreased to R1.8 billion from the R2.0 billion reported in the previous
financial year. Cash balances are primarily held for purposes of providing the bank with a sufficient
liquidity buffer to serve as a hedge for the bank’s perceived refinancing risk. The required balance is
managed by using a model that is designed to take into account, inter alia, normal banking best practice,
and the bank’s own unique requirements and also the bank’s improved ability to raise funding in the local
market. The bank`s strategy is to maintain its cash balances at optimum levels within acceptable risk
parameters. The bank`s refinancing risk has been reduced following the successful investor
diversification.
Trade and other receivables
Trade and other receivables increased to R228.7 million in the current financial year from R189.2 million.
The trade and other receivables mainly consist of intercompany related transactions amounting to R179.4
million (2011: R109.2 million).
Repurchase agreements
Repurchase agreements were entered into to cover any short positions that the bank might have
experienced. At the end of the financial year, the short term positions to be covered amounted to R6.0
million (2011: R nil).
Non-current assets held for sale
Non-current assets held for sale consists of land and buildings which have been earmarked for disposal
for which approval was obtained from the Minister of Finance. The assets under this category have
declined to R15.5 million from the R53.4 million reported in the prior financial year. Disposals in the year
under review amounted to R39.5 million (2011: R16.0million) for properties in possession whilst there
were no disposals under land and buildings (2011: R22.8 million). Fair value loss adjustments on
properties in possession amounted to R0.2 million (2011: R9.7 million). Land and buildings reported a fair
value gain of R1.1 million compared to the loss of R1.5million in the previous financial year.
Investments
The bank’s investment portfolio comprises investments held to serve as a hedge for the bank’s post-
retirement medical aid liability. These investments have been classified as “fair value through profit and
loss”, and are measured and disclosed at fair value. The fair value of the portfolio increased from R227.9
million in the prior year to R247.5 million at the end of the current financial year. This translates to a deficit
of R13.6 million (2011: R9.0 million surplus) when compared to the relevant liability.
Loans and advances
Net loans and advances increased significantly from R14.3 billion in the previous financial year to R21.6
billion for the year under review. This represents an increase of R7.3 billion (51.0%).
The gross performing loan book increased by R7.4billion (54.4%) to R21.0 billion compared to the R13.6
billion at the end of the previous financial year. Business & Corporate Banking and Retail contributed
R6.5 billion and R867.1 million respectively towards the increase in the performing loan book.
Collections on loans in arrears (including insolvencies) amounted to R792.1 million (2011: R476.8
million). The bank continues to make a concerted effort towards the recovery of loans in distress.
Financial Report
Non-performing loans decreased by R254.6 million (15%) from R1.7 billion in FY2011 to R1.4 billion in
FY2012 owing mainly to collections and restructuring initiatives. The percentage of non-performing loans
over the total loan book declined from 11.1% in the prior financial year to 6.4% in FY2012, whilst the
performing book improved from 89% in FY2011 to 93.6% in FY2012. The increase in the performing loan
book has contributed significantly to the growth in interest income.
Total impairments, which include the provision in respect of suspended interest and administration fees,
decreased by R105.2 million from R989.7 million in the prior financial year to R884.6 million at 31 March
2012. The decrease in impairments is attributable to the improvement in the non-performing loan book as
well as the improved credit control and monitoring mechanisms.
Bank Annual Report 2011/12
Assets classified as held-for-sale
These assets comprise the LDFU assets of the discontinued operations. All interest income on these
loans has been suspended. During the course of the year, one of the LDFU clients was liquidated and the
bank has since received proceeds of R8.0 million in relation to the matter. The bank continues to
negotiate settlements with concerned parties.
The net assets of the portfolio have since declined to R144.2 million (2011: R153.9 million) owing mainly
to the liquidation proceeds.
The directors’ valuation of R200.3 million (2011: R215.6 million), based on valuations done by
independent professional valuators, is determined with reference to the net realisable values of
underlying securities.
Derivative financial instruments
2012 2011 Variance
2012
Rm Rm
Interest rate swaps
Assets - 6.9 (100%)
Liabilities 15.4 21.7 29%
Interest rate swaps are used to manage the interest rate mismatches between fixed and floating interest
rates applicable to assets and liabilities.
Intangible assets
The value of intangible assets at the end of the financial year was R54.6 million (2011: R58.0 million).
Initially measured at cost, the values of intangible assets are subsequently reduced by accumulated
amortization and any accumulated impairment losses. During the course of the year amortisation costs
amounted to R13.1 million while new additions and developments amounted to R9.7 million (2011: R21.4
million). Over the past two years the bank has been assessing its ICT capacity and addressing
shortcomings identified.
Investment properties
Investment properties consist of owned office buildings and property held for rental income. For the year
under review, the value of these properties increased to R74.0 million (2011: R42.6 million) owing mainly
to the increase in fair value of the portfolio. The bank realised fair value gains of R27.8 million compared
to the losses of R1.4 million reported in the prior year. During the same period, R3.7 million worth of
properties classified under property and equipment were reclassified to investment properties.
Property and equipment
The net carrying value of property and equipment decreased by R5.0 million (4.3%) to R108.7 million
(2011: R113.7 million) as at the end of the current financial year. Additions during the course of the year
amounted to R5.3 million while disposals were R9.4 million. Reclassifications and net revaluation
surpluses amounted to R3.7 million and R1.9 million respectively.
Capital and reserves
In order to address the financial challenges associated with the development mandate, the bank obtained
a convertible guarantee of R3.5 billion from the National Treasury. The first tranche of R1.0 billion was
received in December 2009 with subsequent receipts of R750.0 million in FY2011 and FY2012. Post year
end (April 2012) R200.0 million was received from the National Treasury reducing the balance of the
convertible guarantee to R800.0 million. The transfers from Government, together with internally
generated profit since FY2009 have contributed significantly towards the growth in capital and reserves.
The bank`s Capital adequacy ratio has declined significantly from 42.6% in the previous financial year to
30.1% for the current year. This is attributable to the growth in funding liabilities in response to the funding
requirements of the loan book which grew in excess of 50%. However, the 30.1% still compares
favourably to the target set by National Treasury as per the terms of guarantee.
Funding liabilities
The bank funds itself by participating in the open market through the issuance of debentures, promissory
notes, floating rate notes, call bonds and bills. Total funding liabilities increased by R6.0 billion (50.4%) to
R17.9 billion (2011: R11.9 billion). The increase is in response to the significant growth in the loan book.
During FY2012, the bank successfully issued a floating rate note (LBK02) to the value of R500.0 million
and increased the short term promissory notes to R15.2 billion (2011: R9.2 billion). The perceived image
of the bank has improved significantly in the market culminating in a diversified investor base and
reasonably priced funding costs. This has also resulted in a more palatable refinancing risk and
operational stability.
Provisions
Provisions increased by R25.7 million from R389.1 million in the prior year to R414.8 million. Additional
provisions raised amounted to R105.4 million while utilisations and reversals in the year amounted to
R64.9 million and R14.7 million respectively. Included in the additional provisions raised are costs relating
to administration fees claims, legal fees on legacy matters and on-going commercial transactions as well
as staff related costs which contributed R20.2million, R10.3 million and R65.9 million respectively to the
increase in provisions.
Segmental review
2012 2011 Variance
2012
Rm Rm
Net operating
income/ (loss)
Business & Corporate Banking 165.0 10.1 +100%
Retail Commercial Banking 32.8 269.0 (+100%)
Retail Emerging Markets (3.7) - (+100%)
Group Capital (17.0) *(48.5) 65.0%
177.1 230.6 (23.2%)
Non-trading and capital items 23.0 37.6 (38.8%)
Indirect taxation (23.5) (26.8) 12.3%
Net Profit from continuing
176.6 *241.4 (26.7%)
operations
* Restated - The restatement relates to a valuation error identified post the FY2011 year-end on a funding liability instrument
(floating rate note) that had been understated by R22.7 million and the profit overstated by the same amount.
Business & Corporate Banking (B&CB)
The Business & Corporate Banking division provides mostly wholesale funding to agricultural
cooperatives and/or businesses, which in many instances then on-lend funds to their customer base. The
division operates through offices in Cape Town and Pretoria. The Business & Corporate Banking book is
highly concentrated towards short-term funding with 78% of the book in the short term maturity bracket.
Highlights
• Operating expenses increased by 27%
• Performing book increased by 61%
• Total collections on loans in arrears for the year amounts to R255.1 million.
Business & Corporate Banking review2
2012 2011 Variance
2012
Rm Rm
Net interest income 200.5 123.8 62%
Net impairment charges (7.7) (96.6) 92%
Non-interest (expense)/ income (1.7) 3.5 (+100%)
Operating income 191.1 30.7 +100%
Operating expenses including
(26.1) (20.6) (27%)
depreciation and amortisation
Net operating income 165.0 10.1 +100%
Net operating income increased in excess of 100% to R165.0 million when compared to the R10.1 million
reported in the previous financial year. Despite depressed interest margins, the net interest income
increased by 62%, owing to the significant growth in the loan book experienced during FY2012. Due to
the nature of their clients and the tight competition in the market, the Business & Corporate Banking
division normally has thin margins. This segment of the market is perceived to be low risk hence most
players in the industry target it. Through sustainable strategic initiatives, the bank has managed to claw
back a significant portion of the market previously lost to competitors making it a force to be reckoned
with in the industry.
The bank has also managed to contain cost of funding within affordable levels through its continued
diversification of investors and the repayment of expensive funding instruments whenever possible.
The Business & Corporate Banking performing loan book increased by R6.5 billion to R17.3 billion. This
translates to growth of 60.8% when compared to the R10.8 billion performing loan book reported in the
previous financial year. This significant growth was achieved, amongst others through the acquisition of
an existing loan book from one of the Agri-businesses in the industry. The bank will continue to assess
and explore similar opportunities with other players in order to continue growing its market share.
Collections in the period under review amounted to R255.1 million (2011: R144.7 million) whilst
nonperforming loans declined by R130.1 million from R657.7 million in FY2011 to R527.6 million in
FY2012.
Retail Commercial Banking (RCB)
The Retail Commercial Banking division operates through a network of 27 Agricultural Finance Centres
(AFCs). The network of AFCs operates across all the provinces in the country in order to ensure the
target market is well serviced. Retail Commercial Banking provides funding to both commercial and
development clients with the commercial side focusing on the small to medium companies as well as
those farmers that have progressed from the development stage.
During the FY2012 financial year, loans amounting to R1.4 billion were approved and R1.2 billion
disbursed. Collections on loans in arrears amounted to R353.0 million (2011: R332.1 million) representing
an increase of 6.3% in collections when compared to the prior year.
Highlights
• Operating income declined by 52%*
• Operating expenses increased by 9%
• Loan book growth of R640.8 million, or 17%
• R353.1 million collected from outstanding arrears.
* When adjusted for the once off impairment releases of R218.9 million, the decline in operating income is
2%
Retail review
2012 2011 Variance
2012
Rm Rm
Net interest income 172.3 175.0 (2%)
Net impairment releases 13.7 221.7 (+100%)
Non-interest income 19.7 31.5 (38%)
Operating income 205.7 428.1 (52%)
Operating expenses including
(172.9) (159.1) (9%)
depreciation and amortisation
Net operating income 32.8 269.0 *(88%)
* When adjusted for the once off impairment releases of R218.9 million,the decline in net operating income is 34.5%
Net operating income decreased from R269.0 million in the prior year to R32.8 million in the year under
review. In FY2011, the division`s profit was significantly driven by impairment releases amounting to
R218.9 million. When excluding these once off impairment releases (R137.5 million Government
guarantee and R81.4 million LGD) for the prior year, the net operating income decreased by R17.3 million
(34.5%) from R50.1 million in FY2011.
The gross loan book increased by R640.8 million in FY2012 when compared to the prior financial year.
For the same period, net loans and advances increased by R746.2 million representing a 22.9% increase.
This is reflective of a stable and growing business unit that has managed to implement appropriate
strategies focusing on sustainability.
Performing loans increased by R765.3 million (26.8%) to R3.6 billion when compared to the R2.9 billion
reported in FY2011, whilst non-performing loans declined from R1.0 billion to R901.4 million, mainly on
the back of continued focus on collection efforts. The management of non-performing loans remains a
priority as evidenced by the decline.
Development
Ensuring that development is at the core of the Land Bank’s operations, the bank launched the
Retail Emerging Markets (REM) division in FY2011. REM caters for emerging farmers that would
ordinarily not be able to secure access to funds from conventional financial markets. In order to mitigate
the risk associated with this market segment, the bank adopted a wholesale financing model which has
seen various controls and support mechanisms put in place in order to enhance the success rate of this
target market.
Total disbursements under the development loan book portfolio amounted to R752.2 million, which is
reflective of the bank’s commitment to its development mandate. This surpasses the corporate plan target
for FY2012 by R302 million (67.1%) that had been set at R450.0 million. REM contributed R101.7 million,
whilst RCB and B&CB contributed R122.4 million and R528.1 million respectively.
Group Capital
Group Capital provides support services to the operating business units of the bank and comprises of the
following support units: Treasury, Finance, Risk and Internal Audit, Information Technology, Strategy, HR,
CEO Office as well as Legal and Board Secretariat. Group Capital is the custodian of the bank’s capital
and manages its capital, cash and funding requirements through the Treasury Unit. Funding is provided
to the RCB, REM and B&CB divisions through an internal transfer pricing model.
Highlights
• Capital adequacy declined to 30.1% (2011:42.6%)
• R750.0 million received as third tranche of recapitalisation
• Successful launch of LBK02 floating rate note of R500.0 million
• Increased investor diversity
• Stabilised cost of funding
• Liquidity optimised.
Group capital review
2012 2011 Variance
2012
Rm Rm
Net interest income 301.5 212.3 42%
Non-interest income 12.9 17.1 (25%)
Operating income 314.4 229.4 37%
Other income 13.0 *19.0 (32%)
Operating expenses including
(344.4) (297.0) (16%)
depreciation and amortisation
Net operating loss (17.0) *(48.5) 65%
* Restated - The restatement relates to a valuation error identified post the FY2011 year-end on a funding liability instrument floating
rate note)that had been understated by R22.7 million and the profit overstated by the same amount.
Group Capital`s net operating loss improved from R48.5 million in FY2011 to a loss of R17.0 million.The
major contributor to the reduced loss was the growth in net interest income which increased by 42.0%.
This helped offset the increase in operating expenses of 16%. Depreciation and amortization costs
increased to R20.9 million from R9.7 million reported in FY2011 as a result of ICT projects that were
capitalised during the year.
Insurance operations (LBIC)
Salient features
2012 2011 Variance
2012
Rm Rm
Gross premium income 183.9 213.7 (14%)
Net premium 50.1 *70.7 (29%)
Operating expenses (19.8) (12.7) (56%)
Underwriting loss (26.2) *(25.0) (5%)
Investment income 80.6 112.8 (29%)
Net profit 54.4 *87.8 (38%)
Investments 893.2 971.5 (8%)
* Restated - The restatement relates to accounting errors identified post the FY2011 year-end. The overall effect of the estatements
is not material.
Total net profit for the year amounted to R54.4 million,which translates to a R33.4 million (38%) decrease
when compared to the profit of R87.8 million profit recorded in the FY2011. The decrease in profit is
mainly attributable to lower investment income realised in uncertain markets and the reduction in asset
portfolio due to a dividend payment of R100.0 million to the holding company, the Land Bank. Investment
income of R80.6 million declined by 29% from R112.8 million reported in the previous financial year.
The underwriting loss of R26.2 million compares unfavourably to the R25.0 million loss achieved in the
prior year. The deterioration is mainly attributable to a 29% reduction in net earned premium and a 56%
increase in operating expenses, despite a 46% decrease in net claims incurred.
Gross premium income
2012 2011 Variance
202012 Rm Rm
Long-term insurance contracts 9.3 9.6 (3%)
Short-term insurance contracts 174.6 204.1 (15%)
Total 183.9 213.7 (14%)
12
Gross premium income decreased by R29.8 million (14%), from R213.7 million in FY2011 to R183.9
million in the current financial year, primarily as a result of a decrease in the number of short term
insurance contracts written which amounted to 2,909contracts compared to 4,035 contracts written in the
previous year.
Operating expenses
Operating expenses increased by R7.1 million (56%) mainly as a result of an increase in investment
management fees of R2.2 million (59%). In addition, the performance fee accrual for investment
managers amounted to R5.6million (2011: R0.1 million) at year end.
Operating costs were allocated to short and longterm insurance business on a proportionate basis which
is consistent with the prior year. Commission and administration costs are disclosed as part of
underwriting results in the statement of comprehensive income and are not included as operating
expenditure. A memorandum of agreement was concluded between LBIC and its holding company, the
Land Bank, which specifies the cost structure in respect of administration activities and support services.
Investments
As at 31 March 2012, LBIC had an investment book of R893.2 million (2011: R971.5 million) which
realised an investment return of 7.1% net of fees (2011: 12.6%)
The annual financial statements for the year ended 31 March 2012
Statement of Financial Position
As at 31 March 2012
Group Bank
Restated1 1
Restated Restated1 Restated1
2012 2011 2010 2012 2011 2010
Note R'000 R'000 R'000 R'000 R'000 R'000
Assets
Cash and cash equivalents 3 1,941,406 2,087,520 1,934,823 1,787,081 2,003,899 1,923,138
Trade and other receivables 4 300,062 181,956 140,224 228,745 189,166 47,922
Short-term insurance assets 5 81,375 101,736 64,618
Repurchase agreements 6 6,032 - 14,779 6,032 - 14,779
Non-current assets held-for-sale 7 15,465 53,383 30,803 15,465 53,383 30,803
Investments 8 1,140,694 1,199,335 1,073,879 247,535 227,862 211,200
Loans and advances 9 21,555,645 14,299,153 12,294,424 21,555,645 14,299,153 12,294,424
Assets of disposal group
10 144,239 153,890 153,898 144,239 153,890 153,898
classified as held-for-sale
Derivative financial instruments 11 - 6,855 15,149 - 6,855 15,149
Long-term insurance assets 17 1,764 729 1,748
Intangible assets 12 54,594 58,002 4,600 54,594 58,002 4,600
Investment properties 13 74,000 42,620 110,890 74,000 42,620 110,890
Property and equipment 14 108,903 113,675 116,178 108,749 113,675 116,178
? ?
Total assets 25,424,179 18,298,854 15,956,013 24,222,085 17,148,505 14,922,981
? ?
Equity and liabilities
? ?
Capital and reserves ? ?
5,630,849 4,719,464 3,707,756 4,830,675 3,873,723 2,899,826
Distributable reserves 15
5,518,606 4,611,952 3,586,043 4,718,432 3,766,211 2,778,113
Non-distributable reserve 15
112,243 107,512 121,713 112,243 107,512 121,713
? ?
Liabilities
? ?
Trade and other payables 16 367,684 206,516 182,526 116,113 83,337 95,422
Short-term insurance liabilities 5 102,940 134,939 90,819
Derivative financial instruments 11 15,421 21,673 21,649 15,421 21,673 21,649
Long-term policyholders'
17 46,805 45,447 46,171
liabilities
Funding liabilities 18 17,864,948 11,877,749 10,661,930 17,864,948 11,877,749 10,661,930
Provisions 19 415,432 390,175 416,227 414,828 389,132 415,219
Post-retirement obligation 20 261,154 218,844 190,149 261,154 218,844 190,149
Liabilities directly associated
with the assets classified as 21 718,946 684,047 638,786 718,946 684,047 638,786
held-for-sale
Total equity and liabilities 25,424,179 18,298,854 15,956,013 24,222,085 17,148,505 14,922,981
1
Certain numbers reported above do not correspond to the 2011 and 2010 annual financial statements and reflect prior period error adjustments made as detailed
in Note 37 to the annual financial statements
Statement of Comprehensive Income
for the year ended 31 March 2012
Group Bank
1 1
Restated Restated
2012 2011 2012 2011
Note R'000 R'000 R'000 R'000
Continuing operations
Net interest income 676,040 511,148 673,100 511,146
Interest income 22 1,498,791 1,305,020 1,495,851 1,305,018
Interest expense 23 (822,751) (793,872) (822,751) (793,872)
Net impairment releases, claims and
3,595 125,059 3,595 125,059
recoveries 9.4
Total income from lending activities 679,635 636,207 676,695 636,205
Non-interest income 24 30,857 52,011 31,557 52,711
Operating income from banking activities 710,492 688,218 708,252 688,916
Operating loss from insurance activities 25 (5,691) (11,588)
Investment income 26 103,462 143,405 125,767 80,572
Fair value losses 27 (12,693) (11,541) (12,693) (11,541)
Operating income 795,570 808,494 821,326 757,947
Operating expenses 28 (563,228) (489,324) (543,467) (476,638)
Net operating income 232,342 319,170 277,859 281,309
Non-trading and capital items 29 23,035 37,556 23,035 37,556
Net profit before indirect taxation 255,377 356,726 300,894 318,865
Indirect taxation 30 (23,598) (26,879) (23,548) (26,829)
Net profit from continuing operations 231,779 329,847 277,346 292,036
Discontinued operations
Net loss from discontinued operations 21 (44,550) (45,267) (44,550) (45,267)
Profit for the year 187,229 284,580 232,796 246,769
Other comprehensive income 2
Actuarial loss on the post-retirement medical
(30,575) (21,369) (30,575) (21,369)
aid liability
Revaluation of land and buildings 4,731 1,797 4,731 1,797
Total other comprehensive loss for the year (25,844) (19,572) (25,844) (19,572)
Total comprehensive income for the year 161,385 265,008 206,952 227,197
1
Certain numbers reported above do not correspond to the 2011 annual financial statements and reflect prior period error adjustments made as detailed in n
2
Other comprehensive income are gross of tax. The Group is exempt from income tax in terms of sections 10(1)(cA)(ii) of the Income Tax Act, 58 of 1962.
Statement of Changes in Equity
for the year ended 31 March 2012
General Insurance Contingency Revaluation Discontinued
Capital Fund Total
Reserve Reserve Reserve Reserve operations
R'000 R'000 R'000 R'000 R'000
Group R'000 R'000
Restated Balance at 31 March
1,900,955 1,362,048 803,717 4,213 121,713 (484,890) 3,707,756
2010 1
At 1 April 2010 1,900,955 1,362,048 803,717 4,213 121,713 (484,890) 3,707,756
Profit/ (loss) for the year - 264,799 86,138 - - (45,267) 305,670
Other comprehensive (loss)/ income - (21,369) - - 1,797 - (19,572)
Total comprehensive income/ (loss) 1,900,955 1,605,478 889,855 4,213 123,510 (530,157) 3,993,854
Recapitalisation by National
746,700 - - - - - 746,700
Treasury
Reversal of revaluation surplus on
- 15,998 - - (15,998) - -
buildings sold
Transfer to the contingency reserve - - (1,264) 1,264 - - -
Balance at 31 March 2011 2,647,655 1,621,476 888,591 5,477 107,512 (530,157) 4,740,554
At 1 April 2011 2,647,655 1,621,476 888,591 5,477 107,512 (530,157) 4,740,554
Prior period error 2 - (22,763) - - - - (22,763)
Restatements 1 - - 1,762 (89) - - 1,673
Restated opening balance 2,647,655 1,598,713 890,353 5,388 107,512 (530,157) 4,719,464
Profit/ (loss) for the year - 17,346 54,433 - - (44,550) 187,229
Other comprehensive (loss)/ income - (30,575) - - 4,731 - (25,844)
Total comprehensive income/ (loss) 2,647,655 1,745,484 944,786 5,388 112,243 (574,707) 4,880,849
Recapitalisation by National
750,000 - - - - - 750,000
Treasury
Balance at 31 March 2012 3,397,655 1,745,484 944,786 5,388 112,243 (574,707) 5,630,849
1
Refer to note 37 for an explanation on the LBIC restatements
2
Refer to note 37 no 8 for an explanation on the prior period error.
General Revaluation Discontinued
Capital Fund Total
Reserve Reserve operations
R'000 R'000 R'000 R'000 R'000
Bank
Balance at 31 March 2010 1,900,955 1,362,048 121,713 (484,890) 2,899,826
At 1 April 2010 1,900,955 1,362,048 121,713 (484,890) 2,899,826
Profit/ (loss) for the year - 314,799 - (45,267) 269,532
Other comprehensive (loss)/ income - (21,369) 1,797 - (19,572)
Total comprehensive income/ (loss) 1,900,955 1,655,478 123,510 (530,157) 3,149,786
Recapitalisation by National
746,700 - - - 746,700
Treasury
Reversal of revaluation surplus on
- 15,988 (15,998) - -
buildings sold
Balance at 31 March 2011 2,647,655 1,671,476 107,512 (530,157) 3,896,486
At 1 April 2011 2,647,655 1,671,476 107,512 (530,157) 3,896,486
2
Prior period error - (22,763) - - (22,763)
Restated opening balance 2,647,655 1,648,713 107,512 (530,157) 3,873,723
Profit/ (loss) for the year - 277,346 - (44,550) 232,796
Other comprehensive (loss)/ income - (30,575) 4,731 - (25,844)
Total comprehensive income/ (loss) 2,647,655 1,895,484 112,243 (574,707) 4,080,675
Recapitalisation by National
750,000 - - - 750,000
Treasury
Balance at 31 March 2012 3,397,655 1,895,484 112,243 (574,707) 4,830,675
2
Refer to note 37 no 8 for an explanation on the prior period error.
Statement of Cash Flows
for the year ended 31 March 2012 Group Bank
1
Restated Restated1
2012 2011 2012 2011
Note R'000 R'000 R'000 R'000
Net profit from continuing operations2 201,204 358,478 246,771 270,667
Net loss from discontinued operations (44,550) (45,267) (44,550) (45,267)
156,654 313,211 202,221 225,400
Adjustment to reconcile profit to net cash flows
Non-cash items: 806,305 637,935 778,239 751,058
Interest expense 23 822,751 793,872 822,751 793,872
Fair value movement of financial instruments 26, 27 (46,321) (87,982) (3,882) (10,717)
Dividend income 26 (17,939) (15,967) (104,600) (3,823)
Interest income 26 (29,449) (27,916) (4,592) (4,491)
Depreciation and impairment of property and 14 10,517 7,762 10,458 7,762
equipment
Write-off of obsolete assets on property and
14 - 205 - 205
equipment
Fair value adjustments (properties in possession) 29 (27,752) 1,360 (27,752) 1,360
Amortisation and impairment of intangibles 12 13,132 (32,047) 13,132 (32,047)
Fair value movement in policyholders' liabilities 17 (195) (324)
Fair value adjustment on non-current assets held- (899) 11,202 (899) 11,202
for-sale 7, 29
Adjustment of revaluation reserve 29 (163) (32) (163) (32)
Movement in provisions 19 34,534 (26,052) 25,697 (26,087)
Movement in post-retirement obligation 20 42,310 28,695 42,310 28,695
Loss on disposal of property and equipment 29 636 (19,481) 636 (19,481)
Loss on disposal of properties in possession 29 5,154 4,644 5,154 4,644
Impairment of other assets 29 (11) (4) (11) (4)
Working capital adjustments: 5,103 39,879 (6,803) (103,329)
(Increase)/decrease in trade and other receivables 4 (68,107) (40,893) (39,579) (91,244)
Increase/(decrease) in trade and other payables 16 52,331 73,770 32,776 (12,085)
Increase in short-term insurance liability 5 1,553 44,820
Decrease/(increase) in short-term insurance assets 5 19,326 (37,818)
Cash flows from operating activities 968,062 991,025 973,657 873,129
Cash flows from operations (8,069,592) (2,798,593) (8,069,592) (2,798,593)
Interest paid 23 (822,751) (793,872) (822,751) (793,872)
Increase in funding to clients 9 (7,246,841) (2,004,721) (7,246,841) (2,004,721)
Cash flow from investing activities 154,273 (20,291) 77,974 25,669
Proceeds from disposal of property and equipment 14 26 6,927 26 6,927
Purchase of property and equipment 14 (5,278) (8,128) (5,278) (8,128)
Additions to intangible assets 12 (8,031) (21,355) (8,031) (21,355)
Proceeds from sale of non-current assets held-for- 7 3,525 38,828 3,525 38,828
sale
Purchase of non current assets held-for-sale 7 - (2,200) - (2,200)
Dividend Income - - 100,000 -
Proceeds from sale of financial instruments 176,299 11,597 - 11,597
Purchase of financial instruments (12,268) (45,960) (12,268) -
Cash flow from financing activities 6,801,143 1,980,556 6,801,143 1,980,556
Increase in funding 18 6,051,143 1,233,856 6,051,143 1,233,856
Capital injection from shareholder 750,000 746,700 750,000 746,700
Net increase/ (decrease) in cash and cash (146,114) 152,697 (216,818) 80,761
equivalents
Cash and cash equivalents at beginning of year 2,087,520 1,934,823 2,003,899 1,923,138
Cash and cash equivalents at end of year 3 1,941,406 2,087,520 1,787,081 2,003,899
1
Certain numbers reported above do not correspond to the 2011 annual financial statements and reflect prior period error adjustments made as detailed in note 37 of
the annual financial statements.
2
Includes other comprehensive income.
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