Land Bank’s hard landing
The Land Bank has already been downgraded to junk status. We asked acting CEO Sydney Soundy what the ramifications of this move will be
As SA waits for ratings agency Moody’s to swing the axe — or not — the Land Bank has already been downgraded to junk status. We asked acting CEO Sydney Soundy what the ramifications of this move will be.
SS: To give you context: we are a development finance institution and so our responsibility goes beyond maximisation of profit.
In addition to that we also operate in a concentrated sector. So we don’t have the same level of diversification of other financial institutions.
In other words, if one sector is going through a bad patch they can shift their focus to other, better-performing sectors. We are stuck in agriculture and we’ve been badly hit by climate impacts, in particular the drought in the North West, Free State and Eastern Cape. In that regard we’ve had a nonperforming loan book. It’s not out of kilter in terms of our covenants, but it is becoming a concern for us as well as the ratings agencies.
FM: Your nonperforming loans, at 9.9%, are much higher than the commercial banks’. Is that to be expected?
SS: We can’t grow the book as much as we wanted to, which [then means] the levels of nonperforming loans against your loan book [looks] high.
FM: Will this downgrade not drive up the cost of capital and make it harder for you to lend?
SS: The bank gets its funding from the capital markets including multilateral investors like the World Bank and the European Investment Bank. Depending on their own internal policies, they might reprice some of the facilities once we’ve repaid and we need those facilities to be rolled over.
We’re sitting with about R42bn of loans, to advance about R44bn to customers.
Relative to other state-owned entities we would not see ourselves anywhere close to being a fiscal guzzler
FM: So you’re saying this will not result in a credit crunch in the agricultural sector?
SS: Depending on how the market reacts, and we’ve engaged so far with most of the investors — they understand the strength of the fundamentals of the organisation. Relative to other state-owned entities we would not see ourselves anywhere close to being a fiscal guzzler. But if we were to take a worst-case scenario where some of the investors are saying "Hey, we don’t like this investment and we’re taking our money away", that might cause a short-term liquidity challenge, in which case we’d require assistance. But we don’t see investors pulling out.
FM: Does this downgrade mean you’ll become another leech on the state?
SS: Well, we are owned by the government. So when the bank requires some form of support to navigate through particular challenges it always has to look to the shareholder. You haven’t seen us requiring any particular bailout but … we get [support] from the state. For example, we do have guarantees which we utilise to raise funding in the market.
FM: How important is the Land Bank to SA agriculture?
SS: The Land Bank has a market share of 28%. So it’s a significant part of the sector.
FM: How about expropriation without compensation — the fear that this will be badly mismanaged is rising again with the ANC’s intention to cut out the courts in deciding on whether the state will pay for land it takes.
SS: We made our submissions to the relevant committees and haven’t made any submissions in this round. We think that this has already been accommodated … into the assessment of risk for players like ourselves. Moody’s has raised it as a potential risk and we can’t downplay it.
FM: But farmers are clearly losing confidence if you consider what has happened to the price of farms.
SS: Anything that potentially can destroy value is risky. And the pronouncements that we’ve had are at the political level and not necessarily at the state level. You know, the state and the political party — even though it’s the ruling party — are two different things and the president in particular has always said we will do things in a responsible way. I accept your observation that farmers are anxious. But we’ve had those commitments from the head of the state and I don’t know how much more we can get in that regard.
FM: One of the reasons Moody’s downgraded you is that you’ve had no permanent CEO for a long time. Why not?
SS: Our understanding from the board is that the hold-up was in relation to recommendations between themselves and the shareholder. All I know is that recommendations were made in October, November, and it was to go to the cabinet for approval, and it appears that that was not discussed by parliament last year. The next cabinet meeting is in February and hopefully the position can be [filled] then.