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FINANCIAL INSTITUTIONS

CREDIT OPINION28 March 2018

Update

RATINGS

Land and Agricultural Development BankDomicile South Africa

Long Term Rating Baa3

Type LT Issuer Rating - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

ConstantinosKypreos

+357.2569.3009

Senior Vice [email protected]

Antypas Asfour, CFA +357.2569.3033Associate [email protected]

Nondas Nicolaides +357.2569.3006VP-Sr Credit [email protected]

Jean-FrancoisTremblay

+44.20.7772.5653

Associate [email protected]

Carola Schuler [email protected]

Land and Agricultural Development BankUpdate following rating confirmation at Baa3; outlook stable

SummaryWe assign Baa3/Prime-3 issuer ratings to Land and Agricultural Development Bank (LandBank), which reflects the application of our rating methodology for government-relatedissuers and the following inputs: (1) Land Bank’s standalone credit profile of ba3, (2) SouthAfrica's Baa3 bond rating, (3) the very high probability of government support for Land Bank,and (4) a very high default dependence. We also assign Aa1.za/P-1.za national-scale issuerratings.

Land Bank’s standalone credit profile (derived using the Finance Companies ratingmethodology) of ba3 reflects the still challenging operating environment, resulting inelevated credit risks, despite non-performing loans (NPLs) declining slightly to 5.8% of grossloans as of September 2017. These risks are balanced against the bank's capital buffers, withan equity-to-assets ratio of 14.3% as of September 2017, which can absorb some unexpectedlosses. Over recent years, Land Bank has taken steps to improve its funding structure byextending maturities and diversifying its funding sources. Nonetheless, the bank's reliance onshort-term funding, with around 49% of total funding maturing within 12 months, remainsrelatively high, albeit on a declining trend. At the same time, plans for strong balance sheetgrowth will require Land Bank to find new funding sources in an environment where thecapital and debt markets remain volatile.

Land Bank’s issuer rating of Baa3 is three notches above its stand-alone credit profile ofba3, and incorporates (1) our assumption of a very high probability of government support,underpinned by the bank's government ownership, its development mandate and thegovernment's ongoing capital and funding support; (2) South Africa's Baa3 governmentbond rating, which acts as the anchor for potential support to the bank; and (3) the very highdefault dependence, which reflects the strong probability that, in the event of a sovereigncredit default, the risk of a potential financial crisis affecting the bank would be very high.

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1111591

https://www.moodys.com/credit-ratings/Land-and-Agricultural-Development-Bank-credit-rating-600069636

https://www.moodys.com/credit-ratings/South-Africa-Government-of-credit-rating-686830

https://www.moodys.com/credit-ratings/South-Africa-Government-of-credit-rating-686830

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Land Bank's government ownership, policy mandate and the resulting very high probability of government support underpin itsissuer ratings.

» The bank's capital buffers provide some loss-absorption capacity.

» The bank maintains a leading franchise in the agricultural sector and is well placed to benefit from the sector’s growth potential.

Credit challenges

» Elevated credit risks, with the loan book overwhelmingly exposed to the volatile agricultural sector and operating conditions stillchallenging

» Challenges in finding new funding sources and extending maturities, in light of its high, although declining, reliance on short-term market funding and projected strong balance sheet growth (though current funding pipeline remains strong, according tomanagement)

Rating outlookThe stable outlook assigned to Land Bank is predominantly driven by the stable outlook assigned to the sovereign rating. It balancesLand Bank's capital buffers and assumptions that government support will be forthcoming in case of need, against its high asset risksand projections for strong balance sheet growth that will require it to raise significant new funding.

Factors that could lead to an upgrade

» A positive rating action will require a significant improvement in macro-economic conditions, also leading to an improvement in thesovereign credit profile; Land Bank will also need to strengthen its asset quality metrics and capital buffers.

Factors that could lead to a downgrade

» Any weakening of the South African government's credit profile and/or willingness to support Land Bank, or any significantdeterioration in its capacity to extend financial support, could negatively affect its issuer ratings. In addition, a weakening of LandBank's stand-alone credit profile, driven by a deterioration in asset quality and capital buffers, would likely exert downward ratingspressure.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 28 March 2018 Land and Agricultural Development Bank: Update following rating confirmation at Baa3; outlook stable


Key indicators

Exhibit 1

LAND AND AGRICULTURAL DEVELOPMENT BANK OF SOUTH AF (Consolidated Financials) [1]3-172 3-162 3-152 3-142 3-132 CAGR/Avg.3

Total managed assets (ZAR thousand) 45,747,009 41,941,414 38,939,106 37,924,212 31,898,858 9.44

Total managed assets (USD thousand) 3,411,728 2,851,606 3,213,792 3,605,683 3,452,743 -0.34

Pretax Preprovision profits / Average Managed Assets (%) 1.1 0.9 1.8 1.4 1.1 1.35

Net Income / Average Managed Assets (%) 0.8 0.4 0.8 1.0 0.9 0.85

ROE (%) 5.5 3.4 5.1 5.2 4.5 4.75

Short Term Debt / Total Debt (%) 66.8 70.7 68.6 74.4 89.5 74.05

Tangible Common Equity (Finance) / Tangible Managed Assets (%) 14.3 15.3 14.8 20.3 22.0 17.45

Effective Leverage (%) 565.2 516.7 535.5 366.6 328.2 462.55

Problem Loans / Gross Loans (Finance) (%) 7.1 8.8 3.7 3.2 5.0 5.65

Problem Loans / (Shareholders' Equity + Loan Loss Reserve) (Finance) (%) 34.0 37.4 16.1 13.0 17.8 23.75

Net Charge-Offs / Gross Loans (%) 1.0 0.4 0.1 0.3 0.2 0.45

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] IFRS [3] May include rounding differences due to scale of reported amounts [4] Compound Annual GrowthRate (%) based on time period presented for the latest accounting regime [5] Simple average of periods presented for the latest accounting regime.Source: Moody's Financial Metrics

ProfileLand and Agricultural Development Bank of South Africa is a government-owned development finance institution. The bank commandsa market share of around 30% in lending to the agricultural sector. The bank is the government’s key delivery agency in the agriculturalsector, aiming to create jobs, reduce poverty and strengthen sustainable economic performance. Land Bank reported total assets ofZAR45.5 billion as of September 2017.

Detailed credit considerationsLand Bank maintains a leading franchise in the agricultural sector and is well placed to benefit from the sector's growthpotential...Land Bank is a government-owned entity, operating as a development finance institution within the full agricultural value chain. Thismandate has allowed the bank to build a strong franchise and expertise in lending to the agricultural sector, being the government’skey delivery agency in the agricultural sector, aiming to create jobs, reduce poverty and strengthen sustainable economic performance.The bank commands a market share of around 30% in lending to the agricultural sector and is well placed to take advantage of thegrowth opportunities within the sector.

Land Bank's government ownership and close co-operation with the National Treasury has allowed the bank to benefit fromoperational and financial support. Additionally, the finalisation of a comprehensive organisational review has led to improvements inthe bank's business model, processes and operational efficiencies. However, the bank’s franchise strength is constrained by its monolinestatus, which exposes it to significant concentration risks.

In respect of Land Bank's governance structure, the National Treasury remains its executive authority, which also appoints anindependent board of directors. The Credit and Investment Committee consists of an independent non-executive chairman and fourindividual non-executive members, with credit decisions now requiring a two-thirds majority; a policy on lending to politically exposedpersons has also been approved by the board.

...but the still challenging operating environment poses risksDespite our expectations that the recovery in the country's institutions – on the back of a more transparent and predictable policyframework – will gradually support a corresponding recovery in the economy, operating conditions still remain challenging. Morespecifically, South Africa's economic strength is hindered by relatively low average incomes, wide income disparities, while for 2018and 2019 we forecast a GDP growth of just 1.4% and 1.9% respectively, levels well-below potential and the rate required to createnew jobs. To add to the above problems, a drought attributed to the onset of an El Niño event exacerbated output challenges inagriculture and other water-dependent sectors, while the government's policy agenda contains elements that have the potential tocreate tensions, such as the still-to-be agreed land appropriation without compensation initiative.



The challenging operating conditions have hurt the performance of financial institutions, with government-owned institutions with adevelopment mandate also being affected, given the expectation to show a more social and flexible approach in dealing with troubledcustomers. Notwithstanding the above, the agricultural sector, especially the grain and livestocks subsectors, presented a remarkablerecovery following good rains during the summer of 2017. However, large sections of the horticultural subsector remain under pressurebecause of continuing drought in certain areas of the Western, Northern and Eastern Cape.

Land Bank faces elevated credit risksAs of March 2017, Land Bank's NPLs were 7.1% of gross loans, with an additional 9.2% of gross loans classified as underperforming, withthe entity already adopting IFRS9. Despite the fact that management has recently announced a reduction in the NPL ratio to 5.8% asof September 2017, we expect Land Bank to face elevated credit risks because of the still subdued economic growth. Similarly, droughtrelief assistance provided by Land Bank, including the restructuring/capitalisation of installments due and the extension of repaymentperiods, will exacerbate asset-quality issues in case weather conditions do not continue to improve and extend to Western, Northernand Eastern Cape.

Asset-quality pressures could also be exacerbated by Land Bank’s high credit concentrations (with the top 10 exposures estimatedto account for over 160% of the bank’s capital), while we understand that the bank has taken a strategic decision to focus more ondevelopmental rather than commercial projects, which have historically proved to be more risky. Another source of risk is the generallylow level of provisioning coverage, with specific provisions at 26% of NPLs, while the coverage for underperforming loans stood at34%; management maintains, however, that the balance is covered by collateral.

Exhibit 2

Credit risks remain elevated despite improved asset quality

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

0%

50%

100%

150%

200%

250%

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Sep-17

Loan Loss Reserves / Problem Loans (lhs) Problem Loans / Gross Loans (rhs)

Sources: Moody's Financial Metrics, Land Bank's financials

Set against these risks, there is some optimism about a better agricultural season and a gradual recovery in economic growth, whichimplies that any deterioration in asset quality could be muted. Also, around half of the bank's portfolio is dispersed to agriculturalco-operative organisations — in the form of service level agreements — which include risk-sharing agreements with the individualco-operatives. Improved risk management capabilities, including the implementation of a new model, with credit risk-related toolsintegrated in the credit (origination) process through to credit approval, should also support a more robust calculation of probability ofdefault, loss given default and IFRS9 impairments.

Land Bank also maintains a modest earnings-generating capacity, impaired by a still-high cost base, rising funding costs and elevatedprovisioning requirements. For the six months ended September 2017, the bank reported net profit of ZAR57.3 million, which translatesinto a return on equity of around 2%. We expect broadly stable profitability metrics, given the still challenging operating conditions,and the bank's development mandate and expectations of higher funding costs.

Capital buffers provide some loss-absorption capacityAs of September 2017, Land Bank held consolidated capital and reserves of ZAR6.5 billion, equivalent to 14.3% of its total assets. Suchcapital buffers provide some protection against unforeseen losses, although they are materially reduced from ZAR7.6 billion reported



in March 2015. The drop in consolidated capital and reserves over the past two years is primarily owing to a restatement of generalreserves, which were reduced by ZAR1.7 billion as a result of the early adoption of IFRS9.

Exhibit 3

Capital buffers, although reduced, provide a loss-absorption buffer

0%

Mar-14 Mar-15 Mar-16 Mar-17

40%

60%

80%

100%

120%

otal Assets Tangible Common Equity / Total Assets

40%

60%

80%

100%

120%

otal Assets Tangible Common Equity / Total Assets

0%

5%

10%

15%

20%

25%

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Sep-17

Shareholders' Equity / Total Assets Tangible Common Equity / Total Assets

Sources: Moody's Financial Metrics, Land Bank's financials

Land Bank has also adopted the Basel II standardised approach to determine the amount of capital needed to ensure solvency andliquidity, and has targeted a minimum capital adequacy ratio of 15% (also included in loan covenants). The bank's total capitaladequacy ratio stood at 17.3% as of September 2017. The bank's capitalisation ratios incorporate a ZAR1.5 billion capital guaranteefrom the government.

In future, and if the bank pursues a stronger balance sheet growth strategy in an effort to deepen its developmental impact, we believeit will require additional capital. The shareholders have historically been injecting new capital on an ongoing basis, but large fiscaldeficits and other government priorities may require Land Bank's management to also pursue other options, such as the issuance of asubordinated instrument that would classify as capital or revise down its growth projections.

Challenges in finding new funding sources and extending maturities in light of the bank's high, although declining, relianceon short-term market funding and projected aggressive balance sheet growthLand Bank has historically raised funding from (1) the local capital markets, primarily as part of its outstanding ZAR30 billion domesticmedium-term note programme; (2) local institutional investors; and (3) related parties, such as the Public Investment Corporation. Thebank has also raised funding from multilateral development institutions (for example, a $300 million 10-year facility from StandardChartered [and backed by a MIGA guarantee], $93 million 25-year funding from the World Bank and a 10-year KfW loan have beenrecently concluded). Land Bank also has approved, but not utilised, lines from local banks, and maintains a contingency plan in case itsusual sources of funding become unavailable; this includes potentially selling part of its loan portfolio or re-adjusting its growth targets.Land Bank has also adopted the Basel liquidity coverage ratio (340% as of September 2017) and net stable funding ratio (107% as ofSeptember 2017), albeit with certain Board approved deviations from the regulations to cater for the Bank's unique business model.

However, Land Bank faces a number of challenges, primarily relating to the high portion of existing funding (around 56% as of March2017) that matures within the next 12 months and its dependence on related-party lending or lending that is backed by a governmentguarantee (currently at around ZAR5 billion). The bank is, however, committed to reducing its reliance on short-term funding andhas already reported that short-term funding declined to 49% of the total as of September 2017. In addition, Land Bank has formallyapproached the Public Investment Corporation to reschedule part of its short-term debt into longer-dated term debt while a number ofnew funding agreements are currently under negotiation.

Plans for strong balance sheet growth will require Land Bank to find new funding sources at a time when it remains vulnerable topotential risk aversion by institutional investors. The bank has navigated through past market turmoil, but any event that adverselyaffects investor confidence could still jeopardise its capacity to further lengthen and diversify its funding sources, while also leading tohigher funding costs.



Government ownership, policy mandate and the resulting very high probability of government support underpin the issuerratingLand Bank’s Baa3 issuer rating is underpinned by a very high probability of government support on the back of its governmentownership via the National Treasury. The bank is regulated by the Public Finance Management Act and the Land Bank Act, andsubmits a corporate plan to the National Treasury, which also documents the key performance measures and targets against whichorganisational performance is assessed. The government's track record of supporting both the capital and funding positions of the bank,as well as the lack of any legal barriers for the bank's timely support, also informs our support assumptions. Land Bank’s crucial role inthe development of South Africa's agriculture sector, including acting as a financial intermediary for smaller farmers with limited accessto bank funding, which is considered one of the cornerstones of South Africa’s economy, according to the National Development Plan,provides further support to the rating.

National-scale ratingsLand Bank’s Aa1.za long-term and P-1.za short-term South African national-scale ratings are derived from its global-scale issuer ratings.The ratings demonstrate that Land Bank remains one of the strongest credits in the country, primarily reflecting its close links with thegovernment and our assessment of a very high probability of support, in case of need.

Source of facts and figures in this reportUnless noted otherwise, we have sourced data relating to systemwide trends and market shares from the central bank. Bank-specificfigures originate from banks' reports and Moody's Banking Financial Metrics. All figures are based on our own chart of accounts andmay be adjusted for analytical purposes. Please refer to the document Financial Statement Adjustments in the Analysis of FinancialInstitutions, published on 13 June 2017.


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1073055

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1073055


Rating methodology and scorecard factors

Exhibit 4

Land and Agricultural Development Bank of South Africa

Rating Factors Aa/A Baa Ba B Caa Historical View Forward View

Non-Financial Factors Ba Ba

Factor: Franchise Positioning Ba Ba

- Market Position and Sustainability x

- Operational Diversification x

Factor: Risk Positioning Ba Ba

- Potential Volatility of Assets/Cashflows x

- Governance and Management Quality x

- Risk Management [1] x

- Key Relationship Concentrations x

- Liquidity Management x

Factor: Operating Environment [2] Ba Ba

- Economic Strength x

- Institutional Strength x

- Susceptibility to Event Risk x

Financial Factors B B

Factor: Profitability Ba Ba

- PPI / AMA 1.27%

- Net Income / AMA 0.69%

- Pre-tax Income Coefficient of Variation 20.66%

Factor: Liquidity B B

- 24 Month Coverage Ratio 9.46%

- Secured Debt / Gross Tangible Assets 0.11%

Factor: Capital Adequacy Baa Baa

Capital Bucket: Traditional Finance Company

- TCE / TMA 14.30%

Factor: Asset Quality Caa B

- Problem Loans / Gross Loans 6.54%

- Problem Loans / (Shareholders Equity + LLR) 29.18%

Scorecard estimated stand-alone credit

assessment:B1 Ba3

Assigned stand-alone credit profile: Ba3

Government-Related Issuer Factor

a) Standalone Credit Profile ba3

b) Government Local Currency Rating Baa3, STA

c) Default Dependence Very High

d) Support Very High

e) Final Rating Outcome Baa3, STA

[1] Capped at Ba; The risk management sub factor score will not exceed the weighted average of scores assigned to a firm's other risk positioning sub-factor scores.[2] Capped at Ba; The operating environment score will not exceed the weighted average of scores assigned to a firm's other non-financial factors.Source: Moody's Financial Metrics



Ratings

Exhibit 5Category Moody's RatingLAND AND AGRICULTURAL DEVELOPMENT BANK

Outlook StableIssuer Rating Baa3NSR Issuer Rating Aa1.zaST Issuer Rating P-3NSR ST Issuer Rating P-1.za

Source: Moody's Investors Service



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