Audit Woes at South Africa’s Land Bank Has Bondholder Worried

Gaps in the financial statements of South Africa’s state-owned agricultural bank are a concern for creditors already fretting over the slow progress in turning the lender around.

The Auditor General issued a disclaimer over the Land and Agricultural Development Bank of Southern Africa’s annual results, citing a lack of evidence to reach a conclusive audit. The lender needs a 7-billion rand ($468-million) government bailout to ease a cash crunch, keep operating and enable it to take on new clients and meet existing customers’ full needs.

“The big worry for a lending institution is the disclaimer that is linked to inappropriate audit evidence,” Olga Constantatos, head of credit at Futuregrowth Asset Management, said by phone. “That points to a lack of record keeping, lack of internal controls around the model for loans, for impairments charges.”

Auditors are questioning the viability of one of the largest provider of loans to South African farmers after the Land Bank’s full-year loss widened, costs soared and its non-performing loans ratio almost doubled, the Pretoria-based lender said on Dec. 31. The National Treasury has said it will address the rescue when it tables the annual budget in February.

South Africa’s finances have been stretched by constant support to money-losing state-owned companies, a drop in tax income and a wage bill that has jumped 40% over the past 12 years.

The Land Bank is starting to address findings by the auditor general, which included weak internal controls, irregular expenditure and concerns over whether expected credit losses were appropriately accounted for, it said.

The lender has filled key vacancies, such as the chief financial officer, chief risk officer and general manager of finance, strategy and planning after resignations in these areas caused a “loss of corporate memory,” which was worsened by poor record keeping.

While asset managers and other creditors have been in constant communication with the lender and government, progress has been too slow and the situation seems to be worsening, Constantatos said.

“It could be worse than the numbers are showing or it could be better,” she said. “The disclaimed opinion means we actually just don’t know. That’s a big worry for us.”

While Treasury has previously said it will not allow Land Bank to fail, what remains to be seen is whether it is able to provide the funding the lender needs on time and in full, said Jones Gondo, a credit research analyst at Nedbank Group Ltd.

“Without the extraordinary government support, Land Bank is not financially viable,” he said.

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