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Development Bank reliant on raising new debt to fund liabilities

Would you invest in this entity?

The Development Bank of SA (DBSA) has funded development loans granted to external parties with debt.

To be specific, 67.2% (2018: 71.3%) of the net development loans granted (after impairment) have been funded with debt.

DBSA’s total debt liability amounts to R51 billion (2018: R53.5 billion). In my view, the DBSA will have to continue to raise new debt in order to fund its liabilities.

The cash flow statement illustrates its reliance on raising new debt.

Cash flow

R’000

2019

2018

Net cash generated from operating activities

3 796 777

4 039 466

Net cash generated from/(used in) development activities

1 216 652

-5 606 062

 Net cash generated/(used by) investing activities

-345 238

-444 179

Exchange rate movements

29 478

-90 272

Gross financial market liabilities repaid

-18 618 727

-15 504 634

Negative cash position before new debt raised

-13 921 058

-17 605 681

Gross financial market liabilities raised

13 102 081

19 048 287

 

-818 977

1 442 606

Brought forward from the beginning of the year

3 741 853

2 299 247

Cash and cash equivalents at the end of the year

2 922 876

3 741 853

Would you invest in the DBSA?

Total comprehensive income for the year is R3.1 billion (2018: R2.3 billion). This represents a 3.4% return on the total assets (2018: 2.6%).

The permanent government funding (treated as equity hence no interest or repayments) is R11.7 billion (R11.7 billion).

The biggest risk is that the DBSA is burdened with debt:

R’000

2019

2018

 

IFRS 9

IAS 39

Debt funding (FVPL) *

6 469 451

6 473 055

Debt funding held at amortised cost

44 516 190

33 363 703

Lines of credit

 

13 677 213

 

50 985 641

53 513 971

Total assets

89 488 409

89 211 946

Debt funding as a % of total assets

56.97%

59.99%

* Fair value through profit and loss

Interest payments were R3.8 billion (R3.6 billion).

It is unlikely that the DBSA will be able to start weaning itself off raising new debt in the foreseeable future.

Investments

The DBSA aspires to “building Africa’s prosperity” and has a “footprint across much of sub-Saharan Africa”, with “developmental partnerships spanning the globe”.

Keeping this up requires sustainability.

The DBSA has provided the following funding to external parties:

1. Development loans

Development loans granted amount to R82 billion (2018: R79.9 billion). This represents 91.65% of the total assets (2018: 89.53%). The provision for expected credit losses is R6.2 billion (2018: R4.8 billion). The provision constitutes 6.92% of total assets (2018: 5.41%).

R’000

2019

2018

Gross development loans

82 012 250

79 870 646

Provision for expected credit loss (ECL)*

-6 195 744

-4 823 167

 

75 816 506

75 047 479

Impairment rate

7.55%

6.04%

* Note 13.9 in financial statements

Interest accrued is R7.7 billion (2018: R7.2 billion). Interest received per the cash flow statement is R8.2 billion (R7.5 billion).

Gauteng received R36.7 billion (2018: R37.6 billion) and the rest of Africa received R20.6 billion (2018: R17 billion), while R47.4 billion (2018: R46.7 billion) went into energy, and R12.4 billion went into roads and drainage. The ECL has not been disclosed.

2. Investment securities

The DBSA holds R1.9 billion in bonds (2018: R1.4 billion). It earned interest of R38.2 million (2018: R41.3 million). In other words, the rate of return was 2.03% (2018: 2.91%).

3. Equity investments

The DBSA holds R5.9 billion in equity investments (2018: R5.5 billion).

No disclosure is provided, other than:

  • Geographical – R1.9 billion in South Africa (2018: R2.1 billion) and R4 billion in Africa (2018: R3.4 billion).
  • Sectoral infrastructure – commercial at R3.3 billion (2018: R2.8 billion), institutional at R0.8 billion (2018: R0.7 billion), and residential at R1.8 billion (2018: R2 billion).

Notable expenses

Notable expenses were:

R’000

2019

2018

Consulting fees

22 946

18 607

Information technology costs

45 802

43 056

Legal expenses

11 164

16 905

Public relations activities

29 793

15 965

Subsistence and travel

51 946

42 487

 

161 651

137 020

The salaries and emoluments of the top brass amounted to:

R’000

Salary, travel, other

Performance bonus

Retention bonus

Total 2019

Total 2018

Executive directors

9 397

2 250

4 888

16 535

9 549

Executive managers

24 351

5 096

9 963

39 410

39 244

Non-executive directors

9 753

   

9 753

8 677

 

43 501

7 346

14 851

65 698

57 470

An unqualified audit report is not a gold star

The DBSA received an unqualified audit report, and had zero fruitless and wasteful expenditure. This should be a given, not a cause for celebration.

An unqualified audit report does not constitute a forensic report, nor a gold star for excellent financial management.

If the government is going to be serious about reining in rampant expenditure in state-owned entities (SOEs) and stopping the bleed, it should learn something about governance and control.

As South Africa’s total debt-to-GDP ratio edges towards 70%, government should be concerned that one of its major SOEs is reliant on raising new debt to cover its liabilities.

Finance Minister Tito Mboweni spoke of SOEs becoming self-reliant, and cutting down on expenditure. Perhaps we can all learn something from how he implements this in the DBSA.

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COMMENTS   4

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This is, after all, a bank. How would you expect it to be funded ? Do you think the big 4 commercial banks are about to collapse because they’re funded mostly by deposits ?

The debt equity ratio of about 1.4 : 1 is pretty conservative by banking standards, I’m not sure what the development bank norm would be.

Where do you get 38.2m for interest on government bonds ? Note 28 has 149m.

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