Development Bank financials indicate core stability, but high risks remain

The Development Bank of South Africa (DBSA) received a clean audit report from the Auditor-General (AG) for the financial year ended March 31, 2021.

Operating income, per the statement of comprehensive income, amounted to R3.9 billion (2020: R5.5 billion).

Its net profit for the year increased to R1.4 billion (2020: R504 million). Total comprehensive income, after adjustments for gains/losses on unrealised and cash flow hedges, and other minor adjustments, was R1.6 billion for the year (2020: R405 million).

Total development funding amounted to R84 billion (2020: R87.5 billion), and interest income calculated at the effective interest rate came to R8.2 billion (2020: R8 billion).

Read: Can DBSA assist in SA’s infrastructure-led recovery?

Total debt raised amounted to R58.5 billion (2020: R60.5 billion), and total interest expense on financial liabilities, calculated using the effective interest rate, came to R3.3 billion (2020: R3.4 billion).

Development funding (Rm)
	2021	2020
Development loans held at fair value through profit or loss – gross	99.6	99.9
Movement for the year	-0.3
Fair value movement	-82.7	-77.5
	16.8	22.4
Development bonds at amortised cost – gross	1 290.2	1 290.9
Provision for expected credit losses (ECL)	-11.0	-2.6
	1 279.2	1 288.3
Development loans at amortised cost – beginning of the year	96 425.6	82 012.3
Movements during the year	-2 327.4	14 413.4
Gross development loans	94 098.2	96 425.7
Provision for expected credit losses (ECL)	-11 364.8	-10 185.4
	82 733.4	86 240.3
Net balance of development funding as at March 31, 2021	84 029.4	87 551.0

The sectoral allocation included development loans (after the movements during the year but before ECL) granted to:

• Energy and electricity – R49.2 billion (2020: R51.5 billion);
• Roads and drainage – R14.3 billion (2020: R14.4 billion); and
• Communication and transport – R11.3 billion (2020: R11.8 billion).

The geographic allocation included Gauteng, which received R43.6 billion (2020: R42.1 billion), and the ‘rest of Africa’ which received R25.7 billion (2020: R28.9 billion). Zambia, Ghana and Angola were the prime beneficiaries.

Local government received R29.2 billion (2020: R25.9 billion), public utilities R29 billion (2020: R35.2 billion), and private sector intermediaries R28.2 billion (2020: R29.9 billion).

The DBSA provided further clarification to Moneyweb: “The DBSA provides financing in the form of equity, senior and mezzanine debt for balance sheet lending and project financing structures. Our client base includes municipalities in South Africa, the private sector, SOEs [state-owned entities], sovereigns and public-private partnerships (PPPs) across the continent.”

Equity investments held at fair value through profit and loss (Rm)
Balance at April 1, 2020	5 994.0
Acquisitions	102.1
Capital return	-235.7
Current year fair value adjustment	-348.8
Foreign exchange unrealised loss	-618.9
Realised gain on equity investments and foreign exchange adjustment	114.8
Balance at March 31, 2021	5 007.5

The DBSA does not provide a detailed breakdown of equity investments.

Infrastructure Fund

The Infrastructure Fund was established in 2019 to “facilitate the financial structuring, procurement and implementation of priority blended-finance projects and programmes”.

A Memorandum of Agreement was signed in August 2020 between the Department of Public Works and Infrastructure, Infrastructure South Africa, National Treasury and the DBSA for a period of 10 years ending August 2030.

Read: DBSA to increase infrastructure delivery support to municipalities

The DBSA and Treasury will each contribute 50% towards the operating costs of the Infrastructure Fund for the first five years of the agreement.

The value of projects committed through the Infrastructure Fund is expected to be in the region of R3.7 billion.

Allegations of serious corruption

The minutes of the Standing Committee on Public Accounts (Scopa) meeting on June 1, 2021 provides details of allegations of serious corruption in regard to the Cranbrook Group: the total amount of the group’s outstanding loans allegedly amounted to R426 million, and the bank allegedly approved the write-off of interest according to the in duplum rule, and wrote off R259 million.

The DBSA responded to Moneyweb’s enquiry as follows:

“The loans to three borrowers that form part of the Cranbrook Group were made between 2007 and 2009 in accordance and in full compliance with the credit processes applicable at the time.

“In 2020, the DBSA’s Audit and Risk Committee requested an audit and legal investigation into loans made to the Cranbrook Group between 2007 and 2009. The Bank’s Internal Audit along with an external legal firm, led this investigation. The process was concluded in February 2021 and the findings were presented to the DBSA’s Board.

“The findings outlined in the report confirmed that the loans to the three borrowers that form part of the Cranbrook Group, made between 2007 and 2009, were compliant with the credit processes applicable at the time. It is also important to note that the accounting write-off of in-duplum interest amounts does not amount to a waiver of rights of recovery against a client.”

The DBSA’s full response to Moneyweb’s questions can be viewed here.

Liquidity

Meanwhile, the bank’s assets of R100 billion (2019: R100.5 billion) outstrip the liabilities of R60.9 billion (2019: R62.9 billion).

The loans considered to be high risk (see Note 42.13 to the annual financial statements) amounted to R24.7 billion (26.2 %), compared to R18.9 billion (19.6%) in its 2020 financial year.

Investment securities, held to balance the bank’s liquidity requirements, were sold, reducing the balance to R0.5 billion (2020: R1.8 billion).

Financial market liabilities of R21.2 billion were repaid (2020: R19.5 billion), and further financial market liabilities of R23.5 billion (2020: R25.4 billion) were raised. The financial year ended with a positive cash and cash equivalent balance of R9 billion (2020: R3.5 billion).

Dual mandate

The bank balances the dual mandate of achieving development impact and financial sustainability. The Covid-19 pandemic significantly impacted the economy, and the accounting for the development loans, development bonds and equity investments was “significantly impacted by the complexity and uncertainty resulting from the fallout”.

The DBSA reported that the risks facing the bank from credit risk, the increase in infections and continual lockdowns emanating from the Covid-19 pandemic, cyber risk, liquidity risk, and reputation risk, remain high.