A Case Study on Land Bank

University of Mindanao Digos College

In Fulfillment of the Course Fin8b - Investment and Portfolio Management

Presented to

Ms. Kate Fernandez, CPA

Presented by

Jerad Mislos

John Christopher Remolleno

Petal Marie Pagas

Anthony Romero

August 2019
Abstract:

This is an overview of President Duterte threatens to shut down the government bank in his
4th SONA, saying it's acting more like a commercial bank instead of focusing on farmers and
fishermen. The President threatened to shut down the bank’s operations. “You are supposed to
finance agricultural enterprises and endeavors. Bakit wala? (Why is there none?) Why can't you just
buy a few wagons or whatever? Go to the countryside and ask the people if there are
cooperatives, tulungan ninyo (help them) to form one,” he said in his speech.

Introduction:

In Duterte’s 4th SONA, in jest, he called Landbank the “number one” commercial bank in the
Philippines. “You know, you are called Land Bank but you are now the number one commercial bank
in the Philippines. What the heck is happening to you?” Duterte said a little over the one-hour-and-
20-minute mark into his speech.

While Landbank is not the leading bank in the Philippines, based on 5 metrics, it is included in the
Bangko Sentral ng Pilipinas’ (BSP) top 10 rankings of universal/commercial banks as of March
2019: assets, stockholder’s equity, deposits, loans, and return on equity.

Created the Land Bank of the Philippines (LBP) to finance the acquisition and distribution of
agricultural estates for division and resale to small landholders as well as the purchase of the
landholding by the agricultural lessee;

Authorized capitalization of 1.5 billion. Initial capital of 200 million.

Tax exempt on all operations, holdings, equipment, property, income and earnings.

Exempted from cash or stock dividend payments to the National Government.

Agricultural Credit Administration (ACA) responsible for extending credit assistance to farmers
cooperatives and directly to small farmers.
Presentation:

MANILA, Philippines – In President Rodrigo Duterte’s 4th State of the Nation Address (SONA) on
July 22, the firebrand president called out the Land Bank of the Philippines (Landbank) for not
providing financial assistance to their number one priority: farmers and fisherfolk.

Since its creation in 1963, Landbank has emerged as one of the biggest banks in the country. Here are
some fast facts about the government bank.

1. Landbank’s creation and primary function

Landbank was formed under Republic Act 3844 or the Agricultural Land Reform Codein August
1963. The main function of the bank is to be the financing agency for the government’s acquisition of
agricultural estates for division and resale to small landholders, as well as the purchase of the land-
holding by the agricultural lessee.

2. It was eventually granted universal banking powers in 1973

Ten years after its creation, Landbank was granted universal or expanded commercial banking
powers through Presidential Decree 251 to remedy the bank’s “deficient and inadequate”
capitalization and organization structure. Former president Ferdinand Marcos cited the bank’s failure
to meet the requirements of the agrarian reform program, so he included granting short-, medium-
and long-term loans to agricultural, industrial, home-building projects, and other productive
enterprises to Landbank’s powers.

In 1977, the bank underwent a major reorganization and formed 3 main sectors: agrarian, banking,
and operations. Today, Landbank’s role is not limited to the provision of credit assistance to farmers
and fisherfolk. It is also an implementing agency of the Comprehensive Agrarian Reform Program, as
well as an official depository of government funds.

As of July 2019, Landbank has a total of 401 branches and 2,046 automated teller
machines nationwide.
Meanwhile, the bank’s return on equity ratio stands at 13.25% – only the 8th highest out of the 45
universal/commercial banks listed by the BSP. Return on equity is a known measure of profitability
and of how well the company generates income growth by utilizing the equity investments of its
shareholders.

3. The Duterte administration stopped the Landbank-Development Bank of the Philippines

Former president Benigno “Noynoy” Aquino III signed and approved the proposed merger of the two
government banks in February 2016 through Executive Order No. 198. Under this EO, Landbank was
supposed to be the surviving entity between the two banks.

EO 198’s goal was to increase Landbank’s capital stock to P200 billion from P25 billion and to
strengthen the financial capabilities of both banks while avoiding unnecessary overlaps of their
respective functions.

However, the new administration stopped the merger in September 2016, led by the Governance
Commission for Government-Owned and -Controlled Corporations (GCG). Finance Secretary Carlos
Dominguez III pointed out that the two banks serve different functions: Landbank for the agriculture
sector, and DBP, for industry.

4. Landbank’s loan portfolio and its compliance with the Agri-Agra Law

Under the Republic Act 10000 or the Agri-Agra Reform Credit Act, banks are mandated to allot 25%
of their loan portfolios for agriculture and fisheries – 10% for agrarian reform projects and 15% for
agriculture.

Landbank's First Vice President for Corporate Affairs Catherine Rowena Villanueva said the
combined loans extended to the agriculture sector and the its mandated sector, which includes
agrarian reform beneficiaries and their associations as well as small farmers, reached 27.45% of the
bank’s total loan portfolio of P799.64 billion as of June 30, 2019.
Data from BSP show that the compliance of universal and commercial banks are way below the
minimum amount required, with total compliance for agrarian reform credit only reaching 1.01% of
its minimum required amount as of end-March 2019, and only 13.27% for agricultural credit.

But Villanueva said Landbank remains to be the biggest lender to the sector. "While growth of the
agriculture sector remained stagnant for the past 10 years, averaging only 1.11%, Landbank's loans to
the sector continued to increase at an average of 10.94%," she added.

Economist and former socioeconomic planning secretary Cielito Habito argued that Duterte's
scolding is "misplaced" since Landbank is expected to be profitable just like other commercial banks
and is still subject to the same rules imposed by the BSP.

Landbank also reported in the 1st quarter of 2019 that its loans to the agricultural sector grew 12%
year-on-year to P13 billion. This covers 128,496 small farmers and fishermen.

Outcomes:

ACA#1:

Triple lending to farmers and fishermen.

ACA#2:

Conclusion: ACA#

We therefore conclude that the ACA#1 is the best solution. The new Landbank President Alex
Buenaventura said in a statement on Sunday, December 25, that to accomplish this goal, he will
initiate a "re-engineering" of the credit facilities for small stakeholders in the agriculture sector, and
encourage them to enter into "corporatives."

Under his proposal, a corporation would be formed to manage the consolidated farms of small
farmers who wish to take part in the corporative. The corporation would be owned 40% by Landbank
and 60% by participating commercial banks.
According to new Landbank chief, the farmers would provide the manpower to keep their lands
profitable. Buenaventura said that under his proposal, 99% of the corporation’s earnings would be
distributed to the participating farmers "pro-rata according to their respective land ownership," while
1% would be declared as dividends of the corporate owners.

He explained that part of the proposal is to enable commercial banks taking part in the corporative to
fulfill their part under the Agri-Agra Law of allotting 15% of their total loanable funds for farmers
and fishermen, and another 10% for agrarian reform beneficiaries, rather than pay fines for failing to
comply with the law’s requirements.

He added that this corporative approach eventually aims to make small Filipino farmers globally
competitive and among the most productive and profitable in Asia. "We will work on tripling loans to
small farmers and fishers to P115 billion by 2022, or in the next 6 years," he added.

Buenaventura said the possible cash crops that farmers can plant under the corporative are palm oil,
rubber, banana, coconut, cacao, and abaca, which have high export potentials.

The scheme will also work for palay farmers who could face new challenges in 2017, with the
possible lifting of the quantitative restrictions on rice in 2017.

Buenaventura said the previous contract growing arrangements only allowed big farmers to have
access to bank loans, shutting out small stakeholders in the farm sector.

Under the setup, the DAR will identify the lands owned by small farmers that can be formed into
corporatives cultivating rice, sugar, and banana.

While the OPAPP will pilot palm oil corporatives in the Autonomous Region in Muslim Mindanao
and in conflict-affected areas in Mindanao.

Buenaventura proposed that the labor department will provide additional livelihood opportunities for
farmers, while the Department of the Interior and Local Government could assist in convincing local
government units to waive the unpaid real property taxes of farmers.

Buenaventura said that loans to the agriculture sector stood at P37.9 billion as of September 2016,
representing only 8.2% of its total loan portfolio of P482 billion.

Given Landbank's high growth performance as shown by the net increase in its income from P4.1
billion in 2006 to P10.3 billion as of September this year, "it is in a very good position to further
expand its services, reach and support especially to its mandated sector, the farmers and fishers,"
Buenaventura said.

References:

https://www.rappler.com/newsbreak/iq/236622-things-to-know-about-landbank

https://www.landbank.com/history