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Investec (comprising Investec plc and Investec Limited) – pre-close briefing statement
Investec Limited Investec plc
Incorporated in the Republic of South Africa Incorporated in England and Wales
Registration number 1925/002833/06 Registration number 3633621
JSE share code: INL LSE share code: INVP
NSX share code: IVD JSE share code: INP
BSE share code: INVESTEC ISIN: GB00B17BBQ50
ISIN: ZAE000081949
Investec (comprising Investec plc and Investec Limited) – pre-close briefing statement
16 September 2016
Investec is today hosting an investor pre-close briefing at 9:00 (BST time) (10:00 South
African time) which will focus on developments within the group’s core business areas in the
first half of the financial year ending 31 March 2017.
Financial overview of the six months ending 30 September 2016
The first half of the group’s financial year continued to see high levels of macro uncertainty in
its key operating geographies.
Against this backdrop, the Asset Management and Wealth & Investment divisions are
expected to report results comfortably ahead of the prior year. Both divisions have benefitted
from higher levels of average funds under management supported by a recovery in equity
markets and net inflows.
The Specialist Banking businesses are expected to report results behind the prior year; albeit
that both geographies continued to experience reasonable activity levels. The UK Specialist
Banking business is expected to report results behind the prior year largely due to increased
investment spend, whilst the South African Specialist Banking business is expected to report
results behind the prior year as a consequence of the formation of Investec Equity Partners
which resulted in a change in accounting policy from fair value to equity accounting.
Overall group results have been marginally impacted by the depreciation of the average Rand
against Sterling exchange rate of approximately 3% over the period.
Taking into account the above mentioned factors, operating profit (refer to definition in the
notes) is expected to be slightly behind the prior year; albeit well ahead of 2H2016.
Salient financial features include:
- Revenue (net of depreciation on operating leased assets) is expected to be ahead of the
prior year
- Recurring income as a percentage of total operating income is expected to be in line with
the prior year
- Impairments are expected to be in line with the prior year
- Expenses are expected to grow faster than revenue as a consequence of investment into
growth initiatives and related infrastructure
- For the period 31 March 2016 to 31 August 2016:
o Third party assets under management increased 13.3% to GBP137.9 billion – an
increase of 10.0% on a currency neutral basis
o Customer accounts (deposits) increased 12.7% to GBP27.1 billion – an increase
of 7.2% on a currency neutral basis
o Core loans and advances increased 10.5% to GBP20.0 billion – an increase of
3.8% on a currency neutral basis
On behalf of the board
Fani Titi (Chairman), Stephen Koseff (Chief Executive Officer) and Bernard Kantor (Managing
Director)
Liquidity and capital management
- The group has continued to diversify and improve the quality of its funding sources
- The group defensively increased cash balances in anticipation of the EU referendum and
remains very liquid
- Net interest margins have remained broadly stable
- Cash balances remain strong. Currently the group holds GBP13.0 billion in cash and near
cash balances (GBP6.9 billion (R128.0 billion) in Investec Limited and GBP6.1 billion in
Investec plc) which amounts to 48.0% of customer deposits
- Advances as a percentage of customer deposits at 30 August 2016 was 72.1%
(31 March 2016: 73.6%)
- For the six months to 30 September 2016 for both Investec plc and Investec Limited:
o Capital ratios are expected to be within the group’s target total capital adequacy
range
o The common equity tier 1 ratio is expected to remain slightly below the group’s
target of 10% for Investec Limited; Investec plc is expected to be ahead of this
target
o Leverage ratios are sound and remain comfortably ahead of the group’s target of
6% on an estimated Basel 3 fully loaded basis.
Asset quality and impairment trends
- The total income statement impairment charge is expected to be in line with the prior year
- Impairments on the UK legacy portfolio continue to decline
- Impairments in South Africa are expected to be ahead of the prior year although the credit
loss ratio remains at the lower end of our long term range
- The group expects the credit loss ratio on total average core loans and advances to be
approximately 0.48% to 0.53% (March 2016: 0.62%; September 2015: 0.54%).
Business commentary
Salient features of the operating performance of the group’s core business areas are listed
below and further details will be provided in the briefing presentation which can be viewed on
the group’s website.
Asset Management
- Positive net inflows of approximately GBP1.1 billion to end of August 2016
- Assets under management and earnings positively impacted by market and currency
movements and higher performance fees
- Stable, experienced staff complement and leadership team
- Competitive long-term investment performance
- Since 31 March 2016 assets under management have increased by 14.8% to GBP86.9
billion.
Wealth & Investment
- Performing ahead of the prior year
o Higher average funds under management
o Net inflows of GBP0.5 billion to the end of August 2016
- Investment expenditure on digital offering continues
- Since 31 March 2016 assets under management have increased by 11.0% to GBP50.4
billion.
Specialist Banking
- The Ongoing Specialist Banking business is expected to post results behind the prior
year
- In summary key aspects include:
o Net interest income
- Net interest increase in the South African business driven by strong book
growth in the 2016 financial year
- Net interest in the UK business negatively impacted by higher
redemptions in the prior period partially offset by strong book growth in
the 2016 financial year.
o Net fees and commissions
- Private client transactional and professional finance activities benefitting
from growth in client base
- Good performance from the South African corporate and property fund
businesses
- Good performance from the UK and Other corporate and advisory
businesses
o Investment, trading and other operating income
- Investment income is expected to be behind the prior year
- Weaker performance from the Hong Kong portfolio
- Prior period included gains from the UK fixed income portfolio and high
realisations from the formation of Investec Equity Partners
- Customer flow trading income increased
- Other operating income now includes equity accounted earnings from
Investec Equity Partners
o Costs
- South Africa is expected to report a decrease in costs as a consequence
of non-recurring costs and equity accounting of Investec Equity Partners
- Costs in the UK business have increased largely due to investment in the
private bank and corporate platforms, and increased headcount to
support growth in the business
o Information on the UK Specialist Banking legacy business:
- The Legacy business is expected to report a smaller loss than the prior
year as a result of an overall reduction in both impairments and costs
- Total legacy portfolio assets are expected to decline to GBP538 million
(31 March 2016: GBP583 million).
Impacts arising from Brexit
While the referendum result is clear, there remains uncertainty as to how and when this might
be implemented. While we cannot predict the impact of Brexit on levels of economic activity,
our diversified business model with multiple income streams should provide resilience as it
has done in the past during times of economic uncertainty. We have significant excess
liquidity and sound capital ratios which continue to support our underlying balance sheet
fundamentals.
Taking the above comments into account, the current impact arising from Brexit on the
group’s UK businesses can be summarised as follows:
Asset Management and Wealth & Investment
- Equity market indices have been favourable, positively impacting funds under
management
- Limited impact on net inflows
- Wealth & Investment is largely a UK domiciled business and net flows are marginally
below the 5% target
o Investec Asset Management:
- The UK fund range is distributed predominantly within the UK and is not
currently registered for sale in Europe
- The Luxembourg fund range is distributed to all other regions (i.e. the
rest of Europe and globally), and managed by a Luxembourg domiciled
entity
Specialist Banking business
- Activity levels appear to be stable, although economic growth is expected to decline
- The group deliberately increased its surplus liquidity ahead of the referendum which
needs to be actively managed
- The bank has limited proprietary trading positions, with the majority of trading
transactions undertaken to support customer flow related activity
- Asset quality metrics remain sound
- Property exposures (excluding legacy book) are well collateralised and servicing from
consistent cash flows. Imminent defaults are not expected in this portfolio but underlying
exposures are being regularly monitored
- The main property portfolios can be assessed as follows:
o Commercial property book: approximately GBP890 million
- Approximately 65% of the portfolio is in the UK (largely London and
Home Counties). Of the non-UK portion the majority of the exposure is in
Germany and Switzerland
- The book is income producing supported by leases with good quality
tenants that provide consistent cash flows
- Average loan to value is approximately 70%
- Average loan size is generally less than GBP10 million
- In addition to the property security value and lease cash flow streams,
personal guarantees from principals are held
- The gross default percentage on the current book is 0% (approximately
4% in 2011)
o High net worth and high income residential mortgages: approximately GBP1.2
billion
- Lending to high income and high net worth clients who have strong
income streams, and who exhibit an ability to earn income through
economic cycles
- Largely London and Home Counties
- Average loan to value is approximately 50%
- Average loan size is just over GBP1 million
- Gross defaults are approximately GBP13 million
o Residential development book: approximately GBP320 million
- Focused on target clients with lending in established areas (London and
the South East)
- Average loan to value is approximately 55%
- Recourse to principal and high level of cash equity contributions into
transactions
- Gross defaults are approximately GBP3 million
o Legacy book: expected to be approximately GBP538 million at 30 September
2016
- Approximately 25% of the book is in default, with the balance performing
- Impairments have decreased although a loss is still expected to be
reported on this book
- Book may take longer to wind down than expected.
Other information
Additional aspects
- Effective tax rate: expected to be approximately 18% to 19%
- Net non-controlling interests of approximately GBP27 million (profits attributable) relating
to the Asset Management business and the consolidation of the Property Fund
- Weighted number of shares in issue for the six months to 30 September 2016 is expected
to be approximately 895 million.
- Notes:
1. Key trends set out above, unless stated otherwise, relate to the five months ended
31 August 2016, and compare the first half of the 2017 financial year (1H2017) to the
first half of the 2016 financial year (1H2016).
2. The financial information on which this statement is based has not been reviewed and
reported on by the group’s auditors.
3. References to operating profit relate to adjusted operating profit, where adjusted
operating profit refers to net profit before tax, goodwill, acquired intangibles and non-
operating items but after adjusting for earnings attributable to other non-controlling
interests and before non-controlling interests relating to Asset Management. Trends
within the divisional sections relate to adjusted operating profit before group costs.
4. Amounts represented on a currency neutral basis for balance sheet items assume
that the group’s relevant closing exchange rates, as reflected below, remain the same
as at 31 August 2016 when compared to 31 March 2016.
5. Please note that matters discussed in the briefing and highlighted above may contain
forward looking statements which are subject to various risks and uncertainties and
other factors, including, but not limited to:
– the further development of standards and interpretations under International
Financial Reporting Standards (IFRS) applicable to past, current and future
periods, evolving practices with regard to the interpretation and application of
standards under IFRS
– domestic and global economic and business conditions
– market related risks.
• A number of these factors are beyond the group’s control.
• These factors may cause the group’s actual future results, performance or
achievements in the markets in which it operates to differ from those expressed or
implied.
• Any forward looking statements made are based on the knowledge of the group at
16 September 2016.
6. The group’s reporting currency is Pounds Sterling. Certain of the group’s operations
are conducted by entities outside the UK. The results of operations and the financial
condition of these individual companies are reported in the local currencies in which
they are domiciled, including Rands, Australian Dollars, Euros and US Dollars. These
results are then translated into Pounds Sterling at the applicable foreign currency
exchange rates for inclusion in the group’s combined consolidated financial
statements. In the case of the income statement, the weighted average rate for the
relevant period is applied and, in the case of the balance sheet, the relevant closing
rate is used. The following table sets out the movements in certain relevant exchange
rates against Pounds Sterling over the period:
Five months to Year to Six months to
31-Aug-16 31-Mar-16 30-Sep-15
Currency Period Average Period Average Period Average
per GBP1.00 end end end
South African Rand 19.29 20.29 21.13 20.72 20.95 19.33
Australian Dollar 1.74 1.85 1.87 2.04 2.15 2.05
Euro 1.18 1.24 1.26 1.37 1.35 1.39
US Dollar 1.31 1.39 1.44 1.50 1.51 1.54
Presentation details
The briefing starts at 9:00 (BST time) (10:00 South African time) and will be broadcast live via
video conference from the group’s offices in Johannesburg to London. The briefing will also
be available via a live and recorded telephone conference call, a live and delayed video
webcast, a delayed podcast and a delayed Mp3. Further details in this regard can be found
on the website at: www.investec.com
Timetable:
Interim period end: 30 September 2016
Release of interim results: 17 November 2016
For further information please contact:
Investec Investor Relations
UK: +44 (0) 207 597 5546
UK: +44 (0) 207 597 4493
South Africa: +27 (0) 11 286 7070
investorrelations@investec.com
About Investec
Investec is an international specialist bank and asset manager that provides a diverse range
of financial products and services to a niche client base in three principal markets, the United
Kingdom and Europe, South Africa and Asia/Australia, as well as certain other countries. The
group was established in 1974 and currently has approximately 9 000 employees.
Investec focuses on delivering distinctive profitable solutions for its clients in three core areas
of activity namely, Asset Management, Wealth & Investment and Specialist Banking.
In July 2002 the Investec group implemented a dual listed company structure with listings on
the London and Johannesburg Stock Exchanges. The combined group’s current market
capitalisation is approximately GBP4.4 billion.
Johannesburg and London
16 September 2016
Sponsor:
Investec Bank Limited
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