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INVESTEC LIMITED - Investec (comprising Investec plc and Investec Limited) pre-close briefing statement

Release Date: 15/03/2019 10:45
Code(s): INL INP     PDF:  
 
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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

15 March 2019

Investec is today hosting an investor pre-close briefing at 09:00 BST time/11:00 South African
time, which will focus on developments within the group’s core business areas for the
financial year ending 31 March 2019.

Strategic, operational, and financial overview of the year ending 31 March 2019

Approximately six months ago, the group announced its intention to simplify and focus its
business in pursuit of disciplined growth over the long term. This process started with the
announcement of the intention to demerge and separately list Investec Asset Management.
Subsequently, the group has articulated a clear set of strategic priorities for both the Asset
Management and Bank and Wealth businesses.

The Bank and Wealth business is focused on a plan to enhance the effectiveness of its
operating platform to better serve clients and deliver long-term shareholder returns. There are
five key priorities: increasing discipline in capital allocation; managing the cost base for
greater efficiencies; accelerating revenue growth; expanding connectivity across the
organisation to more fully serve client needs; and bolstering digital capabilities.

The Asset Management business is concentrating efforts on its existing offering: deepening
and strengthening investment and client capabilities for the long term; scaling the offering
through its global distribution model; and positioning for growth.

The operating environment has remained challenging over the period. Global equity markets
experienced a sharp decline at the end of the 2018 calendar year before showing some
recovery. Economic growth has been weak in both South Africa and the UK, the group’s two
core banking markets.

Against this backdrop, the group’s operating profit (refer to the definition in the notes) is
expected to be ahead of the prior year. The Bank and Wealth business is expected to report
results ahead of the prior year, while the Asset Management business is expected to report
results marginally behind the prior year. Additional information is provided under the business
review section of this announcement.

Salient financial features of the group for the period under review include:

-   Revenue is expected to be in line with the prior year
-   Annuity income as a percentage of total operating income is expected to be
    approximately 77% (2018: 76%)
-   The expected credit loss (ECL) charge is anticipated to be significantly less than the prior
    year. The credit loss ratio is expected to be between 0.30% to 0.35% (September 2018:
    0.34%; March 2018: 0.61%)
-   Modest cost growth is expected
-   Overall group results have been negatively impacted by the depreciation of the average
    Rand against Pound Sterling exchange rate of approximately 4% over the period
-   For the period 31 March 2018 to 28 February 2019:
        o Third party assets under management increased 1.9% to GBP163.7 billion - an
            increase of 5.8% on a currency neutral basis
        o Net inflows of GBP6.9 billion were generated
                                                
        o    Core loans and advances decreased 0.9% to GBP24.9 billion - an increase of
             6.0% on a currency neutral basis
        o Customer accounts (deposits) increased 1.1% to GBP31.3 billion - an increase of
             8.1% on a currency neutral basis
-   The proposed demerger and separate listing of Investec Asset Management is on track,
    subject to regulatory and shareholder approvals.

Conclusion

The group’s performance has been supported by growth in assets under management and
substantial net inflows, good loan book growth, and significantly improved performance from
the UK Specialist Banking business. The group is committed to a strategy of simplification,
focus, and growth with discipline. The Bank and Wealth business and the Asset Management
business are dedicated to pursuing the objectives outlined at their capital markets day
presentations.

On behalf of the board

Perry Crosthwaite (Chairman), Fani Titi (Joint Chief Executive Officer) and Hendrik du Toit
(Joint Chief Executive Officer)

Liquidity and capital management

-   The group has maintained a healthy liquidity position
-   The loans to customer deposits ratio at 28 February 2019 was 78.2% (31 March 2018:
    79.6%)
-   Cash balances remain strong at GBP13.2 billion at 28 February 2019 (31 March 2018:
    GBP12.8 billion), equating to 42.0% of customer deposits. This comprises cash and near
    cash of GBP6.3 billion (R117.1 billion) in Investec Limited and GBP6.9 billion in Investec
    plc as at 28 February 2019
-   For the year to 31 March 2019 for both Investec plc and Investec Limited:
        o Common equity tier 1 ratios are expected to remain in line with the group’s target
             of 10%
        o Leverage ratios are robust and remain comfortably ahead of the group’s target of
             6%
-   The group expects to implement the Foundation Internal Ratings-Based (FIRB) approach
    in South Africa in the first quarter of the 2020 financial year, subject to regulatory
    approval.

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.

Bank and Wealth

Specialist Banking

-   The Specialist Banking business is expected to post results well ahead of the prior year.
    The UK Specialist Bank is expected to report results significantly ahead of the prior year,
    while the South African Specialist Bank is expected to report results behind the prior year
-   In summary, key aspects include:
        o Net interest and net fee income
                - An increase in net interest income driven by book growth in both the UK
                    and South Africa
                - Net fees and commissions in line with the prior year; supported by strong
                    advisory and structuring fees earned in the UK Investment Banking
                    business, and offset by lower investment banking and corporate client
                    activity levels in South Africa

                                              
        o   Other income (refer to the definition in the notes)
               - Other income is expected to be behind the prior year largely due to a
                    weaker performance across the investment portfolio
        o   Impairments
               - Impairments are expected to decrease significantly due to no further
                    occurrence of substantial losses on the legacy portfolio
        o   Costs
               - Costs in the UK are expected to increase in line with revenue
               - Costs in South Africa are expected to grow ahead of revenue, primarily
                    as a result of the prior-year rental provision release.

Wealth & Investment

-   The Wealth & Investment business is expected to report results behind the prior year
-   Net inflows of GBP0.5 billion were generated to the end of February 2019 (sound
    discretionary inflows were partially offset by outflows relating to discontinued non-core
    non-managed UK services)
-   Since 31 March 2018, assets under management have decreased by 4.0% to GBP53.8
    billion (a decrease of 0.6% on a currency neutral basis)
-   Earnings have been impacted primarily by lower transaction-based commissions and a
    non-recurring investment gain realised in the prior year.

Asset Management

-   The Asset Management business is expected to report results marginally behind the prior
    year
-   Substantial net inflows of GBP6.4 billion were generated to the end of February 2019
-   Since 31 March 2018, assets under management have increased by 5.2% to GBP109.2
    billion (an increase of 9.2% on a currency neutral basis)
-   Revenue growth was dampened by considerable market volatility during the second half
    of the year
-   Earnings have been impacted by lower performance fees in South Africa and higher costs
    in the UK, including Markets in Financial Instruments Directive II (MiFID II) and new
    premises costs.

Other information

-   The effective tax rate is expected to be approximately 13% compared with 9.6% in the
    prior year
-   Net non-controlling interests are expected to amount to approximately GBP91 million
    (profits attributable) relating to the Asset Management business and the consolidation of
    the Investec Property Fund
-   The weighted number of shares in issue for the year ending 31 March 2019 is expected
    to be approximately 942 million.


Notes

1. Profit forecasts for the group, Bank and Wealth and Asset Management
      - The following matters as discussed in the briefing and highlighted above contain
            forward-looking statements:
                 - the group’s operating profit (refer to the definition in the notes) is
                     expected to be ahead of the prior year;
                 - the Bank and Wealth business is expected to report results ahead of the
                     prior year; and
                 - the Asset Management business is expected to report results marginally
                     behind the prior year
            (collectively the Profit Forecasts)
                                             
    -   The basis of preparation of each of these statements and the assumptions upon
        which they are based are set out below. These statements are subject to various
        risks and uncertainties and other factors - these factors may cause the group’s,
        Bank and Wealth’s and/or Asset Management’s actual future results,
        performance or achievements in the markets in which they operate to differ from
        those expressed in the Profit Forecasts
    -   Any forward looking statements made are based on the knowledge of the group,
        Bank and Wealth and Asset Management at 14 March 2019
    -   These forward looking statements represent a profit forecast under the Listing
        Rules. The Profit Forecasts relate to the period ending 31 March 2019
    -   The financial information on which the Profit Forecasts are based, is the
        responsibility of the Directors of the group and have not been reviewed and
        reported on by the group’s auditors.


Basis of preparation
   - The Profit Forecasts have been properly compiled using the assumptions stated
       below, and on a basis consistent with the accounting policies adopted in the
       group’s September 2018 unaudited interim financial statements, which are in
       accordance with IFRS and are those which the group anticipates will be
       applicable for the year ending 31 March 2019
   - The Profit Forecasts have been prepared based on (a) the unaudited interim
       financial statements of the group for the six months to 30 September 2018, and
       the results of Bank and Wealth and Asset Management underlying those interim
       financial statements; (b) the unaudited management accounts of the Investec
       group for the eleven months to 28 February 2019; and (c) the projected financial
       performance of the Investec group for the remaining one month of the year
       ending 31 March 2019.

Assumptions
The Profit Forecast has been prepared on the basis of the following assumptions during
the forecast period:

Factors outside the influence or control of the Investec Board:
   - There will be no material change in the political and/or economic environment
       that would materially affect the Investec group
   - There will be no material change in legislation or regulation impacting on the
       Investec group’s operations or its accounting policies
   - There will be no business disruption that will have a significant impact on the
       Investec group’s operations
   - The Rand/Pound Sterling and US Dollar/Pound Sterling exchange rates and the
       tax rates remain materially unchanged from the prevailing rates detailed below
   - There will be no material changes in the structure of the markets, client demand
       or the competitive environment.

Estimates and judgements
In preparation of the Profit Forecasts, the group makes estimations and applies
judgement that could affect the reported amount of assets and liabilities within the next
financial year. Key areas in which judgement is applied include:
    - Valuation of unlisted investments primarily in the private equity, direct
         investments portfolios and embedded derivatives. Key valuation inputs are based
         on the most relevant observable market inputs, adjusted where necessary for
         factors that specifically apply to the individual investments and recognising
         market volatility
    -  The determination of ECL against assets that are carried at amortised cost and
         ECL relating to debt instruments at fair value through other comprehensive
         income (FVOCI) involves the assessment of future cash flows which is
         judgemental in nature
                                         
        -   Valuation of investment properties is performed twice annually by directors of
            subsidiary companies who are qualified valuators. The valuation is performed by
            capitalising the budget net income of the property at the market related yield
            applicable at the time. Properties in Investec Property Fund are valued according
            to the JSE Listings Requirements
        -   The group’s income tax charge and balance sheet provision are judgemental in
            nature. This arises from certain transactions for which the ultimate tax treatment
            can only be determined by final resolution with the relevant local tax authorities.
            The group recognises in its tax provision certain amounts in respect of taxation
            that involve a degree of estimation and uncertainty where the tax treatment
            cannot finally be determined until a resolution has been reached by the relevant
            tax authority. The carrying amount of this provision is often dependent on the
            timetable and progress of discussions and negotiations with the relevant tax
            authorities, arbitration processes and legal proceedings in the relevant tax
            jurisdictions in which the group operates. Issues can take many years to resolve
            and assumptions on the likely outcome would therefore have to be made by the
            group
        -   Where appropriate, the group has utilised expert external advice as well as
            experience of similar situations elsewhere in making any such provisions.
            Determination of interest income and interest expense using the effective interest
            rate method involves judgement in determining the timing and extent of future
            cash flows.


2. Definitions
       - 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. Adjusted operating profit is considered an important
           measure by Investec of the profit realised by the group in the ordinary course of
           operations. In addition, it forms the basis of the dividend pay-out policy. Non-
           IFRS measures such as adjusted operating profit are considered as pro forma
           financial information as per the JSE Listing Requirements. The pro forma
           financial information is the responsibility of the group’s Board of Directors. This
           pro forma financial information has not been reported on by the group’s auditors
       - Amounts represented on a currency neutral basis for balance sheet items
           assume that the relevant closing exchange rates, as reflected below, at 28
           February 2019 remain the same as those at 31 March 2018
       - The credit loss ratio is calculated as expected credit loss (ECL) impairment
           charges on gross core loans and advances as a percentage of average gross
           core loans and advances subject to ECL
       - References to other income relate to investment income, share of post taxation
           profit of associates, trading income and other operating income.


3. Exchange rates
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 the Pound Sterling over the period:




                                              
                       Eleven months to         Six months to              Year to
                          28-Feb-2019               30-Sep-18            31-Mar-18
 Currency              Period    Average      Period     Average     Period     Average
                        end                    end                    end
 per GBP1.00
 South African         18.62       17.96       18.44      17.76       16.62       17.21
 Rand
 Australian Dollar      1.87        1.80       1.80        1.79        1.83       1.72

 Euro                   1.17        1.13       1.12        1.13        1.14       1.14
 US Dollar              1.33        1.31       1.30        1.33        1.40       1.33


Presentation details
The briefing starts at 09:00 (BST time) (11:00 South African time) and will be broadcast live
via video conference from the group’s offices in London to Johannesburg. 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
Year end: 31 March 2019
Release of year end results: 16 May 2019

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 select client base in three principal markets, the UK
and Europe, South Africa and Asia/Australia as well as certain other countries. The group was
established in 1974 and has approximately 10 300 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 GBP4.7 billion.


Johannesburg and London

Sponsor: Investec Bank Limited




                                                

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