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INVESTEC LIMITED - Investec (comprising Investec plc and Investec Limited) pre-close trading update

Release Date: 20/09/2019 08:00
Code(s): INL INP     PDF:  
 
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Investec (comprising Investec plc and Investec Limited) – pre-close trading update

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 trading update

20 September 2019

Investec today announces its pre-close trading update ahead of its interim results for the six
months ending 30 September 2019 (1H2020), which are due for release on 21 November
2019. A conference call will be held at 9:00 (BST time) / 10:00 (South African time). Dial-in
details are in the Notes section of this announcement.

Key points:
   - Further progress on simplifying and focusing the business in pursuit of disciplined
       growth over the long term
   - Group 1H2020 adjusted operating profit is expected to be slightly behind the prior
       period (in line on a neutral currency basis) given challenging market conditions
   - Adjusted earnings per share is expected to be 4%-7% lower than prior period
   - The group’s credit loss ratio remained low. Capital and leverage ratios remain above
       targets
   - At 31 August 2019, third party assets under management (AUM) increased 6.7% to
       GBP178.4 billion
   - The proposed demerger and separate listing of Investec Asset Management is on
       track
   - The Bank and Wealth business three-year financial targets remain.

The key trends set out below, unless stated otherwise, relate to the five months ended 31
August 2019, and compare forecast 1H2020 to 1H2019.

Strategic and operational overview
The group remains committed to its objective to simplify and focus the business in pursuit of
disciplined growth over the long term. The proposed demerger and separate listing of
Investec Asset Management is on track, with regulatory approval obtained in August 2019.

The Bank and Wealth business is focused on its strategic priorities of 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. In this regard the following management actions have been
executed:
    - Closure of the Click & Invest operations which formed part of the UK wealth
         management business
    - Closure and run down of the private equity direct investments business in Hong Kong
    - Sale of the Irish Wealth & Investment business
    - Restructure of the Irish branch as a consequence of Brexit.

The above management actions, as well as the costs incurred in relation to the proposed
demerger, are anticipated to negatively impact pre-taxation earnings for the six months to 30
September 2019 by approximately £42 million. This compares to a pre-taxation earnings drag
of £22 million in the prior period on a like-for-like basis. Refer to breakdown in the notes.

The group’s adjusted operating profit (which excludes the items noted above in both the
current and prior period), is expected to be slightly behind the prior period. Adjusted earnings
per share is expected to be approximately 4% to 7% lower than the prior period.
                                             
Taking into consideration the management actions above, basic earnings per share are
expected to be approximately 10% to 13% behind the prior period and headline earnings per
share are expected to be approximately 15% to 18% behind the prior period.

Group and divisional overview
Salient financial features for the group on an adjusted basis include:
- Revenue and costs are expected to be slightly lower than the prior period
- The group’s credit loss ratio has remained low displaying a resilient credit performance.
    The annualised credit loss ratio on average core loans and advances is expected to be
    between 0.26% and 0.32% (March 2019: 0.31%, September 2018: 0.34%)
- The group’s capital and leverage ratios are expected to remain above targets
- For the five month period to 31 August 2019:
         o AUM increased 6.7% to GBP178.4 billion
         o Net inflows of GBP3.5 billion were generated
         o Core loans and advances increased 4.0% to GBP25.9 billion
         o Customer accounts (deposits) increased 2.7% to GBP32.2 billion.

The Asset Management business is expected to report adjusted operating profit ahead of
the prior period. Earnings have been supported by market levels, currency movements and
net inflows of GBP3.3 billion to the end of August 2019. Net flows have been well spread
across client regions. Since 31 March 2019 AUM have increased by 8.9% to GBP121.3
billion.

The Bank and Wealth business is expected to report adjusted operating profit behind the
prior period.

The UK Specialist Banking business is expected to report adjusted operating profit
significantly behind the prior period. Market variability and persistent uncertainty relating to
Brexit and global trade wars, has negatively impacted investment banking fees and trading
income. Furthermore, interest income has been impacted by the additional liquidity required
to pre-fund the exit of Irish deposits as a result of Brexit. However, our lending franchises
have continued to perform as expected. The corporate lending and private banking
businesses have shown traction in both target client acquisition, fee income and loan book
growth with the total UK loan book growing 4.7% since 31 March 2019 (to GBP11.0 billion).
Management’s focus on cost discipline, as well as lower premises charges, are expected to
result in a marked reduction in costs.

The South African Specialist Banking business is expected to report adjusted operating profit
ahead of the prior period. The private banking business has continued to see growth in its
client base and a reasonable level of activity, supporting net interest income. Weak economic
growth and low business confidence has resulted in subdued corporate activity levels. Since
31 March 2019 the loan book grew by 1.9% to R276 billion. Costs are expected to be in line
with the prior period in Rands.

The Wealth & Investment business is expected to report adjusted operating profit behind the
prior period. While the business has generated reasonable net inflows and growth in AUM,
results were impacted by higher costs in the UK to support technology investment and
business growth. Since 31 March 2019 AUM have increased by 2.2% to GBP56.4 billion.

The Bank and Wealth business remains committed to the three-year financial targets set out
at the February 2019 Capital Markets Day.

Other information
- Group results have been negatively impacted by the depreciation of the average Rand
   against Sterling exchange rate of approximately 2.8% over the period
- The effective tax rate is expected to be approximately 16% (1H19: 16%)
- Net non-controlling interests are expected to amount to approximately GBP38 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 six months to 30 September 2019 is
   expected to be approximately 950 million. The group has committed to cease issuing
   shares for variable and long-term awards.

Outlook
In spite of challenging trading conditions, the group remains well positioned for the long term
and continues to concentrate on the execution of its strategy of simplification, focus, and
disciplined growth.


On behalf of the board
Perry Crosthwaite (Chairman), Fani Titi (Joint Chief Executive Officer) and Hendrik du Toit
(Joint Chief Executive Officer)


Key income drivers

Total group core loans
                                                                           % change year-to-
    GBP'million             31-Aug-2019     31-Mar-19       30-Sep-18
                                                                           date versus Mar-19

    UK and Other              11,006         10,514          10,056               4.7%
    Southern Africa           14,938         14,427          14,134               3.5%
    Total core loans          25,944         24,941          24,190               4.0%

Total group customer deposits
                                                                           % change year-to-
    GBP'million             31-Aug-2019     31-Mar-19       30-Sep-18
                                                                           date versus Mar-19

    UK and Other              13,456         13,137          12,362               2.4%
    Southern Africa           18,705         18,170          17,987               2.9%
    Total deposits            32,161         31,307          30,349               2.7%

Total group AUM

                                                                           % change year-to-
    GBP'million                 31-Aug-19      31-Mar-19      30-Sep-18
                                                                           date versus Mar-19

    Asset Management
    UK and Other                  82,149          75,968       74,978             8.1%
      Mutual funds                 32,166          30,374       30,351            5.9%
      Segregated mandates         49,983          45,594        44,627            9.6%
    Southern Africa               39,149          35,450       34,226             10.4%
      Mutual funds                18,136          16,337       15,648             11.0%
      Segregated mandates         21,013          19,113       18,578             9.9%
                                  121,298         111,418      109,204            8.9%


    Wealth & Investment
    UK and Other                  40,751          39,118       39,355             4.2%
      Discretionary                32,311          30,810       31,108            4.9%
      Non-discretionary            8,440           8,308         8,247            1.6%
    Southern Africa               15,605          16,003       17,332             -2.5%
      Discretionary                7,483           6,999        6,989             6.9%
      Non-discretionary            8,122           9,004       10,343             -9.8%
                                  56,356          55,121       56,687             2.2%



                                              
Notes

1. Approximate pre-taxation financial impact of management actions including costs
   relating to the demerger

                                                                Forecast
 GBP'million
                                                               30-Sep-19      30-Sep-18
 Costs incurred in relation to proposed Asset
                                                                    (7.5)              -
 Management demerger
 Closure of the Click & Invest operations                           (4.7)          (2.5)
 Closure and run down of the principal direct
                                                                   (45.5)        (28.7)
 investments business in Hong Kong
 Gain on sale of the Irish Wealth & Investment
                                                                    18.2               -
 business
 Restructure of the Irish branch as a consequence of
                                                                    (2.7)           9.7
 Brexit
                                                                   (42.2)         (21.5)

2. 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 adjusted operating profit is expected to be slightly behind the
                   prior period;
                 - adjusted earnings per share is expected to be approximately 4% to 7%
                   lower than the prior period
                 - basic earnings per share are expected to be approximately 10% to 13%
                   behind the prior period
                 - headline earnings per share are expected to be approximately 15% to
                   18% behind the prior period
                 - the Bank and Wealth business is expected to report adjusted operating
                   profit behind the prior period; and
                 - the Asset Management business is expected to report adjusted operating
                   profit ahead of the prior period.
            (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 19 September 2019
      -     These forward looking statements represent a profit forecast under the Listing
            Rules. The Profit Forecasts relate to the period ending 30 September 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 March 2019 annual financial statements, which are in accordance with
           IFRS and are those which the group anticipates will be applicable for the interim
           period ending 30 September 2019
       -   The Profit Forecasts have been prepared based on (a) the unaudited
           management accounts of the Investec group for the five months to 31 August
           2019; and (b) the projected financial performance of the Investec group for the
           remaining one month of the interim period ending 30 September 2019.


                                                
    Assumptions
    The Profit Forecasts have 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 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.

3. Definitions
       -   References to adjusted operating profit refer 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
        -  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.

4. 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:

                        Five months to               Year to          Six months to
                         31-Aug-2019                31-Mar-19            30-Sep-18
 Currency              Period    Average      Period     Average     Period    Average
                        end                    end                    end
 per GBP1.00
 South African         18.50       18.27      18.80       18.04      18.44       17.76
 Rand
 Australian Dollar      1.81        1.82       1.83        1.80       1.80       1.79

 Euro                   1.11        1.13       1.16        1.13       1.12        1.13
 US Dollar              1.22        1.26       1.30        1.31       1.30        1.33

Conference call details
The conference call will commence at 9:00 (BST time) (10:00 South African time).
Telephone conference dial in numbers:
- Australia: 1 800 350 100
- Ireland: 014 860 742
- Johannesburg (Neotel): 011 535 3600
- Johannesburg (Telkom): 010 201 6800
- Other (Neotel): +27 11 535 3600
- Other (Telkom): +27 10 201 6800
- UK: 0 333 300 1418
- USA: 1 508 924 4326

Timetable:
Interim period end: 30 September 2019
Release of interim results: 21 November 2018

For further information please contact:
Investec Investor Relations
UK: +44 (0) 207 597 5546 / +44 (0) 207 597 4493
South Africa: +27 (0) 11 286 7070
investorrelations@investec.com

For media enquiries please contact:
Lansons (UK PR advisers) - Tom Baldock. Tel: +44 (0) 78 6010 1715

                                                
Brunswick (SA PR advisers) - Marina Bidoli. Tel: +27 (0) 11 502 7405 / +27 (0) 83 253 0478

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 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 10 500 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 GBP5.0 billion.

Johannesburg and London
Sponsor: Investec Bank Limited




                                                

Date: 20/09/2019 08:00:00
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