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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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