Investec Group

Stephen Koseff - CEO and Executive Director Nishlan Samujh - CFO

Okay, welcome to our End of September 2017 Results Presentation. And I'll just introduce briefly, and I'm going to hand over to our CFO, Nishlan to talk through the numbers and then I'll come back and talk about the strategies of the different divisions.

I think we were really in a funny kind of environment over the past six months, very difficult macro background but strong double equity markets and a stronger global economy against a very weak environment in South Africa and a mixed environment in the UK -- I would rather regarded it similarly weak. I think overall, if we look at our business, I think, we still managed to get quite good fund inflows, about £3.6 billion, and both our Wealth and asset wealth -- and management business and Asset Management businesses benefited from higher funds under management and now what we regard as favorable equity markets.

I think our Specialist Banking business continue to see good growth in our loan portfolios and client activity, notwithstanding the uncertainty in our two core geographies. We have continued as a group to invest for growth and our increase in costs reflect largely planned investment spend and growing our client franchise businesses.

We've made further progress on our digital and online innovation enhancements across our group, which coupled with our high touch client-centric service model has further entrenched the strength of our franchises, particularly in our private banking businesses and our wealth management businesses. Again geographic and operational diversity continues to support our sustainable recurring income base and earnings through varying markets.

I'm now going to hand you over to Nishlan who's going to take you through the numbers and then when he's finished, I'll come back and talk about what's going on in the business -- in the various businesses.

Good morning, everyone. Just get rid of the nerves very quickly.

So in this period, if we look at a summary of our statutory performance, operating profit has increased to £314.6 million, an increase of 11.8%. Obviously, the positive rand on the income statement has influenced that number.

So on a neutral currency basis, it's up 1.1% and we will unpack the various drivers of that. Adjusted earnings per share up to £0.266 in the period and that's a 17.2% growth in the period.

The rand has -- sorry, the dividend has grown by 5% in the period to £0.105, which translates to about 12.4% growth in the overall rand dividend that we've declared. If we have to look at splitting this out by effectively our geographical contribution and by our businesses; from a geographic perspective, the UK and European businesses generated effectively 41% of the operating profit level, down 5% in the period.

And that's really driven by lower trading income and investment income, offset by some very good fundamental growth in the interest margin and fee line, which Stephen will unpack as he goes through the divisional results. South Africa, from a rand perspective, is up 7.9% and that number is significantly higher as you bring in the impact of the rand over the period.

From a business perspective, I think you'll see that the Specialist Bank has contributed 62% and the Wealth and the Asset Management businesses contributing 38% of contribution, sort of in line with what you would have seen in September '16, and again we'll go through some detail around that. Now let's look at some of the earnings drivers.

From a funds under management perspective, as you've seen earlier, there was net inflows of £3.6 billion in the period taking those funds under management to £154.3 billion in the period. Now that increase has been offset because of the weakness in the rand.

So again, just to position it, the rand weakened by about 8% since the last trading update that we delivered to you and that has an impact on some of these fundamental drivers. Customer accounts on neutral currency up 0.7% in the period to £28 billion.

We continue to actively manage our net liquidity position and the net cash position across the group, and core loans increasing by 5.6% on a currency neutral basis in the period to £22.4 billion with good growth experienced across our Specialist Banking businesses. If we look at the key drivers in terms of operating income that is coming at £1.191 billion in the period, total operating income increasing by 13.2%, net interest income 16% up to £364.4 million in the period, and again as we go through the contribution from the Specialist Bank you'll see the driving force coming from the good growth in the underlying book.

Net fees and commissions up 9.4% to £666 million. Investment in associate income, which makes up about 7% of the underlying operating income line, has increased to £85.6 million.

That also includes about £23 million of income from the associate line, which is decently up on the prior period and is mainly driven by the underlying operating income from the IEP business and platform. Trading income and customer flows is down 12.7% in the period to £64.2 million.

And that's really driven by the fact that at this time last year you did have a higher level of activity driven off the Brexit sort of base really in the prior year. Now bringing the picture together, I think what you do see is a healthy mix between capital light and capital intensive businesses with capital light revenue coming in at 56% of the total revenue base.

And if you look at the net annuity fees at £546 million that contributed 45.8% to the net operating income line. And third party assets and advisory contributing £672 million versus our sort of capital intensive drivers with interest investment and associate and trading income contributing £519 million or 44% of the overall base.

Okay, in terms of the relationship between operating income and operating expenses, we did see positive jaws in the period, with operating income growing by 13.2% as we've just earlier discussed. And operating cost in the period did grow by 12.9% to £792.5 million.

There are some very specific reasons for that bidding higher than what you would see in a normalized environment and Stephen will unpack that as he gets through the divisional analysis. In terms of headcount, the Wealth businesses and the Specialist Banking businesses continued to grow headcount in the period really driven by growth initiatives across the platform.

The Asset Management business actually decreased headcount slightly in the period from efficiencies achieved through some automation in the administrative functions. Impairments in the period is up from £18 million to £31.1 million and I think as we've mentioned, we are coming off a relatively low base in the prior period with the credit loss ratio at 19 basis points now at round about 28 basis points, which is still more or less at the lower end of our long-term average.

Impairments in the legacy book have been more or less in line with the prior year at £28 million and that's driven by an increase in acceleration of very specific portfolios in that particular portfolio in the current period. So if we have to summarize it from an ongoing perspective, operating profit at £347.5 million, up 10.5% in the period, with adjusted earnings per share up at £0.295 or 14.9% in the period.

I think one point to note is that that's a combination of the operating profit as we've discussed. And the average tax rate in the period is coming at about 14.5%, which is usually due to our mix of earnings, but in the period we've also had some tax provisions released that we no longer require.

Total shareholders' equity down slightly to £4.76 billion and that's really driven by the impact of the rand on the closing balance sheet, on a currency neutral basis growing by 3.7%. And customer accounts and net core loans and advances again mentioning growing by 5.6% on a currency neutral basis to £22.4 billion.

Now if we look at our various financial targets, the ROE is within the 12% to 16% sort of target at 12.5%. That's in line with what we saw at March and a bit better than what we see at September '16.

Adjusted earnings per share growing by 17.2% or 14.8% on an ongoing basis. Our cost to income ratio at 66.9% is outside of our target at 65%, but as we've highlighted that's driven by very, very key initiatives that are on the go currently.

The dividend coming in at £0.105 is at a 2.5 times cover over the current period. From an ROE perspective, if you look at the ongoing ROE coming in at 14.1% and as we phase out the legacy book, you will see those two lines sort of converge in terms of statutory and ongoing, and that's reasonably within our target range.

Now ROE is driven by strong client franchise businesses and solid annuity earnings as we've discussed. And if we really look at it from an ongoing perspective, the key levers that we challenge to continuously invest in and drive our activity levels across the board, growing our client base and core drivers and managing our liquidity, and optimizing our capital structure.

And if you had to look at the various business leaders, in terms of their strategies and what's been driven from a business perspective, these are holistically embedded within those strategies at this point in time. Stephen, I think it's time to -- okay -- one more.

All right. From a overall balance sheet perspective, the overall capital ratios I think have remained relatively healthy over the period.

I think I must remind you that we measure all of these capital ratios on a standardized basis. From a South African perspective, we are aiming to move to AIRB.

The key differential for us between standardized and AIRB is a better measurement of collateral in a highly collateralized lending base, as well as a low loss sort of history, if we look at that relationship across our book. So we are expecting between probably 1.5% to 2% benefit in terms of the overall capital ratio, but we obviously subject to a regulatory process before we can start reporting on that particular basis.

Liquidity has remained strong over the period. We have -- as we mentioned earlier on, we are managing that liquidity level quite actively in terms of cost of funds.

And the leverage ratios have remained fairly healthy across the -- across both balance sheets. In the PLC, we have issued £250 million of additional Tier 1 instruments in October and those are coming to the capital base as we move into the next half, but we've given you a pro forma feel for it in terms of the total capital adequacy ratio, including the £250 million that would be reported at 16.3% and the leverage at about 9.3% which does give you a fair amount of room in terms of further growth trajectories.

Okay. Thanks, Stephen.

So I'm going to go into the divisions. And I'll start up with Asset Management.

I think Asset Management had growth of 1.2% in operating profit. And I think that really was very good growth in our global business with -- as the South African business went backwards on the -- on performance fees, which really a feature of history because remember we've reminded you last year and the year before that South African performance had been -- had weakened.

It's now come back into line, but certainly we were unable to earn performance fees at the same level than previously earned. But the international business grew quite strongly, so that earnings overall was still up 1.2%.

I think operating margin was also down more, again for the identical reasons that I gave you before, mainly as a consequence of performance fees. If you look to the operating margin from the rest of the business, it had improved.

Funds under management were -- increased 3.1% to 98.2 billion. Remember at the end of August, we were just over 100 billion and the rand went a bit AWOL and so pulled the numbers back.

And markets also were softer towards the backend of September. However, what we're very happy with is very solid net inflows of £2.1 billion, which I'll give you some color on in a moment and that gives an annualized torque ratio of 4.4%.

So overall, if you look at our business, 57% of our income is managing emerging market funds and 43% developed market. We've talked about gaining traction in America.

We had just under £1.3 billion of net inflows in the Americas during this half. We had £628 million of net inflows in the African business, which would include South Africa.

Asia-Pac £927 million and Europe including UK was down £731 million, that was a big loss of a emerging market fixed income portfolio, which would have had the effect in the European business. So we think that we have built a strong platform.

We still think that active asset management is very relevant. And I know there's been a lot of talk about pesos eating up [indiscernible] but I think we just have to go and look in the history and say that every now and again, there's something that goes wrong and then people switch.

So we believe we got very positive momentum and are confident about where we are in this business as an active asset manager. If we look at our wealth business, good overall performance.

Again on the South African front, we were impacted by lower brokerage volumes across the private clients. And I think people are, in South Africa, in a bit of a bad mood, worried about the politics.

Whereas in the UK business, we were up 21% benefiting from, again, good inflows and higher average funds under management. I think operating margin overall improved to 25.5%, with operating income up 12.5% and operating costs up 11.7%.

And again, we saw net inflows of £1.5 billion and funds under management up from £54.8 billion to £55.5 billion, again affected by the rand at the end of the year. So I think for us, we keep on investing for long-term sustainability.

Our core platforms both in the UK and in South Africa are very well established. We have distribution in the UK, Switzerland, Ireland, Guernsey and Hong Kong.

And we're recognized as one of the leading client investment managers. I think in South Africa, we are the largest player.

We just again won the Financial Times award for the fifth year running. And I think we have a very good brand and very good positioning.

So obviously looking forward, market conditions are very unknown to us. I think we have uncertain investor sentiment and all we can do is focus on the ball, not on the environment, and I think that's important for us is to continue to play the ball and remain focused.

So we believe we're very well placed and we continue to focus on building our franchise and our strategic initiatives. If we look at the Specialist Bank, overall we are up -- this is ongoing numbers, up 12.5% to £239.4 million.

UK was down 22%. That was really due to the points that Nishlan made that last year we had very strong investment banking in the period and good client flow from post-Brexit volatility, which wasn't repeated in this particular period.

But I think what was important in the UK is net interest income was actually up 18% and that's a key driver of earnings going forward. I think South Africa we're up 21% in rand.

That was strong performance from our investment portfolios and I think we still continue to see quite good activity levels from our clients notwithstanding the environment that we're in. So we're still able to continue batting.

I think the cost to income ratio overall 61% down from 61.8%, this is a number that we need to focus on. I think we have a lot of IT expenditure, regulatory expenditure and we have the double U.K.

premises costs and we are busy rolling out the private bank, which we will come to in a moment. So overall, loans are up 5.6% in neutral currencies, the growth on neutral currencies because they reflect the trend, and custom accounts sort of flattish at 0.7% in neutral currency.

I think we have been trying to get our cost of funds down in the U.K. and I think that's really part come through in the strong improvement in net interest income.

So I've already covered this, you can see income overall down by £7 million in the U.K. or £6.5 million, that really was fees down and trading down, and net interest income, as I mentioned before, strongly up.

If we look at the costs in the U.K. bank, they were up £13 million during the period, £5.1 million came from incremental investment in building up our private bank and £6 million double premises costs.

I think in the private bank this expenditure will continue for March '18 and then it starts flattening out and we won't see much rise in costs to net business as because all the investments again gets replaced by people going forward and so it flattens out. The reminder of the costs in the U.K.

Specialist Bank were up £1.5 million, which was reasonably moderate. So I think we're getting things under control, but we still have to build out our business and I reminded someone when we walked in here, that if I went back five or six years to where the private bank in South Africa was, it hardly made a contribution off the back of a bad season, it now contributes almost as much as our corporate bank.

So these are franchise businesses, you got to spend money to build them, and they do cost you while you're building them but then one day you wake up and the monies spent and then the income starts coming through. So obviously that's reflected in our ROE in that business, which is down to 8.8% plus tax.

I think if I unwrapped the -- what we do in the corporate bank, that is still performing very well. And as I said, the private bank, in particular the banking side of the private bank is still loss making as we're spending more than the income, but we know that given time that will turn around.

So we do have what we believe a resilient business. We're mindful that there is a lot of uncertainty out there and that affects client's decision making, but we just have to navigate the storms.

I think on the legacy, and Nishlan spoke a little bit about the legacy, what we're trying to do is get rid of this legacy because we know it's a thorn in everyone's side, it affects returns, it affects performance, and at a point we need to kill it. So Ursula will shoot me for saying this because it's not down here in writing, but we hope that from 1 April, we don't have this legacy thing anymore and the residual piece that we have just gets normalized, but -- and that we then report only ongoing.

So that's not a guarantee, but that's what we hope, but you can see our expectation is, it will be down to £330 million, even maybe a bit better depending on one or two things and then down to £200 million by the end of March 2019. So it is coming, it's taken a long time to deal with but at least as I read yesterday that RBS are reporting losses for the 10th year in a row post the financial crisis.

So we're ended the [indiscernible] that takes 10 years to get over a financial crisis, well that what it's taken us to deal with all this stuff that were coming from the pre-crisis period. I think if we look at South Africa, you can see that quite strong growth in total income from ZAR5.9 billion to ZAR6.8 billion, that was very good performance from the investment portfolios, but still underlying very strong performance from the rest of the businesses.

Net interest, slightly down and that's mainly because of accounting noise, but overall we have had book growth and we're growing I think annualized at over 12%. So not withstanding people saying corporates aren't investing, Investec is still active in its space.

ROE, I'll give you two numbers, 13.5% including the investment portfolio; 15.9%, just under 16%, excluding the investment portfolio. Why you need to exclude the investment portfolio is because the investment portfolio you have to look at over a long period of time.

The bulk of it we recognize only income coming through from an equity accounting point of view. And I think you get very confused if you bring that into our ROE number.

The other thing is we have quite a big balance sheet in Mauritius, which is a dollar balance sheet that earns very little on your free funds. So that would add another 1% to ROE, if we actually had to strip that out.

So I think a resilient performance, I think we are in a difficult period in South Africa, I think political events can continue to impact on the perception of our clients, and the activity levels that they conduct. At the moment, we have been reasonably active.

So if you look at going forward, Asset Management, I think key priority is investment performance both scaling the multi-asset and quality capabilities, growing the advisor business, I think that's something that I've been talking about for a long time, and then focus on large markets. And not withstanding everyone talking about the emerging markets Asia, mainly China, India, and the growth in those markets; 50% of savings in the world still live in North America and that's why it's very important for us to grow and develop in North America.

And you saw quite big inflows into North America, which tells you that we've got good traction there. And then, I think we are a responsible investor.

We have to make sure that we do things that are sustainable over the long term and that we continue to invest motivate and lead our people. So I think as a strong franchise, a strong business and that has very good long-term growth opportunities.

I think on the Wealth business, again we're investing for the long term the Wealth business is delivering. I think you remember we spoke a long time about click and invest, you got really bored with us.

But we launched that in June, and it was ranked as a number one robot advisor in the independent survey of digital portfolio management in the UK. We continue to enhance it and develop the rest of our digital channel.

I think one place what brings investment and banking together is a very important platform for us and we continue to improve that and then add to that and make sure that we are properly integrated and we still got quite a bit of work to do on efficiency. So we're not there yet, we have very good recognition from around the world in terms of what we're doing as a firm and how we're progressing.

I think if we look at the Specialist Bank in the UK, I think we mentioned to you a lot of times how we're going to build a domestically relevant private bank. We are getting very good traction in this business.

It will take quite a while for the income to really start coming through, but it's not a one day game, it is a couple of test series, and we will ultimately get there, and we are very confident that we are gaining there. And we're seeing good contraction, good activity.

I think we're still trying to broaden our client base and building our franchise. I think we have a very good corporate franchise, we're doing very well in the corporate bank, and we also need to continue to deepen relationships with our clients both between the private bank and the corporate bank.

Improved coordination across all our geographies, I think -- I don't think it's ever been better with people from different parts of the world work together as a team and you start seeing very good cross border flow as a consequence of that. And then we have to deal with costs, I know you're shocked about costs, we can't have a cost to income ratio at the level it's at.

If you normalize it, it's just over 72%. We still need it down in the U.K.

into the low 60s, but we just need a bit of time for that. So again we get a lot of independent recognition for some of the stuff that we do.

Coming to South Africa, I think clearly we're trying to still grow our client base, and I think we're having -- we continue to make good progress in that. I mean, South Africa is not without competition, but we prefer a place where there's a lot of competition because it makes you better.

We continue to evolve our digital offering and we're trying to leverage our international capabilities, as I mentioned on the previous slide, and I think we've also created Investec Specialist investments that offer certain types of investment strategies to clients delivered, sometimes manufactured by our Wealth business. Sometimes manufactured by our Specialist individuals.

And then we've also launched Investec Life and it is working exceptionally well. We're starting to -- it's just been launched to the general -- to our clients in the last week or so.

So it started off by being launched to us as individuals, staff. I've got a life policy at the age of 66 in 2.5 minutes fully underwritten with my letter from the underwriter.

I think it's -- no people involved, just all online. So but there are people if you need people.

If you need to go for medicals and things like that, but we are quite confident that it's a great value add to our client base. And again, as I mentioned under the Wealth business, we again got recognition from the Financial Times for the fifth year running.

We got recognition from Euromoney. Again, we were up there in My PrivateBanking Research as the second best app for private bank and wealth management globally.

We were second just beyond UBS and Credit Suisse. So I think we are making decent progress.

I think on our digitization strategy, it's a high touch client centric model. I am probably boring you now, so we try and bring everything together bank, borrow, invest, save and protect and manage my life.

And I think that's something that if you as an investor client can do things right across your financial needs. We also have to make sure that we try and integrate our corporate clients with the private bank because we deal with executives or the corporate and make sure that the private bank and wealth management businesses work together to offer the strong product to our client base.

So in closing, I think whilst we see just coming back from iMyth what one noticed is that, whereas we certainly are miserable in South African and the U.K. are panicking about Brexit, the rest of the world has moved on.

And the rest of the world is quite happy with where they are actually. They're actually growing.

So we still have to deal with the ball we did -- with the balls that we're dealt with and we have to navigate the bumps in the road in the two geographies as they look at how they're going to go forward from a political point of view, which does have a knock-on impact on economics. Thank god it's not impacting the global world.

They just carry on with life. I think notwithstanding this, we have continued to improve in shape and capability.

We've made further progress in dealing with our legacy book and the development of the UK private bank and that we have made great progress in our various digital initiatives. I think we continue to invest in infrastructure and our people across the group and that's indicative of the accounts we have in our franchise, and that we are trying to position our business appropriately for future growth and development.

So we think a credible set of results in a difficult environment. We believe that we are strong in terms of our strategic delivery.

And we know there are bumps in the road, but we're happy to navigate those bumps. We've navigated them many times in our history.

So again, thank you, and we now can take questions. We can start Dave in the UK, I don't know if anyone wants to ask questions.

Any questions? James has got one.

James has a question.

Yes. James, how did you webcast your forecasting time?

You didn't read our trading update.

Badly I think is the short answer.

You what?

Badly is the short answer.

We'll help you next time.

If you just handle the management accounts side, it would certainly ease the process. I've got -- I've got one question and it's about the credit outlook coming clearly at 28 basis points, it's still quite a low number and during your presentation, you referenced both South Africa and UK concerns.

Can you sort of comment on where you see the impairment chance of the settling out in the next period or two?

Dave, can you repeat that because it's very blurred? What's wrong with that thing?

Okay. You're talking about -- yes, look we did increase our impairments in South Africa.

UK, our ongoing impairments can't stay lower there all forever, but we will see not for the second half but a drop off in legacy. If you look at our defaults like at quarterly level right across the group and have continued to decline, but in our last time we had some defaults in mining area.

We have very little mining exposure on the South African balance sheet where the risk was. I think we're on top of our guidance but yes, you don't know what the economic environment is going to bring.

So it's very hard to give you a forecast. If life is as it is now and there's no big calamities, I think the impairments remain moderate.

But we can't predict what's going to happen in South Africa in December and the continued uncertainty from the Brexit negotiations. So those are the key issues, but we're not feeling the stress.

And you should look at out our default level if you don't believe me and [indiscernible] should given to. Better, James?

Are there any other questions? No?

No other questions, over to you.

Okay. I'll come back to S.A., questions in South Africa.

Harry, come, you will need a mike. You were smiling before you came in, now you're going to ball a bouncer.

So I think very impressive results on the net interest income in the U.K. Can you give us a sense on what your normalized net interest margin target is for that business and how does that change as the private bank and so...

You mean U.K.?

Yes.

The margin in the U.K. will be slightly lower.

Our normalized margins are about 2%. That -- yes, we probably think we will hold us.

We're seeing an improvement in cost difference. That obviously there's more competition as the world gets a bit better and more banks are entering the triads, we will get better sizing, we have balance another 2%.

More questions? Is that it?

Okay. Thank you very much and anyone wants to ask anything offline, you're welcome.

Thank you.