Investec Group

Hendrik du Toit - Chief Executive Officer Fani Titi - Joint Chief Executive Officer Ciaran Whelan - Global Head of Private Banking Nishlan Samujh - Chief Financial Officer

Abhishek Sahoo - Citibank

Good morning, ladies and gentlemen in London where is 30 Gresham Street, in Johannesburg. We're in now Greyston office and I can't see you but I presume everyone is there.

My name is Hendrik du Toit, and on behalf of myself and Fani Titi, I welcome you to our Interim Results Presentation for the 2019 Financial Year. But before we start, I'd like to just say a short word of thank you.

Thank you, firstly to our predecessors Stephen Koseff, Bernard Kantor who are both here. In spite of that we got an operation by the effort to come and listen to make sure Fani and I make no mistakes.

We'll try our best. Thank you helping the transition.

Thank you for the support you gave us out. In preparing for today, our Chairman, Perry Crosthwaite, many of our board members and colleagues from senior management.

But most importantly, the 10,000 people who made this result, 10,000 people who serve our clients, who are busy working as we speak to build the Investec business. Thank you very much for what you've achieved during the transition period and also putting our business on the right footing for growth because that's the story Fani and I want to share with you.

And I'll ask Fani to do most of the presentation, but I just like to say very simply in a nutshell, our business has good momentum in spite of pretty tough macro conditions. We're lifting the return on equity, we concentrating on it.

Our Asset and Wealth Management business are gathering significant net flows and growing. And I think what's really important, the people in Investec are also ready for the major strategic move we announced namely the demerger which is all about focus, simplicity and setting up the platform for growth for the long term.

But it's my privilege to ask my Joint CEO and partner Fani Titi to do most of the presentation today. I'll take some difficult questions at the inquiry.

Thank you, Hendrik, and good morning, ladies and gentleman. As you can see, we are a take team, so I'll do a bit of the lifting this morning.

I'm going to try work both my iPad and the screen, so just check or me if I don't move the screen over there. As Hendrik indicated, we are quite privileged and honored to be presenting the results and to be leading the business.

We believe the results do reflect a very sound financial performance. Hendrik has spoken about the fact that the ROE of the Group is increasing.

At much 2018, ROE was at 12.1%, we are now at 13.4%. So we are making progress in the execution of our strategy.

And as Hendrik indicated again, we have a solid flows in Asset Management and in the wealth business about GBP4.8 billion in total and this Specialist Bank in the U.K. has done particularly well in fact just about doubling profits in the period.

So as we go forward because I don't want to repeat what Hendrik said, as you go forward, our concentration and our focus will be on revenue growth, on capital allocation and on cost discipline. This results have been achieved despite very tough economic and market conditions.

In South Africa, where we have a special operation, the South African economy has been particularly weak given the lack of confidence that is occasioned by political uncertainty. So you will generally see that the performance of both the bank in South Africa and the wealth of investment business will be muted, although there was an increase in Rand but it was a very tough market overall.

In the U.K. as we all know, Brexit has been the issue of concern, looks like there's been some progress, but we don't know whether that is real progress or not, but we shall see as time unfolds.

But impact of that ongoing uncertainty is that both corporate and consumer confidence is affected. If we look at equity markets, we all know that we are in a period where liquidity is being drained out of the global financial system, so U.S.

interest rates are going up. There is a threat as you know of some trade wars, and overall what has been a very synchronized world economic growth is beginning to stutter.

And effect is that we have significant market volatility and uncertainty. In particular, the effect on emerging markets has been particularly strong.

So if we look at the snapshot of the results, growth in operating profit and adjusted EPS is recorded a 14.2%, and growth - sorry - and operating profit 14.2%, growth in adjusted EPS at 6.4%. We will pick the difference in growth rates a little later.

Again as we said, significant flows in Asset Management and wealth at GBP4.8 billion taking total assets under management to GBP166.5 billion. In the Specialist Bank, one of the key drivers has been a substantial reduction in impairments as a consequence of us having lessly dealt with the legacy portfolio.

We did beyond a significant impact of the reduction in impairments, we did see revenue growth, we also had a reasonable level of activity supporting earnings and revenue. The cost to income ratio has improved slightly.

It is still above our target range of under 65%, but we are beginning to see revenue grow faster than cost. Revenue growing at 7.6%, while costs are growing at 7.2%.

We have been investing quite significantly particularly in the U.K. Hendrik and the Asset Management team have been investing over a period of time now that is the job of Mimi and John, but there is significant investment in the base.

So as we go forward, we should reap the benefit of that investment, but also reap the benefits of scale as our revenues continue to improve. We have a solid base of annuity income which supports earnings as we go forward.

Annuity income comprises in this result 76% of income. So just to show you the results with a waterfall graph, you will see that we started with GBP314.6 million and that we've had significant improvement of 14% in Asset Management in the U.K.

and other regions that we've had a significant increase of 96% in the Specialist Bank in the U.K. and that is not only a consequence of the reduction in impairment, there has been improvements in the underlying business as well.

You will know that when markets are this choppy that your investment income both in listed equity and unlisted equity will generally be impacted negatively. So the story is not just about the reduction in impairments, there have been fundamental improvement in the underlying performance of the business.

The Asset Management business in South Africa is up 9% in Rand, so a credible performance given the tough market and economic backdrop. The Wealth & Investment business in the U.K.

is largely flaps down about 7% or so. It really is a cost story there because we've hedged to make investments in IT people, we've had regulatory cost as well, we know about MiFID, we know about GDPR.

And in essence, there was any improvement in operating income. As I say, there's been a cost issue there.

So in general, good performance in the business, helped largely by the Asset Management business in the U.K. and the Specialist Banking business in the U.K.

as well but solid performance and resilient performance in fact by the businesses that are affected by the markets. We have benefited from consistent contribution across geographies and businesses.

If we look at geographic diversity, the combined U.K. and other regions business grew up by 40.2% in pounds that really is quite impressive growth and profits.

If you look at South Africa, we have growth of 5% in Rands, as I said that economy has been buffeted by a number of headwinds. So that performance in my view is resilient given the environment.

We have also seen an improved geographic balance in that profit from South Africa versus non-South Africa regions has improved from 35% to 43% of total profit. So there's a better balance in terms of profit contribution from the regions.

If you look at business diversity, we see a consistent contribution over a long period of time and with the contribution from capital light businesses at 36%. If we look at growth in key earnings drivers starting with third party assets under management, I have already indicated that we have assets under management at GBP166.5 billion.

In currency neutral or a currency neutral basis, the increase is 7.2% as opposed to the pound increase of 3.7%. If we look at customer accounts and loans and advances, customer accounts decreased by 2.1%, again there's a currency impact there or on a currency neutral basis, customer accounts would have increased by 4.3%.

If we look at core loans the advances, a decrease of 3.7% in pounds or on a currency neutral basis an increase of 2.4%. If we look at the loans to the profit ratio, it has been consistent in the high 70s.

In this reporting period, it is 78.2%. If you look at this movement in key earnings drivers, you can see that the engine room is running in a disciplined manner.

The operating income was up 7.6% to GBP1.3 billion. Again if you look at where we were in September 17, you will see that net interest income has increased quite significantly at 11% with net annuity fee income up at 3%.

We have fees and operating income up 17% and I would like to mention that the corporate advisory business in the U.K. performed particularly well.

You will see that the investment and associate income line was significantly affected, you see a reduction of 27% there. As I indicated earlier, when markets are this difficult and this choppy, you will always see an impact in or weaker performance in listed and unlisted equities.

That was the key driver of that particular reduction in performance on that line. Looking at operating income, I have already indicated that our recurring income as percentage of total income is consistently larger about 76%.

Looking at the balance in the business model, over the period that Stephen and Bernard Glenn have been running the business, you will know that strategically we wanted to increase the contribution of capital light activities. You can see now that in this reporting period that comes in at 55% and we are quite pleased with the trend over the last 5 years.

I have mentioned that we are beginning to see - a sorry I'm trying to - yeah that's the right one, we are beginning to see the jaws widening, so the efficiency of the business and the scale that comes and the efficiency that comes also with scale is beginning to show results. If you look at costs, just to give you a bit of color on cost, you will see that premises went up 14%.

As you know both the banks here and the Asset Management business have been in the process of moving premises, so we've had some additional costs there. Business expenses have gone up 18% again that is driven largely by regulatory costs, I spoke about MiFID and I spoke about GDPR, those costs would have affected, Asset Management would have affected also the Wealth & Investment business and the Bank also.

You will see the personnel costs went up 6%, we've added about 180 people between the two periods the majority of those 180 would have gone into regulatory areas. So the regulatory burden unfortunately is not lightening up at all.

Just to get back to impairments, as you can see in the graph there, the light grey bar has largely disappeared because we have dealt with the legacy portfolio. There is still a small residual of about GBP189 million.

But as we go forward, we take that the legacy issue has been dealt with, so we are reporting simply on a statutory basis and not looking at ongoing and statutory, because we have dealt with the issues of the past. So in summary, if you look at our operating profit for the period started at GBP350 million ended at GBP359 million.

Strong growth in operating income. As I said, the engine room is ticking on nicely.

We've had the benefit of a reduction in impairments of GBP29 million. We have had operating expenses as I have explained in the previous slide and you will see there that there was an 86% increase in non-controlling interest, driven largely by IPF, Investec Property Fund earnings growth.

We consolidated at the top, obviously we take minorities out. That partly explains some of the differences in the growth in operating profit.

When you look at the growth in a pivotable profit that is 8.2, that's part of the difference. When you look at growth in EPS, adjusted EPS, that growth is 6.4.

Obviously the tax in this period is lower than it was last year and we also have had an increase in shares issued. If we go to the next page looking at the performance again, I will just talk about the defendant.

So on this slide, I would just like to highlight the fact that we have a dividend growth of 4.8% in pounds against a growth in adjusted EPS of 6.4%. In Rands that growth in the dividend will be 3% because the Rand is stronger now than it was in November last year.

Those who live in South Africa know that in November last year, the outlook, the political and economic outlook was quite significantly concerning. If we look at performance against financial targets, our ROE that 13.4% as I said against a target of 12% to 16%, what is impressive here is that the ROE trend has been upwards over a number of years.

We will see the relevant graph in a minute or so. I have talked about the cost to income ratio improving a little bit still outside of target, but we are hopeful that we can get into target.

The dividend cover at 2.6 times is in the middle of the range. And as you can see at September 17, it was also at about 2.5.

So generally at entrance that's where we normally are. We will see what we do at fund.

If we got to the next slide, you can see there the trend in ROE growth that I referred to a consistent improvement over time, given some of the key decisions that have been taken over the last few years and given the execution on this strategic decisions taken the last few years. As we go forward, we hope to continue to see improvement based on growing the underlying client franchises, being disciplined on costs and optimizing capital allocation.

So if we look at certain aspects of the balance sheet, the balance sheet is sound, the business is well capitalize, lowly leveraged with strong liquidity. So let's me go into a quick review of the different divisions starting with Asset Management.

As we have announced there is a Capital Markets Day on Tuesday where we will go into significant detail into the Asset Management business. So we will just go through quickly over this because we do have a big day coming on Tuesday where the team will go into the detail of the business.

We're seeing growth of 10% in operating profit to GBP91.5 million. The operating margin is a 31.4%.

We've seen a slight compression in the margin. At September 17, the margin was 31.8%.

As I said earlier, we continue to invest in key strategic growth areas. The AUM over the reporting period increased 5.1% to GBP109 billion.

We have indicated the substantial net inflows of GBP4.1 billion. If we just look briefly at the strategic priorities of this business, the business is managed for the long term, so the focus is never short term and we look to attain sustainable growth.

So we will be looking to concentrate our effort on our existing offering where we have differentiated and we have performance. We're not going to try to do all things to all people, only where we differentiate and we have performance that's where we will continue to spend our effort.

We will continue to look for scale through our global distribution model with specifically to the institutional another channel that we have been targeting and growing over the years. We look to capture the next wave of flows, specifically the rebalancing in the North American institutional market.

We also positioning ourselves for the future in that we do believe Asia in the long term is an area of significant opportunity. We will obviously continue to do hard work in the remaining markets that we have done well in over time.

As always, we'll continue to deepen and strengthen our investment and client capabilities. This business is about being relevant for clients and the creation of value and shareholder value specifically in the long term.

If we look at the Wealth & Investment business, as I indicated, we had an increase in operating income of 4.4% but we've had some cost issues that I have talked about already. So increasing income, significant increase in costs, again we've been investing significantly in this business for future growth.

Some of you will know about our digital platform in the wealth business called Click and in the South African business, in conjunction with the private bank, we have the one place. So investments and digital platforms is one of our key strategic focus areas as we go forward.

The asset under management grew by 4.5% in the neutral currency representing a net flow of 650 million. These performances are consistent with the industry given just how difficult our operating conditions are.

The business will continue to focus on internationalization. The business will also continue to focus on enhancing the range of services and products to the appliance.

I've already spoken about the need to invest in digital capabilities and specifically Click in South Africa one place with integration of the South African wealth business or the collaboration between the South African World Business and the private bank. We will also focus in particular in the U.K.

market on financial planning. If I move to the Specialist Bank, firstly globally, an increase in profits of 18.8% to GBP245 million.

We've spoken about the increase in the profitability of a Specialist Bank in the U.K. We've also indicated the resilient performance of the South African Specialist Bank, even though earnings are up by 4.2% only because that market has been particularly tough.

The cost to income ratio of the Specialist Banking business globally is now at 60%, operating income growing up at 7.1%, and costs up at 5.6%. You will remember that we have been investing pretty significantly in the private bank in the U.K.

that is largely done now. That cost is in the base, so we would expect as we go forward to gain some benefit out of that.

I have already indicated growth in core drivers of the business and customer accounts and in loans and advances. With respect to customer accounts, we saw in this period a significant increase in retail deposits and therefore the quality of our liabilities has increased.

If we dig a little deeper into the Specialist Banking business in the U.K. and other regions, net interest income up 18.7%, net fees up 14%.

What is really important on this particular slide is the history more than just the numbers for the period. If you look over a 5 year period, you can see consistent increase in net interesting come, you can see increases in net fees, you can see contribution in investment in associate income.

So this is not just one reporting season issue, we have been growing the business consistently, the franchise is growing. If we look at the return on equity, we can see that for this period, our return on equities is at 9.3%, we were at 3.2 at March.

So there has been a significant increase in return on equity. Our objective would be to have a double digit return on equity as we go forward.

As you can see, we are not too far from there. Hopefully, this is the last time you still see that line that says ongoing, because we've dealt with issues of the past, we are now reporting on a statutory basis.

If we go to the South African banking business, I've indicated that it has been affected by a tough operating environment. So we've seen softer loan book growth, client flow trading has been weak as well, as well as investment income.

But this is a resilient business. We have a premium position in the South African banking market and our clients are very resilient as well.

So we have also been investing in new areas of growth in the South African banking business. We have as an example invested in infrastructure life, we have recently reorganized our business offering to the mid-market and investor for business and we will be launching transactional services in that market.

So that business is resilient and they are looking at new ways to grow revenue, but more importantly, to serve their client base. Just looking at the return on equity there, the return on equity for this particular period is 12.4%.

Obviously this business has a large equity portfolio, but in periods returned 6.9%, we generally do judge the performance of the investment portfolio on the basis of the internal rate of return. So if you see that ROE that just fit into your mind that there is large investment portfolio there.

The Bank and Wealth business in South Africa is quite integrated as well. And if you were to look at those businesses together, you will see that the performance on an ROE basis is quite encouraging.

We would in the long term be looking at returns in the South African Specialist Banking and wealth business of over 15%. So if you look at the strategic priorities of the Bank and Wealth business post the measure, when we will not have access to the earnings and cash from Asset Management, we would see our ROE still being significantly higher than where you would have thought if you simply stripped out Asset Management.

So we would be looking at a target range of between 11% and 15% post the measure. So our concentration as we go forward will be to grow the underlying client franchise.

This is what this business is about. Client acquisition and deepening of existing client relationships.

We will be looking to continue the progress that has been made in the U.K. private bank.

We will also as I have indicated be investing in technology platforms, spoke about one place in South Africa if we can invest here and generally other investment in technology to improve efficiency, to improve find experience and to improve client acquisition. We believe technology is important, so we generally will be high tech but we will remain high touch as well, because we believe personal service is absolutely critical as we go forward.

I've indicated that we've invested a lot because the investment is in the base, revenues beginning to grow and we have a disciplined cost approach that we would look to improve the growth ratio. We will also look to manage our capital base, specifically we would be looking at efficient capital allocation.

We would look to address in future the dilution that has been cost by issues of shares to the share scheme and the philosophy will be to buy back shares as oppose there but we will give you more detail on that particular aspect later on. We intend to have a Capital Markets Day for the Bank and Wealth business on the 26th of February.

This business is about clients and this business is about the people that work in it, because if we concentrate on clients, if we create an environment that motivates the people that Hendrik spoke about the 10,000, we should be able to create value in the long term. Hendrik, you want to conclude with this slide or should I just take.

You can just take it.

Should I take it, okay. In concludes, we're committed to shareholder value.

We have indicated that we are going to look to simplify the business to sharpen our focus as we grow and do so in a disciplined manner. Post the measure, we will release two independent businesses that are post for long term growth and value creation.

Thank you very much. Hendrik, will you take the questions.

Any questions, shall we start with Johannesburg.

Good morning. My name is [indiscernible], I am from Reuters.

I just have a question for Fani. Discovery and three new brands are coming to town, do you lose any sleep over that?

Thank you.

Fani, do you want me to answer that, it's a South African issue mainly.

I am happy for you to take it Ciaran.

First of all, there is a lot of competition in our market in South Africa, it's not just discovering. The second point, I think that there are many other financial services organizations in South Africa who should be a lot more worried about Discovery coming in than ourselves.

We are very niche organization. We provide Wealth & Investment, Wealth and Banking services both locally and offshore.

That is a key part of our offering to a very select niche target market. So, yes everyone says you welcome competition, well I say that with the smile on my face competition is good, because it is good for the market, but we wish Discovery well and also the other organizations that are coming now to do well because that will maintain the integrity of the financial service system which is very important.

Thanks Ciaran. Ciaran is the Global Head of the Private Banking and Glynn Burger he will be the Head of Risk.

So let's see what Discovery has to offer, competition is good, sharpens our gain, beneficial for clients. We welcome it.

We have another question here.

Good morning, guys, congratulation on the result. It's [indiscernible] from Merrill Lynch.

Just one quick question. Your ROE improved to 13.4%, could you just please tell us what the impact of IFRS 9 was on your ROE?

Fani will deal with that.

Okay. We've done the numbers, Nishlan, do you want to talk about it.

In essence, the impact was about GBP250 million. Nishlan is our CFO.

I think the impact of IFRS 9 obviously opening reserves were adjusted. There was about GBP265 million, that would have added about 0.4% to the underlying ROE number.

The income statement effects of IFRS 9 has been fairly muted because we haven't clearly seen any key change from a modeling perspective. I think fundamentally you see the growth in ROE in the current period really supported by the underlying fundamentals of the business.

Thanks Nishlan.

As illustrated, ROE type of thing, it is over time metric and it's an overtime consistent metric. So to get too hung up about a particular number at a point in time, the focus is you've got to look at the train and that's why Fani try to show the train.

We have to be actually I wouldn't be here, before they will be explaining to you that ROE about 15% in two years' time but I don't know having any targets, but that really is - it's exactly, you quoted that so that's I quoted.

Any other question we here in Johannesburg? That's it, Fani.

Thank you, Ciaran.

Thank you.

In London? There is a mic coming so the people in Johannesburg can hear.

Abhishek Sahoo from Citibank. Quick question around post demerger for the Bank, will - is the report around the current dual listed company structure or that stays as it?

No, that will stay as is. We want to be quite categorical about it that while there is a level of complexity, we do believe that in the long term this is the right structure for us.

So we've considered the issue but be quite clear but there is the structure that we will have going forward. I think it would be a problem trying to take this business into the U.K.

market if you want to collapse this way, I don't think you can get regulatory approval for that, similarly trying to take the U.K. bank to be owned by the South African business would not work commercially.

So we are quite definitive about it. This is the structure for the foreseeable future.

And Abhishek, it's exactly the opposite for the Asset Management business because it's a simple business, it's not a capital markets dependent business. And I think that would be a move away from the DLC for obvious reasons.

Subject of course to regulatory approval and ultimately shareholder approval,

Thank you.

Any other questions? I think we can, maybe it's almost end Fani.

Thank you very much supporting us today and being here and we look forward to your attendance at the Capital Markets Day coming up and then of course we'll be back after what is probably a slightly tougher macro environment in the second 6 months of the year and we hopefully would have delivered on the agenda we've given you which is simplification, focus and discipline. Thank you very much.