Investec Group

Richard Wainwright - CEO, Investec Bank Limited, South Africa Stephen Koseff - CEO and Executive Director Nishlan Samujh - Head, Global Finance

Good morning, everybody and welcome to Investec. My name is Richard Wainwright.

Stephen will be doing his presentation and delivering the results from London this morning and we should be crossing over at any minute now. So there he is.

Okay.

[Indiscernible] in which we saw strong operational performance across all our areas of activity. I think it is a year in which we saw good activity levels from both our corporate and private clients and we managed to deepen our core franchises with very strong growth in funds under management and I think we benefited from that strong growth.

And we continue to invest in the future through our strategic initiatives to ensure that we're ready and fit for whatever comes at us as an organization. I think we all know that we had a very strange operating environment.

We call it mixed, but it was quite volatile. There were a lot of events happened in this past year which I don't need to repeat.

On the exchange rate front their end, the 5 orders are done in previous -- the previous 4 years and appreciated quite strongly against all currencies and developed market, stock markets also ran quite strongly across the board. But one exception was which is not a developed market was the JSE which was down about 0.4%.

So many mixed environment, lot of volatility, lot of political uncertainty and I think not too standing that we're able to produce a very decent set of results. So if we look at our growth, I think, across the board, we had very steady growth.

We did change accounting policy for Investec Equity Partners in South Africa which would've had a quite a big impact on the South African results, but not to standing that, we had overall operating profit up 18.5% to £599 million. That could be 8% on a currency-neutral basis.

Earnings per share up 16.9% to 48.3p that 6.3% on a currency-neutral basis. Dividend per share up 9.5%.

Net asset value per share up 22.3%. And intangible net asset value per share up 28% which is also 16.1% on a currency-neutral basis.

And I think that was quite a strong overall performance in this particular year. We also had a solid performance from the ongoing business which if you remember we took -- we separated out legacy some years back.

We still have a residual legacy portfolio that is having some impact on the results and I think that's what we'll focus on for the rest of the presentation. I'm now going to call on Nishlan Samujh, our Chief Financial Officer to take you through the numbers.

And then I will return to take you through different operating areas. So Nishlan, you're not required here to go through this.

All right. Thanks, Stephen and hi to everyone.

I think just starting off with that good summary, it's worthwhile just having a look at the diversified business model and how that operated over the period. You can see that U.K.

and South Africa really contributed relatively consistent to the prior year with U.K. contributing around about 44% of the overall operating profit in the current year.

The U.K. and other operating areas grew by 10.8% and these are the ongoing numbers.

The South African business was marginally up, but as Stephen alluded to you earlier, we've got a rebasing with regard to IEP. So fundamentally the underlying operating areas actually grew strong over this current period offset by the drop of on investment income which is really a rebase in the current period.

If we look at business diversity, you can see that the Asset Managements and the wealth business contributed 36.2% to the bottom line, up from 35% in the prior year and a strong contribution from the Specialist Banking businesses across both geographies. We'll see that in some detail later.

Looking at the earnings drivers, so third party assets under management up strongly 23.9% in the period to a £150.7 billion, 14.8% up in the currency neutral. You saw from the first slot of the slide that we've had strong equity markets in the period and that's obviously driven a lot of this number in the current year.

We have had good net inflows within the Wealth business as well. Customer accounts and deposits, you can see that the core loans and advances has grown 26.8% in the period to £22.2 billion and the customer accounts are up at a slightly lower rate of 21.1% in the current period.

So a little bit of rebalancing in terms of that mix, both up strongly within currency neutral numbers as well. If we get to the operating income line which is up 18.1% over the period to just under £2.3 billion.

If we -- looking at the fundamentals, net interest income was up 19% off the back of strong growth across the banking businesses in terms of lending activity. Net annuity income was actually up 20.1% in the period.

[Audio Gap] You saw the fundamental growth in funds under management. We also had -- which really supported strong growth within the Asset Management and Wealth businesses.

Within the Specialist Banking businesses, sort -- the gearing up of the property fund has also supported that line. And particularly in the corporate business in the U.K.

some strong fee has been earned in the period. Investment income is one line that has been impacted this year by the change in accounting.

That's down 10% to -- still to £155 million. Within that, there's been some strong contribution from our investment portfolios.

However, IP has fundamentally impacted that line in the current period. Trading income, again, supported by a strong client activity over the period and some of the volatility that you saw in the market is also positively impacted on that line.

So up 35.6% to £166 million. If you look at the makeup of the £2.3 billion of operating income, £1.3 billion comes from third party assets and advisory income and just over £1 billion from net interest investment and trading income.

Investments and associates -- investment income and associate income made up 14% of the total and net annuity income made up 42% of the total operating income. So you can see that the capital light businesses contributed 56% overall and the capital intensive business is 44%.

Once again, you can see our exposure to both operational and effectively-lending risk being diversified within this. If we look at costs, our cost-to-income ratio has remained at about 65.8%, over the period.

You see that operating income growing at 18.1%, but cost effectively growing at a similar rate of 18.1%. The growth in the cost base has been largely intentional.

There has been a large investment within -- with people which really follows the growth initiatives as well as some of the growth of activity that we have already seen across the board. IT infrastructure and effectively the rollout of the private client offering within London and the investment within that portfolio.

There is a bit of double counting on some of the costs incurred on premises and as we gear up for the move, we will see this for a little while. You can see that headcount has actually increased across all of the businesses and all of the franchises really showing that net investment.

Impairments was slightly up and this is total impairment. The impairments on the ongoing book dropped -- sorry, on the legacy book dropped over the period to £54 million from about £65 million last year.

And if we look at the overall credit loss ratio of 54 basis points, the ongoing book makes up about 29 basis points in the current period. So the overall ratio down from 62 basis points to 54 basis points largely attributable to the decrease in impairments associated with the legacy book.

The impairment levels on the ongoing book hasn't raised any alarm bells, those are still very much within our lower end of our understanding. Now if we look at the overall group performance, operating before -- operating profit before tax at £663.7 million, is up 13.7% in the period.

Attributable earnings up 15.1% in the period. So you can -- you see the fundamental growth is coming through in those numbers.

Adjusted earnings per share 54.1%, is 11.3% up. And as I've highlighted earlier, you've seen the growth in both customer accounts and net core loans and advances with net core loans and advances just slightly up stripping that growth.

In terms of financial targets, I think we're glad to see that the ROE is at 12.5% on the statutory basis versus 11.5% last year and an ongoing basis at 14.2% versus 13.9%. We'll look at that in a little bit more detail just now.

The growth in adjusted earnings per share, you can see that we've moved into a growth of 11.3% in the period which is ahead of our target on an ongoing basis and 16.9% on a statutory basis. The cost-to-income ratio is still above our target of 65%, but as I've indicated, that's really [Audio Gap] as a result of key investments currently into the platforms.

The dividend cover ratio based on the proposed dividend levels will end up at around about 2.1x, so comfortably within our target ratio. If you look at ROE, firstly, I'll draw your attention to growth in ordinary shareholders' funds.

You saw from Stephen's discussion earlier that, the net asset value per share is up significantly as well as tangible net asset value. Notwithstanding that strong growth in ordinary shareholders' funds, you can see that the ROE has grown to 12.5% overall and 14.2% on an ongoing basis.

I think to -- looking forward in terms of what levers we have to pull to improve the ROE. It's really key 3 areas.

One being activity levels and there has been a fair amount of investment from that perspective growing our client base and our core drivers and managing liquidity and optimizing our capital base. And we'll again, touch on that just now.

If we look at the balance sheet, both balance sheets, be Investec Limited and Investec plc, operate on the strong leverage ratios of 7.3% in SA and 7.8% in the plc. And notwithstanding those strong leverage ratios, we still have quite strong capital ratios.

And all of those capital ratios have been improved over the period. I think it's worth noting that these are reported under the standardized basis.

In South Africa, we do have a project to move on to AIRB and that remains on track towards implementation towards April 1, 2018. Indications through that project is that there is a strong improvements in the underlying capital ratio as you bring in the impact of actually measuring LGD in our underlying exposures.

Cash and near cash flows are at about £12 million over the period. We did run-up effectively our conservatism on the balance sheet, just pre the sort of E-referendum period and post that, we have started to manage on that number slightly over the period.

Stephen, I think I've run through that. Yes, back to you.

Thanks, Nish. So I think you got to handle on the macro numbers.

I'm going to talk briefly about the different businesses. I think if we look at Investec Asset Management, we did have positive momentum, we had very good growth in operating profit 22.3%.

That was clearly driven by increasing assets under management. We also saw some improvement in operating margin, where earnings grew at 18.1% and our cost grew at 16.2%.

So operating margin opened up from 32% to 33.1% and there are still costs that we -- still a lot of investment in our whole host of areas within Investec Asset Management regulatory and in terms of expansion. That is continues to take place.

And we also have been migrating some of the administrative functions back to Cape Town which is a cheaper jurisdiction. But overall, I think, you saw good opening up of the jaws.

I think, if we look at the funds under management, overall -- mainly affected by positive markets and ForEx. We did have some net outflows towards the back end of the year which ended up having net outflows of about £600 million, to which I'll cover in a moment to give you some color on that.

But overall, strong performance. So if we look at the funds under management by asset class exposure, about 59% of the funds we manage on emerging markets and 41% on developed markets.

You saw in this particular period, we had authorizing Asia Pacific and Middle East and that wasn't performance-based, that was just restructuring of portfolios or need for some cash from certain quarters. Africa, we had very strong growth.

You remember last year, we -- Africa was a key area that we had a turnaround and the performance in the African business has been excellent and the flows have really started to come back in. If we look at Europe, we were flattish, U.K.

up and Europe a little bit down. And then, the Americas, we lost some flows and that's obviously a core area that we need to make sure that we penetrate properly because it is a core area of focus, where we want to attract flows.

So for us, we're cautious on the outlook financial asset process. As we said earlier, that was particularly volatile and we have a solid pipeline that flows to -- picture still a little bit unclear.

We -- there are lots of regulatory demands across the spectrum and there's some significant regulatory projects, in particular, MIFID II, but we've been guiding down this business for 26 years and I think we're very confident of where we're in life. If we look at the Wealth and Investment business, I think operating profit up 8.8%, 10% and off in rand and the U.K., 3.3%.

The U.K. itself was very strong that was -- would have been I think between 12% and 14%.

But we still have running some losses in the Swiss platform which we're addressing and I think that would have had an impact, whereas last year, we had some one-off gains in the number. So the number looks -- the underlying performance was much stronger than these numbers reflect.

Operating margin is slightly down 25.9% from 26.4% and net operating income up 11% and operating costs up 12%. You would be well aware that there's been a significant investment in our digital platform and we're -- we have gone large internally for staff on click and invest and we opened up yesterday to all staff and we will formally launch this to the general public in the second half of June.

But again [Technical Difficulty] like most areas we have to spend a lot of money on IT infrastructure and compliance. They also have a big MIFID II project.

And then -- so overall, funds under management in the U.K. up 19.4%, in South Africa actually down a little bit in rand and that's partially because the rand was strong and some of their clients have invested internationally.

So -- and you saw the Johannesburg Stock Exchange down a little bit. So overall, we had net inflows of £1.2 billion in that business.

So, If we look at the overall business, I think clearly we operate really -- mainly South Africa, Europe with a small platform developing in Asia. So Europe is U.K., Ireland and we have a swiss platform which is for the international business activities or international investors and then we have a office in Hong Kong.

And then South Africa, we have South Africa and Mauritius, right across South Africa and Mauritius. Clearly, it is a difficult market to predict.

I think consumer and investor confidence in South Africa clearly will be impacted by all the politics and the political uncertainty going on and I think you're all well aware of the uncertainty in the U.K. with an election and then whether you have a hard or soft Brexit.

But we're still confident in where we're in this business and we continue to see good growth. There is a lot of collaboration between this business and the private bank and that's a very important collaboration because of private bank probably has lots of clients and these clients need wealth management services.

Looking at the specialist bank, overall up 11% from £409 million to £454 million. The U.K.

was up 8.2% and South Africa was down 3.3% because of that change in accounting policy. As Nishlan mentioned, if it was not for that change, the business was up strongly underneath.

And particularly, we had very strong growth in South African private bank and quite good growth in the corporate bank. So that change in accounting would have affected the South African banking business.

The cost to income ratio declined from 59.1% to 59.9%. I think that's another area where we've spending significant amounts of money on IT infrastructure, increased headcount to support the building of the private bank in the U.K.

and we also had double premises costs because we will be moving to 30 Gresham street in 2018 and we have to already start paying the rent as we foot out the infrastructure in this particular period. Nishlan has covered loans and deposit growth across the board, so I'm not going to go into that.

Other than it was a -- loans were up 8.5% on neutral currency basis and deposits up 5.5% on a neutral currency basis. So again, if we look at the U.K.

specialist bank, as I mentioned, quite -- very strong growth in revenue £591 million to £713 million, but we also had strong growth in costs because of the initiatives around the private bank, the initiatives around the IT projects and the infrastructure, IFRS 9, again MIFID II and the regulatory projects and then the double premises costs. If you look at the ROE net business it move from 11.4% of the tax to 11.5%.

So we're also seeing -- as you can see from March, 2014 to now a decent improvement in ROE. I think on the legacy we -- I think we beat our original legacy target and we did sign our trading update that it will be at about £475 million over that £476 million, some settlements actually just missed the deadline that came in April, but down from £583 million.

We expect that to be down to £382 million March this year and £221 million by March [Technical Difficulty]. So we're selling assets.

Obviously, we're cleaning up as well and taking some hits every here and then, but we're able to manage -- we believe we'll be able to manage this thing down reasonably well over the next 2 years. Obviously, the economic conditions can affect this.

So we're always cautious on what can happen in overall economy, but at the moment, it's going according to plan. And then, if we look at South African specialist bank, clearly this is an environment where we did see growth in top line notwithstanding the fact that we changed accounting for associates.

It is a volatile environment. We have still seeing client activity and I think the volatility or the writing downgrades and all that's kind of things can affect activity.

But at the moment, we're still seeing reasonable activity from the clients. Certainly last year and up to now we're still seeing reasonable client activity.

So we still hopeful that notwithstanding the difficult economic environment, we can still manage to grow this business in next year. And the ROE of the bank, if I strip out -- we strip out the investment activities, because the change in accounting policy will delay the recognition of profits from the investment activities.

So the ROE, excluding investment activities 15.3% from 15.2% last year. We need to get that ROE over time above 16%.

So just a little bit of color on Investec Equity Partners. We created it in January 2016.

I think you are well aware that it was a portfolio that was sold in 7.6 billion rand. We received 2.5 billion rand of cash and we end up with 45% to the shares.

It's a diversified investment holding company. Its key investments are in the chemical business, a very strong positioning in the chemical business, industrial services, building materials.

It has a life assure that it owns a stake of in the financial services industry which is at a different kind of target market to the one that we operate within and then it has industrial energy and 1 or 2 other assets. But we quite -- this -- it's taken about a year to get everything settled and we're quite confident on the ability of this business actually to grow and develop.

We've got very good partners and we look forward to strong growth in this business over time. But it is an investment from our point of view which were not equity account.

So if we strip out the investment activities, just to give you some color, historically, we were making about 15% per annum ROE in these businesses. It's really this type of activity got to look at from an -- our perspective and this year was not a good year from a recognition of income and we've stripped out the impact of that on the Bank ROE.

And in future, we -- as we said to you in the trading update on September, we will show this separately in terms of giving you an understanding of what the performance of the underlying assets are. So, I think if we come to strategy of our core businesses and Asset Management is still -- the primary focus is on clients, our people and long term growth.

I think our strategic priorities are investment performance. 18 months ago, we were worried about performance in South Africa that turned around quite strongly.

Last year, we had 2 areas that we worried about performance in, one was emerging market fixed income. We're seeing a strong turnaround in emerging market fixed income, as you saw that risk on and search for yields starting to take shape, again.

And then in our full factor investment philosophy, we had a very weak performance last year and we're starting to see a turnaround. But those 2 are big parts of our business and we obviously need to see those performances turnaround.

We're -- it's important for us to grow the advisory channel. I said -- I think we had very good growth in that -- in South Africa.

We still need to penetrate in the rest of the world. With regard to our focus on our larger markets, North America is important to us.

And it's something in area that we're going to focus on quite strongly over the next year. We see good growth in multi-asset and global equities and we will continue to scale those businesses.

And then we always nurturing a limited number of long term growth initiatives because, obviously, you need to nurture these initiatives to ensure that when something dies, you have something to take over. And again, we're very client-driven business.

We invest in our people and we try and lead our people and I think that this business has had a long history of success. On Wealth & Investment, our strategic priorities are the internationalization or creating a strong operating platform in Switzerland.

And I think we're going to partner Switzerland and South Africa in that platform. And hopefully, we will see some decent savings on the one hand or utilizing our capability on the other.

As I said, digitization has been a strong theme here. We're about to launch our click and invest initiatives in the second half of this year.

One Place which is a link between wealth and the private bank is working exceptionally well and we continue to build One Place and continue to create that platform and we continue to get flows from that activity. And then it's just a question of how we digitize the back office, that's an important thing for us is to eliminate blockages through human intervention for things that are easily digitizable.

So these are things that we continue to focus on. And hopefully, we can still continue to see good inflows and growth in this business.

We're -- it's a very good business. And then on the specialist banking side, I think if we look at the U.K., our fixed strategic priority is to build a private bank, to build it domestically a relevant Private Bank.

We've been talking about this for some time and we shifted the product model to a client-centric model some time back. And we're focusing on high net worth individuals and active entrepreneurs.

We're building -- still building some of the processes, the products and the people. This is an area, we have been hiring and we think that all the platforms will be in place by the 1st of April, 2018, where we'll start -- being able to drive this business forward.

But a lot is taking place here and we're quite confident that we will have a great offering and we do have a great ability to penetrate our client base. I think we also have broadened the client base by building the franchise, while deepening our client relationships.

These are focus on small and mid-corporates and we always incrementally add new products and services. So we're seeing good growth in the mid-corporate space.

And then important for us as a firm is to increase improve coordination both across business units and geographies. And I think that's something that we're getting much better at and then it's very, very important for growth and development of our client base.

So one of the challenge that we have here is costs and obviously, this is -- and some priority is, we have a lot of initiatives running simultaneously, that is costly and we have to focus on reducing and managing those costs over time. But in the meantime, we still have to invest.

On the South African front, I think client acquisition and client penetration continues to be important. We're growing our client base strongly and we're continuing to penetrate our market through a -- our digital offering is still evolving.

And it's very important that we continue to invest in this offering, we'll always get competition coming at us in this particular area. So it is an area that we have had good success and we need to maintain it.

The other important area is leveraging our international capabilities to our corporate clients and we've seen a lot of success on that in the past year as corporates look particularly -- South African corporates have been looking to invest internationally and we have supported them in that those kinds of endeavours. And then always, cost is an issue and we need to make sure that our cost is under and out of sink.

The final thing which I think I will cover a little bit, for -- in the next slide is we're going to -- we're launching Investec Life. We have had a Life insurance license for decades, but we've never used it and we feel that's a very appropriate product to offer to our client base.

This will take place in the second part of this year, may be the third quarter of this calendar year. And I think it is an offering to our existing clients.

It is a whole inner offering and this is something that we think that we can be pretty successful at. And that we will give you a lot more color on it when it's launched.

But we've been working on this for some time and it will be, hopefully, a very effective product that clients can apply for and modify online. But this will come in the second half of this financial year.

So I think if I close -- in closing I think, we continue to focus on our revenue drivers. We need to continue to build quality income through diversified revenue streams.

We'll continue to strive to grow our funds under management. We'll have managed growth in loans and customer deposits.

I think you always want to manage that growth quite carefully because it's also very much linked to capital. That's more important for us actually to build capital light activity and that's why we want to see increased transactional activity through client penetration.

And I think it's more important for -- through client penetration because markets confidence goes up and down and therefore, we don't want to be affected by too much of our confidence. I think in building our franchise across our customer base remains very important.

I think we're very visible and we will continuously many on building our franchise, our clients and our brand. I think coming from a country like South Africa, as far as it deploys to anywhere in the world, you have to be very responsible corporate citizen and that means you need to invest in your own people.

You need to invest in your communities and we also need to invest on our planet. And I think these are areas that we as Investec, take a lot of pride in the kind of work that we do and the kind of investment that we make.

And that particularly, a place like South Africa communities and upliftment of society are very, very important to us, because if we can make a difference there and corporates in South Africa are trying to make a difference there, then you can transform that society in a non-populous way. So for us, I think when we look at the overall picture, we've made very good progress again in building our core franchise, while at the same time generating growth and returns for our shareholders.

I think we have a very strong leadership team. They're motivated to build their businesses and our people always look at Bernard and I and say, "Well, you guys, you're getting old, when are you going?"

But the guys ride and run the businesses run their businesses. We're more portfolio managers and just trying to help support and encourage and probably sometimes irritate them.

But we try and build quality income through varying cycles. We also focused on coordinating our offerings, integrating our IT systems to leverage our client profile.

So we can maximize the benefit that our clients get through an integrated client experience as well as hopefully, we'll earn some extra revenue. I think we spent a lot of time engaging with our stakeholders, investing in the learning and development of our people and providing support for our communities.

So we believe that we're well positioned to build sustainable business and not only that provides decent returns to our shareholders, but also contributes to stability and social upliftment in the societies in which we operate. So I think in closing, this was a good year for us.

We had good levels of activity. They supported performance and we continued to strengthen our client franchise businesses.

I think we're in a very uncertain macro environment that could impact levels of activity. I think we as a firm generally have a culture that doesn't matter what kind of environment you're in.

We sort of like can get things done. But overall, it is volatile.

We believe that our business model together with the strategic initiatives that we have undertaken do put us in a decent position to continue to grow in our core markets and that's what its all about at the end of the day. Is -- do you have the ability to grow in your core markets, do you have the strength and the mentality and the capability to continue to grow no matter what balls the world throws at you.

I think for us, we're very satisfied with this year. Our people have done a great job and we'd like to thank all of them for the contribution that they've made in getting us to this point.

I think we have come through a lot over the past 10 years and I think it's a credit to our people that we're where we're today. So thank you, everybody and we will now be ready for questions.

Yes. I'm here Stephen.

Any questions? There are actually no questions.

Okay. We're here in London, any questions.

Where that one fellow who always asks questions? Not here today?

Okay we can have tea and cake. Have we got cake?

Thank you.