Investec raises dollar deposits ahead of ratings decision

Financial services group shrugs weak rand to post marginal increase in profit.

Specialist bank and asset manager Investec has raised more dollar deposits to mitigate the impact of a potential sovereign rating downgrade.

“We’ve gone long on the dollar because if we are downgraded the availability of foreign currency may be an issue and we have to make sure that we have enough resources to get through that,” said Stephen Koseff, chief executive of Investec.

Should South Africa’s credit rating be cut to sub-investment grade, government and business may struggle to raise foreign currency.

Although there is uncertainty as to whether the foreign currency bond rating will be downgraded, Koseff said the domestic currency bond rating is likely to remain unchanged, above investment grade level.

The financial services group shrugged off a 3.4% depreciation in the rand’s value against the pound sterling to post a marginal increase in profit.

The South African group, which reports in pounds, posted a 0.7% increase in statutory operating profit to £281.4 million for the six months ended September 30 2016.

On a currency neutral basis operating profit rose 1.6%.

In pound terms, the group’s operating profit before tax dipped 0.2% to £314.5 million whereas it increased by 2% to R6.25 billion in rand terms.

Investec benefited from a 16.6% increase in operating profit to £82.3 million in its asset management arm, which boasted total funds under management of £89.8 billion at its half-year mark.

Koseff said net inflows of £1.1 billion were very good considering market volatility, impacted in part by the political uncertainty in South Africa and the United Kingdom’s Brexit Referendum.

“Apart from the financial crisis year, I don’t know whether one has had a year with so much going on from a political, geopolitical and economic perspective. We are very mindful that life is very challenging out there but we believe that our operational and geographic diversity supports a recurring income base, which has proved resilient notwithstanding fluctuating market conditions,” he said.    

With net inflows of £7 million, operating profit at its Wealth and Investment business rose 14.1% to £43.2 million. 

Specialist Banking operating profit fell 7.1% to £212.8 million, which Koseff said was impacted by a decline in investment income. In South Africa, its’ specialist bank reported 9.2% decline in operating profit, while that of its UK and other businesses decreased by 3.6%.

Koseff said the South African unit is not seeing “a massive amount of stress” on its high net worth individual and corporate client base. Instead, the decline relates to change in accounting treatment for the assets transferred to Investec Equity Partners.

However, an increase in defaults in the South African banking business drove group gross defaults up to £272.3 million from £201.9 million. The defaults stemmed from corporates with exposure to the mining industry and West Africa, the region hard hit by low oil prices.

“We may be at a turning point in the mining cycle, where these mining groups have cut costs quite dramatically, where they get an uptick in revenue and now the profit comes forward,” Koseff added. 

At group level, impairments on loans and advances ticked up to £18 million from £17.7 million.

Diluted headline earnings per share (HEPS) amounted to 23.8 pence compared with 20 pence over the prior corresponding period.

It declared an interim dividend of 10 pence per share compared with 9.5% a year earlier.

The group did express concerns about persistent macroeconomic uncertainty linked to “political noise” in South Africa, the UK’s plans to leave the European Union and a new presidential administration in the United States.

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