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Investec legacy portfolio immaterial in 2018

Group reported double-digit increase in profits despite uncertainty in SA and UK.

Investec aims to manage down its legacy banking portfolio in the United Kingdom such that its impact on the group is immaterial by April 2018.

The portfolio, comprising assets taken on before the 2008 financial crisis as well as assets related to activities no longer undertaken by the UK specialist bank, has been actively managed down from £476 million as at March 31 to £425 million over the six months ended September 30. It reported a pre-tax loss of £32.9 million with total net defaults amounting to £106 million.

Stephen Koseff, Investec’s group chief executive, said it would continue to actively manage the portfolio down so that the group would no longer have to report separate statutory and on-going results from April 1. “The whole book won’t be gone but it will at a level that is not materially anymore. We gave you a forecast of £330 million – it may be a little lower than that – but it won’t be making a big difference on results like it has been making,” he said.

“The intention to manage the legacy book down by April is very positive even at the expense of higher impairment costs. The sooner they deal with it, the better so that they can focus on turning the specialist bank and gain sufficient scale to compete [in the UK],” commented Simbarashe Chimanzi, an equity investment analyst at JM Busha.

Despite political uncertainty in South Africa and Brexit-related uncertainty in UK, two of its largest markets, the group reported an 11.8% increase in interim operating profit to £314.6 million.

Specialist banking was the main driver of profits, with the business reporting a 12.5% increase in operating profit to £239.4 million, on the back of a strong performance by its South African arm. The unit registered an operating profit of £165 million, up 44% in reported currency and 21.6% in rand terms. In the UK, the specialist bank’s operating profit fell by 22.1% to £74 million, as the strong investment baking and client flow trading activity levels registered in the prior period fell.  

The performance of the group’s Wealth and Investment and Asset Management businesses were supported by higher average funds under management and combined net inflows of £3.6 billion.

The Wealth and Investment business grew operating profit by 14.7% to £49.5 million, with the UK business outperforming the South African unit. Koseff said lower brokerage volumes across private clients weighed on the South African unit.  Total funds under management grew to £55.5 billion from £54.8 billion as at March 31.

Asset Management grew operating profit by 1.2% to £83.2 million, as earnings were negatively impacted by lower performance fees in South Africa.

“The South African asset management performance has been positive relative to peers, but on an absolute basis relative to their benchmarks they underperformed, negatively affecting fees. This can be fixed and we believe can be turned around,” said Rahima Cassim, a portfolio manager at Ashburton Investments.

Amid widespread talk of passive asset management posing a threat to active asset managers, Koseff said the business has positive momentum and affirmed Investec’s confidence in the business as an active asset manager. Total funds under management increased to £98.2 billion from £95.3 billion in March.

At group level, net interest income rose 16% to £364.4 million while net fee and commission income rose 9.4% to £666 million. Investment income more than doubled to £61.9 million from £28.8 million, largely due to the strong performance of its South African investment portfolio.

Its credit loss ratio deteriorated to 0.28% from 0.19% as impairments on loans and advances increased to £31.1 million from £18 million.

Operating income increased by 13.2% to £1.190 million while operating costs increased by 12.9% to £792.5 million, resulting in positive jaws.

The group reported a 17.2% increase in earnings per share to 26.6 pence and lifted the interim dividend by 5% to 10.5 pence.

It flagged continued political uncertainty in South Africa and the UK as concerns, with Koseff saying that the business would continue to “play the ball”.

“We’ve got to concentrate on our business because we can’t work out where the politics is going. That means look after our clients, build our product offering, make sure that we are efficient in what we do and just keep playing the ball.

“We’re not politicians, the environment is given to us. We can give advice, we can try and help, we can express our opinions. But at the end of the day we don’t run politics, we run a business and we have to try and make sure we navigate the difficult bumps in the road.”

Listen: Investec H1 profit climbs: Clients remain active

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