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Investec Limited Investec plc
Incorporated in the Republic of South Africa Incorporated in England and Wales
Registration number 1925/002833/06 Registration number 3633621
JSE share code: INL LSE share code: INVP
NSX share code: IVD JSE share code: INP
BSE share code: INVESTEC ISIN: GB00B17BBQ50
ISIN: ZAE000081949
Investec (comprising Investec plc and Investec Limited) ' pre-close trading update
18 September 2020
Investec today announces its scheduled pre-close trading update for the six months ending
30 September 2020 (1H2021), the results of which are due for release on 19 November 2020.
A conference call will be held today at 08:30 UK time / 09:30 South African time. Dial-in
details are in the Notes section of this announcement.
The commentary and trends that follow, unless stated otherwise, relate to the five months
ended 31 August 2020, and compare forecast 1H2021 to 1H2020. The comparability of
1H2021 to the prior period is impacted by the economic effects of COVID-19 which prevailed
in the period under review.
Trading update:
' Operating environment: A challenging economic backdrop, primarily caused by COVID-
19 and associated lockdowns, resulted in reduced economic activity and increased
market volatility. The first half of the year has seen lower average interest rates, reduced
client activity and a 22% depreciation of the average Rand against Pound Sterling
compared to the prior period.
' Client franchises: The Wealth & Investment businesses reported net inflows and growth
in funds under management (FUM). The Specialist Banking businesses have seen good
client acquisition in both geographies, the Private Banking franchise showed resilience
reporting loan book growth since year end while the corporate lending businesses
experienced reduced lending activity.
' Key earnings drivers: Over the five months to 31 August 2020, third-party FUM
increased by 14.1% to #51.4 billion (31 March 2020: #45.0 billion) and net inflows were
positive at #391 million. Core loans and advances declined 1.3% to #24.6 billion (31
March 2020: #24.9 billion).
' Operating income: Remained under pressure, given the operating environment
summarised above and unfavourable market conditions for investment income and
hedging of structured products.
' Operating costs: Reduced against 1H2020 as management increased focus on
controllable costs given the challenging trading conditions and our stated strategic
objective to reduce costs.
' Simplification: Further progress was made on the group's strategy to simplify and focus
the business. In the UK we have further enhanced efficiencies by more closely integrating
business-enabling functions. This means we are proposing a reduction in the UK Bank's
London based headcount of approximately 210 roles or 13%.
' Capital and Liquidity: Capital and leverage ratios remain sound, ahead of internal
targets and regulatory requirements. The group's cash and near cash at 31 August 2020
was #12.9 billion (representing c.40% of customer deposits).
' Asset quality: The group expects elevated levels of expected credit losses, as indicated
at the FY2020 results in May 2020, mainly driven by forward-looking macroeconomic
scenarios. Following the increased impairments, including a COVID-19 overlay, raised in
the last quarter of FY2020, the annualised credit loss ratio is expected to be between
0.47% to 0.54% (1H20: 0.23%; FY2020: 0.52%).
' 30 September 2020 net asset value (NAV) and tangible NAV guidance:
o NAV per share expected to increase from 414.3p (FY2020) to between 422p and
428p.
o Tangible NAV per share expected to increase from 377.6p (FY2020) to between
387p and 394p.
' 1H2021 earnings guidance for continuing operations: This excludes the results of
Investec Asset Management (which was demerged in March 2020) from the comparative
period, but includes the equity accounted earnings of the group's 25% retained stake for
1H2021.
o Adjusted earnings per share (EPS) expected to be between 10.5p and 8.3p; 53%
to 63% behind 1H2020 (1H2020: 22.4p), primarily due to the challenging market
conditions described above and effective tax rate normalisation.
o Basic EPS expected to be between 8.4p and 6.5p; 56% to 66% behind 1H2020
(1H2020: 19.0p).
o Headline earnings per share (HEPS) expected to be between 9.0p and 7.3p; 47%
to 57% behind 1H2020 (1H2020: 17.0p).
' 1H2021 earnings guidance including discontinued operations: This includes the
results of Investec Asset Management (which was demerged in March 2020) in the
comparative period and includes the equity accounted earnings of the group's 25%
retained stake for 1H2021.
o Adjusted EPS expected to be between 10.5 and 8.3p; 64% to 71% behind
1H2020 (1H2020: 28.9p), as a result of the demerger of the asset management
business in March 2020 in addition to the factors noted above.
o Basic EPS expected to be between 8.4p and 6.5p; 66% to 74% behind 1H2020
(1H2020: 24.7p).
o HEPS expected to be between 9.0p and 7.3p; 60% to 68% behind 1H2020
(1H2020: 22.7p).
' Dividend guidance: In light of the prevailing guidance from both the South African and
UK regulators regarding dividend declarations, the group does not anticipate declaring an
interim dividend. Subject to any changes to this guidance the group will declare a
dividend in its normal distribution cycles.
Fani Titi, Chief Executive of Investec, said: 'The business has proved resilient in a period
characterised by COVID-19 stringent lockdowns in the first quarter, followed by a gradual
reopening of the economies. Severe GDP contractions and volatile financial markets
negatively impacted revenues.
Capital and liquidity ratios remain robust and are expected to be stable. Provisions for ECL
are expected to remain elevated in the period under review. Net asset value per share is
expected to increase. Costs were well managed.
The business is well positioned to support its clients through this challenging environment.
We will continue to ensure the safety and wellbeing of our people and the integrity of our
balance sheet. I wish to thank my colleagues for their dedication to our clients and
communities around us.'
For further information please contact:
Investec Investor Relations
Carly Newton
UK: +44 (0) 207 597 5546 / +44 (0) 207 597 4493
South Africa: +27 (0) 11 286 7070
investorrelations@investec.com
For media enquiries please contact:
Lansons (UK PR advisers) ' Tom Baldock. Tel: +44 (0)78 6010 1715
Brunswick (SA PR advisers) ' Graeme Coetzee. Tel: +27 (0)11 502 7419/+27 (0)63 685 6053
Divisional overview
The commentary and trends that follow, unless stated otherwise, relate to the five months
ended 31 August 2020, and compare forecast 1H2021 to 1H2020 for Continuing operations
excluding the asset management business which was demerged in March 2020. Continuing
operations include the group's equity accounted earnings for Ninety One for the period under
review.
' Adjusted operating profit for Continuing operations is expected to be 50% to 60% behind
1H2020 (1H2020: #276.3m) driven by lower operating performance.
o South African Specialist Bank: adjusted operating profit is expected to be behind
1H2020 in Rands and Pounds Sterling (1H2020: R3 205 million, #175.6 million).
We continue to grow our franchises in a difficult trading environment with growth
in client acquisition across both private and corporate clients. Growth in trading
income was offset by lower net interest income, net fee income, associate and
investment income; mainly due to lower interest rates, lower client activity and
negative fair value adjustments on both equity and property investments. The
ECL impairment charge is expected to remain elevated, albeit lower than 2H2020
which already incorporated updated macroeconomic scenarios and management
overlays given COVID-19. Operating costs are expected to be lower than the
prior period.
o UK & Other Specialist Bank: adjusted operating profit is expected to be down on
1H2020 (1H2020: #79.4 million). There was strong performance from the bank's
equity capital markets' activities. The Private Banking business continued to
increase traction and growth in clients with good levels of private client activity
and mortgages. Loan growth was relatively strong in certain areas albeit with
overall lending levels behind the prior period given COVID-19 impact on activity
levels, resulting in lower net interest and fee income. Net interest income was
also reduced by the fall in interest rates. Trading income continued to be
negatively impacted by unfavourable market conditions for hedging of structured
products as communicated in May 2020. The ECL impairment charge is expected
to remain elevated, however below the level reported in 2H2020 which included
COVID-19 overlays. Operating costs are expected to be lower than the prior
period.
o South African Wealth & Investment business: adjusted operating profit is
expected to be in line with 1H2020 in Rands, behind in Pounds Sterling (1H2020:
R258 million, #14.1 million) with modest fee income growth offset by the impact of
lower interest rates. Operating costs are expected to be lower than the prior
period.
o UK & Other Wealth & Investment business: adjusted operating profit is expected
to be behind 1H2020 (1H2020: #30.5 million). Revenue was impacted by the sale
of the Irish wealth business in 2H2020 as well as lower interest rates. Operating
costs are expected to be lower than the prior period.
' Net interest margins have been impacted by negative capital endowment and the lag on
the repricing of liabilities relative to assets following the reduction in interest rates.
' There were no significant costs associated with the implementation of the group's
strategic initiatives in the period under review.
Asset quality
' Given the further deterioration in the macroeconomic backdrop due to COVID-19, the
group is expected to report an increase in stage 2 and 3 loans in South Africa; and an
increase in stage 2 loans and stable stage 3 loans in the UK. The group predominantly
provides secured loans to niche target markets, such as professionals, high net worth
individuals and income producing real estate. The corporate book is well diversified
across industries and asset classes.
' COVID-19 relief: In support of our clients and the economy during this crisis, we have
provided various forms of relief on request from some of our clients. At the peak, the
group provided relief to loans equivalent to 13.7% of the book in the UK (mainly in asset
finance, lending collateralised by property and corporate lending) and 23.0% in South
Africa (mainly in lending collateralised by property and Investec for Business). Currently,
12.3% of UK and 5.6% of South Africa's loans are under some form of relief.
Capital and Liquidity management
' For the six months to 30 September 2020 for both Investec plc and Investec Limited:
o The common equity tier 1 ratio is expected to remain ahead of internal targets
and regulatory requirements.
o Leverage ratios are sound and remain comfortably ahead of the group's 6%
target.
' The group has maintained strong liquidity levels. Cash balances remain strong. As at 31
August 2020 cash and near cash balances amounted to #12.9 billion (#6.5 billion (R147
billion)) in Investec Limited and #6.4 billion in Investec plc) amounting to approximately
40% of customer deposits.
' The loan to customer deposit ratio at 31 August 2020 was 75%.
Other information
' The results of Ninety One are equity accounted in 1H2021 and reflected as a
discontinued operation in the 1H2020 results.
' Results have been negatively impacted by the depreciation of the average Rand against
Pound Sterling exchange rate of approximately 22%.
' The effective tax rate is expected to be approximately 19% (1H2020: 16.2% for the group
including asset management; 14.4% for Continuing operations).
' The weighted number of shares in issue for 1H2021 is expected to be approximately 934
million (1H2020: 948 million).
On behalf of the board
Perry Crosthwaite (Chairman), Fani Titi (Chief Executive)
Key income drivers
Core loans
Neutral currency
#'m 31- Aug-20 31- Mar-20 % change
% change
UK and Other 12,017 11,870 1.2% 1.2%
South Africa 12,571 13,041 (3.6%) (1.3%)
Total 24,587 24,911 (1.3%) (0.1%)
Customer deposits
Neutral currency
#'m 31- Aug-20 31- Mar-20 % change
% change
UK and Other 15,947 15,272 4.4% 4.4%
South Africa 16,418 16,949 (3.1%) (0.8%)
Total 32,364 32,221 0.4% 1.6%
Funds under Management (FUM)
Neutral currency
#'m 31-Aug-20 31-Mar-20 % change
% change
Total Wealth & Investment FUM 50,582 44,510 13.6% 14.3%
UK and Other 37,697 33,117 13.8% 13.8%
Discretionary 31,713 27,599 14.9% 14.9%
Non-discretionary 5,984 5,518 8.4% 8.4%
Southern Africa 12,885 11,393 13.1% 15.8%
Discretionary and annuity 6,948 5,982 16.2% 18.9%
Non-discretionary 5,936 5,411 9.7% 12.3%
Specialist Bank 782 508 54.0% 46.8%
Total third party FUM 51,364 45,018 14.1% 14.7%
Notes
1. 1H2020 adjusted operating profit
#'000 30 Sept 2019
Total operating income 959,269
Impairment losses on loans and advances (31,021)
Operating costs (622,247)
Depreciation on operating leased assets (845)
Operating profit before goodwill 305,156
Operating profit attributable to minorities (28,863)
Adjusted operating profit - Continuing operations 276,293
Taxation on adjusted operating profit (41,482)
Earnings attributable to other preference share and equity holders (22,464)
Adjusted earnings attributable to shareholders - Continuing operations 212,347
Adjusted earnings attributable to shareholders - Discontinued operations 61,265
Adjusted earnings attributable to shareholders - Total group 273,612
Adjusted earnings attributable to shareholders - Continuing operations including
25% interest in Investec Asset Management 227,663
2. Definitions
' Adjusted operating profit refers to operating profit before goodwill, acquired
intangibles and strategic actions and after adjusting for earnings attributable to
other non-controlling interests. Non-IFRS measures such as adjusted operating
profit are considered as pro forma financial information as per the JSE Listing
Requirements. The pro forma financial information is the responsibility of the
group's Board of Directors. This pro forma financial information has not been
reported on by the group's auditors.
' Adjusted earnings is calculated by adjusting basic earnings attributable to
shareholders for the amortisation of acquired intangible assets, non-operating
items including strategic actions, and earnings attributable to perpetual
preference shareholders and other additional tier 1 security holders.
' Adjusted earnings per share is calculated as adjusted earnings attributable to
shareholders divided by the weighted average number of ordinary shares in issue
during the year.
' Headline earnings is adjusted earnings plus the after tax financial effect of
strategic actions and the amortisation of acquired intangible assets. This
adjustment specifically excludes the after-tax gains realised on the demerger and
the sale of subsidiaries but includes the transaction costs incurred. Headline
earnings is an earnings measure required to be calculated and disclosed by the
JSE and was calculated in accordance with the guidance provided in Circular
1/2019.
' Headline earnings per share (HEPS) is calculated as headline earnings divided
by the weighted average number of ordinary shares in issue during the year.
' Basic earnings is earnings attributable to ordinary shareholders as defined by
IAS33 Earnings Per Share
' Core loans and advances is defined as net loans and advances to customers
plus net own originated securitised assets.
' The annualised credit loss ratio is calculated as expected credit loss (ECL)
impairment charges on gross core loans and advances (annualised) as a
percentage of average gross core loans and advances subject to ECL.
3. Conference call details
The conference call will commence today at 8:30 (UK time) (9:30 South African time).
Telephone conference dial in numbers:
- Australia: 02 8015 2168
- Ireland: 014 860 742
- Johannesburg: 010 201 6700
- Johannesburg: 011 535 3500
- Other Countries: +27-10-201-6700
- Other Countries: +27-11-535-3500
- South Africa: 0 800 203 599
- UK: 0 333 300 1417
- USA and Canada: 1 508 924 4325
4. Exchange rates
The group's reporting currency is Pounds Sterling. Certain of the group's operations are
conducted by entities outside the UK. The results of operations and the financial condition of
these individual companies are reported in the local currencies in which they are domiciled,
including Rands, Australian Dollars, Euros and US Dollars. These results are then translated
into Pounds Sterling at the applicable foreign currency exchange rates for inclusion in the
group's combined consolidated financial statements. In the case of the income statement, the
weighted average rate for the relevant period is applied and, in the case of the balance sheet,
the relevant closing rate is used. The following table sets out the movements in certain
relevant exchange rates against the Pound Sterling over the period:
Five months to Year to Six months to
31 August 2020 31 March 2020 30 September 2019
Currency Period Average Period Average Period Average
per GBP1.00 end end end
South African Rand 22.68 22.13 22.15 18.78 18.69 18.28
Australian Dollar 1.82 1.87 2.03 1.87 1.82 1.82
Euro 1.12 1.12 1.13 1.15 1.13 1.13
US Dollar 1.33 1.26 1.24 1.27 1.23 1.26
5. Profit forecasts
' The following matters highlighted in this announcement contain forward-looking
statements:
- Continuing adjusted EPS is expected to be between 10.5p and 8.3p; 53%
to 63% behind 1H2020.
- Continuing basic EPS is expected to be between 8.4p and 6.5p; 56% to
66% behind 1H2020.
- Continuing HEPS is expected to be between 9.0p and 7.3p; 47% to 57%
behind 1H2020.
- Group adjusted EPS (including discontinued operations in the prior
period) is expected to be between 10.5 and 8.3p; 64% to 71% behind
1H2020.
- Group basic EPS (including discontinued operations in the prior period) is
expected to be between 8.4p and 6.5p; 66% to 74% behind 1H2020.
- Group HEPS (including discontinued operations in the prior period) is
expected to be between 9.0p and 7.3p; 60% to 68% behind 1H2020.
- Adjusted operating profit for Continuing operations is expected to be 50%
to 60% behind 1H2020.
- Adjusted operating profit in the South African Specialist Bank is expected
to be behind 1H2020.
- The UK Specialist Bank adjusted operating profit is expected to be
behind 1H2020.
- The South African Wealth & Investment business adjusted operating
profit is expected to be in line with 1H2020 in Rands, behind in Pounds
Sterling.
- The UK Wealth & Investment business adjusted operating profit is
expected to be behind 1H2020.
(collectively the Profit Forecasts).
' The basis of preparation of each of these statements and the assumptions upon
which they are based are set out below. These statements are subject to various
risks and uncertainties and other factors ' these factors may cause the group's
actual future results, performance or achievements in the markets in which they
operate to differ from those expressed in the Profit Forecasts.
' Any forward looking statements made are based on the knowledge of the group
at 17 September 2020.
' These forward looking statements represent a profit forecast under the Listing
Rules. The Profit Forecasts relate to the six month period ending 30 September
2020.
' The financial information on which the Profit Forecasts are based is the
responsibility of the Directors of the group and has not been reviewed and
reported on by the group's auditors.
Basis of preparation
' The Profit Forecasts have been properly compiled using the assumptions stated
below, and on a basis consistent with the accounting policies adopted in the
group's audited financial statements for the year ending 31 March 2020, which
are in accordance with IFRS and are those which the group anticipates will be
applicable for the interim period ending September 2020.
' The Profit Forecasts have been prepared based on (a) the unaudited
management accounts of the group for the five months to 31 August 2020; and
(b) the projected financial performance of the group for the remaining one month
of the interim period ending 30 September 2020.
' Percentage changes shown on a neutral currency basis for balance sheet items
assume that the relevant closing exchange rates at 31 August 2020 remain the
same as those at 31 March 2020.
Assumptions
The Profit Forecasts have been prepared on the basis of the following assumptions
during the forecast period:
Factors outside the influence or control of the Investec Board:
' There will be no material change in the political and/or economic environment
that would materially affect the Investec group.
' There will be no material change in legislation or regulation impacting on the
Investec group's operations or its accounting policies.
' There will be no business disruption that will have a significant impact on the
Investec group's operations, whether for Covid-19 or otherwise
' The Rand/Pound Sterling and US Dollar/Pound Sterling exchange rates and the
tax rates remain materially unchanged from the prevailing rates detailed above
' There will be no material changes in the structure of the markets, client demand
or the competitive environment.
Estimates and judgements
In preparation of the Profit Forecasts, the group makes estimations and applies
judgement that could affect the reported amount of assets and liabilities within the
reporting period. Key areas in which judgement is applied include:
' Valuation of unlisted investments primarily in the private equity, direct
investments portfolios and embedded derivatives. Key valuation inputs are based
on the most relevant observable market inputs, adjusted where necessary for
factors that specifically apply to the individual investments and recognising
market volatility.
' The determination of ECL against assets that are carried at amortised cost and
ECL relating to debt instruments at fair value through other comprehensive
income (FVOCI) involves the assessment of future cash flows which is
judgemental in nature.
' Valuation of investment properties is performed by capitalising the budget net
income of the property at the market related yield applicable at the time.
' The group's income tax charge and balance sheet provision are judgemental in
nature. This arises from certain transactions for which the ultimate tax treatment
can only be determined by final resolution with the relevant local tax authorities.
The group recognises in its tax provision certain amounts in respect of taxation
that involve a degree of estimation and uncertainty where the tax treatment
cannot finally be determined until a resolution has been reached by the relevant
tax authority. The carrying amount of this provision is often dependent on the
timetable and progress of discussions and negotiations with the relevant tax
authorities, arbitration processes and legal proceedings in the relevant tax
jurisdictions in which the group operates. Issues can take many years to resolve
and assumptions on the likely outcome would therefore have to be made by the
group.
' Where appropriate, the group has utilised expert external advice as well as
experience of similar situations elsewhere in making any such provisions.
Determination of interest income and interest expense using the effective interest
rate method involves judgement in determining the timing and extent of future
cash flows.
About Investec
Investec partners with private, institutional and corporate clients, offering international
banking, investments and wealth management services in two principal markets, South Africa
and the UK, as well as certain other countries. The group was established in 1974 and
currently has approximately 8,700 employees.
In 2002, Investec implemented a dual listed company structure with listings on the London
and Johannesburg Stock Exchanges. In March 2020, the group successfully completed the
demerger of Ninety One (formerly known as Investec Asset Management), which became
separately listed on 16 March 2020. Investec's current market capitalisation is approximately
GBP1.4 billion.
Johannesburg and London
Sponsor: Investec Bank Limited
Date: 18-09-2020 08:00:00
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