Investec Group (INL) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Investec's trading update. [Operator Instructions] Please note that this conference is being recorded. I'd like to hand the conference over to Mr. Fani Titi. Please go ahead, sir.

Good morning. I'm joined on this call by Nishlan Samujh, our Finance Director; and David Van der Walt, our Executive Director. We would like to thank you for taking the time to join this conference call during this extraordinary period to discuss our preclose statement, which relates to the 11-month ended 29th February 2020. At the outset, however, I would like to emphasize that the well-being of our clients and colleagues is uppermost in our minds. Importantly, we appreciate the unique challenges faced by our clients in this environment, both physically and financially. These are unprecedented times. Our foundations are strong. We have the agility to respond. At Investec, we have always believed in living in society and not of it. To that end, we will do everything that we can to support our clients and colleagues during this trying time. I will now give you a brief overview of our announcement before opening the call for questions. Over the 11 months, Investec has delivered a resilient performance under demanding operating and trading conditions in both South Africa and the U.K. As you would expect, trading conditions in the last few weeks have worsened considerably and will negatively impact the full year performance. We will be able to report more fully on this period at our full year results in May, but it is clear we have already felt the impact in line with the market. Primarily as a result of these tough conditions over the period, group adjusted operating profit is expected to be 7% to 14% behind financial year 2019, and adjusted earnings per share is expected to be 16% to 23% behind financial 2019. Other key numbers we are reporting today are as follows: operating income is expected to be behind the prior year number of GBP 2.527 billion. Both net interest income and net fee and commission income are expected to be ahead or broadly in line with the prior year, while other income is expected to be behind the prior year. Operating costs are expected to reduce from the prior year figure of GBP 1.668 billion. While impairments are expected to increase in this environment, the credit loss ratio is expected to remain similar to the prior year between 31 basis points and 37 basis points. The effective tax rate is expected to be higher at approximately 16% compared to the 12% of financial year 2019. Now we move to the balance sheet. As I said at the beginning of these introductory remarks, we have strong foundations. We are well capitalized with strong liquidity. Capital and leverage ratios remain sound and comfortably ahead of regulatory requirements. The group's cash and near-cash position as at 18 March 2020 was GBP 12.4 billion, representing 40% of customer deposit. We also have strong dollar liquidity. Net asset value and tangible net asset value is expected to be between 425p to 450p per share compared to financial year 2019 figure of 434.1p. That is net asset value, and tangible net asset value is expected to come in between 385p and 405p compared to the prior year number of 386p. Moving on to our strategic actions. We've continued to make some progress. Most notably in this regard was the completion of the demerger and listing of the asset management business now called Ninety One earlier this week. This demerger has added to our capital strength. We have retained a 25% stake in this business, as you know. Furthermore, we have continued our program of restructuring, closing and selling of noncore and soft-scale businesses. And consequently, we have reduced risk. I would also like to reiterate that we have continued to invest in our platforms to achieve sustainable growth for the long term. We are on track with our U.K. private bank investment with both client acquisition numbers and the loan book meeting our expectations. We have made good progress on cost containment and efficiencies as reported in this announcement. I would like to finish by saying that despite these unprecedented times, we remain optimistic. We are resolutely focused on the safety and well-being of our colleagues, the integrity of our balance sheet and also focused on supporting our clients. I will now hand the call back to the moderator, and we will take any questions that you may have.

[Operator Instructions] The first question comes from Harry Botha of Avior Capital Markets.

Thanks for the preclose update. Got 3 questions, please. Just on the Hong Kong losses that you still expect to come through in H2, could you give us some guidance on the figure, if it's still the same as your previous guidance? And then can you give us a sense, I mean you chose not to sell the additional 10% to Ninety One, but considering where Ninety One is trading relative to the Investec shares, could there be a transaction to sell Ninety One and buy back Investec shares? And then finally, can you give us a sense of your ability to grow, and do you see conditions to grow, obviously, with challenges in global markets because of COVID-19 disruption in the U.K.? And if you see the ability to continue growing in terms of private client acquisitions because of that?

Thanks, Harry. On Hong Kong, at the interim results stage, we did indicate that we had a position that we were reviewing. In these results, one of the management actions that we have taken would be to review that position, and we are likely to -- in fact, we will be writing that off, that is part of the effect that you see in the numbers. As I said, the management actions are meant to simplify the business, but also to reduce risk. This is the one element that we would see as part of risk reduction. On the 10% of Ninety One, we tried to place the 10% in very difficult conditions. And given the volatility, we really couldn't put a price on the 10%. Remember that the objective for us behind the selling of the 10% was, one, to, obviously, get that cash in to continue to bolster capital in the U.K., as we had said, that it will have benefited, but the demerger itself gives us a capital benefit. So we did not believe that we needed to sell at any price whatsoever. So we thought we would wait and see whether there is a level of stability in the market and we don't have any pressure on capital. So we voluntarily locked ourselves up for the next 6 months or so, so that we don't cause market uncertainty about our intentions relating to the 10%. So we're well capitalized. We believe Ninety One is a very good asset. We would like to see a level of stability return to market, hopefully, with the strong reaction of governments around the world, the U.S. government, the U.K. government, the European government, even the Japanese have taken significant actions. We know what the Chinese have been doing because they have been affected by the virus earlier on and also the impact of the significant actions of the central banks right across the world that at some point, as the health care part of the crisis peaks or if there is a way to contain it, then there will be a level of stability, and we will relook what markets do at the time. So we're under no pressure really to dispose of that 10%. On COVID-19 and growth in the U.K., our strategy is obviously not based on revenue growth. I spoke to the growth in the private bank because that is an initiative that we launched, and we would like to continue to update the market on what we're doing there. Our strategy in the private bank in the U.K. is a very niche strategy, where we provide services to the entrepreneurial class. So our clients are generally active and they look for opportunities, but we wouldn't be looking for unusual growth other than just serving the needs of our clients in that market. As I said, in this environment, we have a level of control on our costs, and we will continue to focus on that as an important lever of our strategic delivery.

[Operator Instructions] The next question comes from Bankole Ubogu of Bank of America -- sorry, my apologizes, BofA Securities.

Two quick questions from my side. The first is, I think given the value at which you listed Ninety One at was quite a bit below your expectations. Can you kind of give a guide as to where your capital levels currently are for the bank? And if you don't sign within the next 6 months, whether or not you have enough capital to support your growth plans? And my second question is, I know we are still focused on -- or this call is primarily focused on the 2020 results. I think U.S., probably starting with March, is being really difficult, but it looks like it's going to carry on into April and May. Can you kind of give a sense of how Investec, at least on its other fee and commissions, other noninterest revenue line performs in an environment like this? Is there a potential risk that you could have another difficult environment for that revenue generation? Or do you think that Investec can actually fare relatively well, at least on net fee -- noninterest revenue in an environment like this?

Look, I'll take the second question and ask Nishlan to deal with the questions of capital. Needless to say, on capital, I did say that even though we did not place the 10%, we still were able to get a significant benefit on capital. You will also know in the U.K. that we had -- we have certain changes that have occurred in that market. As an example, the Bank of England has scrapped the countercyclical buffer of 1% going forward until a period of 2024, but Nishlan will address the impact of Ninety One on capital. We are comfortable that we have sufficient capital for us to support our business as we go forward. This is a trading statement for the year up to March, covering essentially the 11 months that we have traded. There is a level of volatility now that is unprecedented. We think the impact of the virus on public health, on the economies and on the markets is such that it would be too early for us to make any forward-looking statements. I think we would like to see where things settle. We have a strong client franchise. Even in these results, we indicated that we saw some book growth, particularly on the private line side. We know that corporates are under pressure, and that will come through over time. Our expectations in terms of impairments have been, given in this current period, at 31 basis points to 37 basis points. When we announce our results in May, we will have traded for 2 months. We will be in a better space, I think, to talk about the future. Too early to make any predictions about trading conditions going forward. I think that will be the response you will get from every business leader around the world, including the other banks.

Briefly to touch on -- in the circular, we had indicated that there would be around about 130 basis point uplift for the plc following the demerger. We currently expect that to be around about 50 basis points, and from a South African perspective, around 40 basis points, both an uplift to the underlying capital position. I think if you do follow on the capital disclosures at the end of September where we had disclosed the CET1 ratio for Investec Limited at 11.6% and for Investec plc at 10.8%, so just note those particular disclosures. And also note that the plc continues to report under standardized. So when we did adopt FIRB in South Africa, there was just over 1.5% improvement in the overall capital ratio. So from our perspective, we are quite comfortable. We had -- obviously, there would have been a further benefit had we placed the 10%, but that is well managed within our capital ratios. We continue to maintain very conservative leverage position. I think if you look at our loans to equity, that's at about 5.5x. And overall, the balance sheet remains conservative both from a capital perspective and a liquidity perspective.

Those questions came from Bankole Ubogu of Bank of America Securities. The next question comes from Christopher Steward of Investec.

Just a quick question. You provided guidance as to net asset value and tangible net asset value at -- I presume, expected as at March 31. Could you just clarify exactly how is the residual 25% holding in Ninety One treated in your net asset value calculations, please?

Sure. So effectively, you are correct. That's the forecast till 31 March '20. The 25% is held as an associate on our underlying group accounts. So on demerger, obviously, you would have switched from carrying it at book value to fair value and it represents the initial fair value thereafter it's equity accounted.

So it's effectively a fair value number as of 31 March estimate?

Correct.

[Operator Instructions] Sir, we don't have any further questions on the lines. Do you have any closing comments?

Thank you very much for calling into this preclose briefing. As you know, we are in difficult market environment. We've made sure that we can continue to operate in this environment. Primary to us is the safety of our people, the safety of our clients. And over the next coming months, we will work hard to remain close to our clients and to support them. We hope that the measures that have been taken by the different countries and governments will contribute significantly to reducing the level of transmission in infection of the coronavirus and that, in time, economies and markets can return to a level of stability. Thank you, again, for calling in.

Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.