Investec Group (INL) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Investec Preclose Trading Update. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Fani Titi, Chief Executive of the Investor Group. Please go ahead.

Ladies and gentlemen, good morning, and welcome. Thank you all for taking the time to join us on this call to discuss our pre-close trading update, which covers the continuing operations for the 11 months ended 28 February 2021, and guidance for our full year results. Please note that our full year results for the 12 months ending 31st of March will be announced on the 25th of May. We'll take a few minutes to talk through the key highlights from our trading update, and we'll then take some questions. First, a few general comments on the operating environment and our overall performance. Despite further lockdowns globally during the period under review, the actions taken by governments and central banks have continued to support economies and financial markets. We are encouraged by the momentum we are seeing across our business, the continued recovery of markets and the positive developments related to COVID-19 vaccines. We expect the group's operating results for the year ending March 31, 2021, to be in line with the guidance released in our interim results in November 2020. Adjusted earnings per share from continuing operations is expected to be 20% to 29% behind the prior year. A table containing full details of our earnings guidance for financial year '21 can be found on Page 2 of today's trading statement. Year-on-year, our performance has been negatively impacted by lower interest rates, elevated costs related to the hedging of our U.K. structured products book as guided in November, reduced client activity over the period and circa 14% depreciation of the average rand against pound sterling. This was offset by lower expected credit losses and continued cost containment. Our expected performance also demonstrates the strength of our underlying client franchises, the continued execution of our strategic objectives and the resilience of our people in what has been an untreated entity yet. In terms of the momentum I mentioned, second half adjusted operating profit and earnings are expected to be ahead of comparable numbers reported in the first half of the financial year, reflecting an improving trend, particularly in the last quarter. Now I move on to financial performance in more detail. In terms of the underlying performance over the 11 months to February 28, third-party funds under management increased by 26.7% to GBP 57 billion with net inflows of just under GBP 1 billion. Core loans increased 5.5% to GBP 26.3 billion, while deposits were up 5.9% to GBP 34.1 billion. Turning to operating income. The expected revenue decline in FY '21 reflects an environment still marked by the crisis that prevailed throughout the financial year. Risk management and risk production costs related to the hedging of the U.K. structured product book are expected to be in line with the guidance provided at our September interim results. In the second half relative to the first half, revenue benefited from improved client activity and liability repricing. Operating costs for the full year are expected to be lower than last year by mid-single digits and these costs include costs associated with the implementation of strategic initiatives taken during the period under review. On asset quality, the group expects to report a lower credit impairment charge in the second half compared to the first half, resulting in the full year forecast credit loss ratio of between 37% and 44% basis points. Capital leverage and liquidity ratios remain sound and ahead of internal Board-approved minimum targets and regulatory requirements. The group's cash and near cash on the 28th of February was at GBP 13.9 billion, representing approximately 41% of customer deposits. Turning to the geographic performance of the business. In Southern Africa, adjusted operating profit from continuing operations is expected to be 16% to 24% behind in pound sterling. Financial year 2020, that number was GBP 286 million. And in rent terms, adjusted operating profit from continuing operations is expected to be 4% to 12% behind. That number in rent was GBP 5.3 billion last year. In the U.K. and other, adjusted operating profit from continuing operations is expected to be 15% to 26% behind the prior year number of GBP 133.5 million. Finally, on the dividend, Investec paid an interim dividend to 5.5p at the half year and a final dividend will be considered as part of the normal Board process leading up to the full year results on the 21st of May 2021. In summary, the group's operating results for the year ending 31st March '21 are expected to be in line with guidance, including the hedging costs related to our U.K. structured products book. Our underlying performance demonstrates the strength and resilience of our client franchises. We anticipate lower expected credit losses year-on-year and costs remain well contained. While the general outlook is improving, the long-term impact of the pandemic is uncertain. Investec remains well capitalized, highly liquid and well provisioned for impairments. With the simplification of the group now substantially complete, we are positioned to pursue long-term growth. Thank you for joining the call. I would now like to open the line for questions.

[Operator Instructions] We have a question from John Storey of JPMorgan.

Thanks very much for the detail in your earnings there. I wonder if you could give a little bit more color just around the cost performance of the U.K. Specialist Bank. So then anything more that you could provide than what was provided in the release this morning would be useful.

It's Nishlan. I think what is quite relevant from a U.K. Specialist Bank perspective is the fact that we have obviously been through a period of implementing some of the strategic actions. So in this period, some of the costs associated with implementation are going to be carried in the cost base. So the benefits are really going to be reflected into our 2022 financial years. Now having said that, notwithstanding those particular costs, we've indicated that, overall, our cost base will be down in sort of mid-single digits. And that's represented across both the South African and the U.K. platform.

And obviously, when we announce our results, we will go into more detail and disclose what the associated costs to the restructure are and how they impacted the number that we're talking about.

Our next question is from David [indiscernible] of [indiscernible] Capital Markets.

Just a question around those losses in the U.K. So I know you check more about [indiscernible] may be improving, U.K. equity markets would help that unwind slightly quicker than has previously added to.

Yes. Thanks, David. You're right that improving equity markets are positive for this business. Just to remind you, we have costs of ongoing day-to-day hedging, and we have costs related to taking of risk from the table, specifically selling portions of the book. So the costs of managing the book on a day-to-day basis in terms of hedging, those costs are obviously moderating as markets improve. But we specifically are continuing to sell a portion of the book. So the cost reduction element of the total cost would obviously still be there. And therefore, the overall costs are in line with guidance. So whenever there is an opportunity to reduce the book, we will do so.

Our next question is from Chris Steward of Ninety One.

Just a quick question from my side, probably one for Nishlan. Can you just comment on the fairly dramatic uptick in the tax rate in the second half? What's driving that? And what the indications are for 4 different tax rates profitability?

Yes. So Chris, and thanks for the question, it's again pretty much associated with our actions in Australia, where we did have some deferred tax assets that we've revised our outlook on, which has caused a pickup in the effective tax rate.

Does that imply that the effective tax rate you're showing for the full year is the sort of protective tax rate you would expect as a sustainable rate going forward? Or will the clearly elevated second half tax charge is more indicative of an ongoing run rate?

No. I would say that the elevation in this period was caused much more by a one-off event. Obviously, noting that you do have corporate tax rates going up in 23% in U.K. as was announced. And in South Africa, you have a slight decrease, about 1%, also coming into effect in '23. So those will blend in to the forward look tax rate.

Okay. So we shouldn't necessarily use the 2021 full year or H2 tax rate as relatively elevated levels, isn't necessarily the free tax dispensation change in the 2 geographies' rates?

Yes. Yes. I think previously we guided to a sort of a normalized tax rate of about 19% to 20%.

Next question is from James Starke of SBG Securities.

If you could just give us some color around the asset quality trends you're seeing in your real estate exposures, in particular on the commercial property side and then also on the mortgage books within the private bank.

Sure. I think, overall, I would say that the asset quality trends have been relatively pleasing. I think particularly when you look at some of the relief levels being provided, and those are at relatively low levels in both the South African and the U.K. book. Overall, loan-to-value levels and collateral positions have also remained relatively strong over the period. And repayment rates, we have seen maybe 1 or 2 migrations into Stage 2 or Stage 3, but nothing symptomatic from an asset quality perspective. If I look at our private -- our mortgage lending book, I think, over history, we've tended to have a fairly low loss rate. And in particular, the book in the U.K., I think, over history has been around about 4 to 5 basis points. And we haven't seen any change to those long-term trends.

Our next question is from Michael [ Gresty ] of Anchor Capital.

Can you hear me okay?

Yes. Loud and clear. Please go ahead.

Just a couple from me. I just wanted to clarify the way you guys are seeing these losses relating to that structured lending book in the U.K. My previous recollection was you were looking at a similar loss in the second half, which was about GBP 100 million and then potentially slightly smaller but not much in the next year. Fani, your comments would suggest that maybe that's looking less sizable than it used to. So if you could just be a little bit clearer on, a, is my recollection correct? And b, how you're seeing it now. Next question is, have you made any progress in these more supportive markets in the second half and getting rid of any of that private equities noncore assets that you had? And then the last question, just the big outflows in discretionary AUM in South Africa versus inflows in nondiscretionary. That was quite interesting. What...

No, no, it's actually the opposite.

Sorry. Could you just tell a bit about that.

Okay. Let me take the first question, just to give you clarity. We had guided to approximately GBP 106 million of losses relating to the hedging of that book for the full year, being GBP 53 million in the first half and a similar number in the second half. We had also said that we would expect a similar number for the full year, March 2022. So that was the guidance we gave. And what we are seeing now is while we have benefited from improving markets on the ongoing costs of management of the book, we have had the opportunity to take off risk as we go forward. So while the overall guidance for the financial year '21 is the same, the proportion of where that money has been spent is different. Lower ongoing management costs versus slightly higher risk reduction costs. Clearly, as markets improve, our position in that book should improve, but I don't want to speculate at this stage. We will give you more color of our expectations when we report our results. But to your general understanding of how the book should behave is broadly in line. The second question related to flows. Nish, do you want to deal with flows?

Yes. I think, Michael, again, it's very important to note that we actually saw very strong flows into our discretionary portfolios in both South Africa and the U.K. I think, in South Africa, just under ZAR 7 billion of flows into the discretionary portfolio. Now the nondiscretionary is, if it is effectively directly managed by clients as they effectively react to various aspects, we're not concerned about the level of change that we've seen on that and are holistically focused on the discretionary element. And then your question around progress on the investment portfolio. I would say that over the period, again, we have seen improving sort of trends of late in this sort of last quarter of this financial year. Our intention is not to offload any of these assets. Our intention is to work through the portfolio with an intention to effectively realize value because these are and remain high-quality asset portfolios. We have had some success in terms of realizations, and we'll report those levels in the results and also remain quite encouraged with where markets are heading to.

[Operator Instructions] We have a question from Neill Young of Coronation.

Just a differential question for Nishlan. Just to confirm, the adjusted operating profit share is down 16% to 24%. That would exclude the 25% holding in Ninety One. Is that correct, in both periods?

No, Neill. I think it excludes the full results of asset management in the prior year. We would have equity accounted a piece of Ninety One from the 16th of March to the end of last year. I think that number was about GBP 1.4 million last year. And this period will include equity-accounted income of Ninety One under 25%.

For the full year?

For the full year, correct.

And that is included in both the adjusted operating profit number as well as the adjusted earnings per share from continuing operations number?

Yes, that's correct. Yes.

[Operator Instructions] It seems we have no further questions on the line, sir. Would you like to make any closing comments?

Again, just to thank everyone for their interest in the business and for attending this briefing. As usual, if there are follow-up questions, please contact our IR team and we will deal with the questions raised. Equally, if you want to talk to any of our other executives on any part of the business, please let us know and we can facilitate that. Thank you again, and good day to you.

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