Investec Group (INL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Investec Pre-Close Conference Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Group Chief Executive, Fani Titi. Please go ahead, sir.

Thank you, Denis, and good morning all. Thank you for joining us for our pre-close trading update. This update reflects the financial performance of the 11 months ended 28th February 2025 and the expected results for the year to 31 March 2025. I'm joined this morning by Nishlan Samujh, our Group Finance Director; Ruth Leas, the CEO of our U.K. business; and Cumesh Moodliar, the CEO of our South African business. We are pleased with the performance of our underlying client franchises, which continue to report progress against our strategic priorities and support revenue growth in a challenging environment. The group maintained strong capital and liquidity levels, which allowed us to continue supporting our clients in the current environment and achieve results within our financial target ranges. Turning to the underlying performance for the 11 months ended 28th February 2025. Higher revenue was supported by continued client acquisition, strong net inflows of discretionary and annuity funds under management in the current and prior period as well as higher average advances. The cost-to-income ratio improved as revenue grew ahead of costs. Fixed operating expenditure reflected continued investment in people and technology for growth as well as inflationary pressures. Looking at the underlying drivers of our client franchises, net core loans from our banking businesses increased by 4.7% annualized to GBP 32.2 billion, driven by private client lending in both geographies and corporate lending in South Africa. Customer deposits increased by 4.8% annualized to GBP 41.2 billion. Funds under management in our South African Wealth and Investment business increased by 14.5% to GBP 24 billion. We saw strong inflows in discretionary funds, which were partly offset by outflows in nondiscretionary funds. So for the year ending 31 March 2025, we expect to report the following: pre-provision adjusted operating profit to be ahead by 5% to 12% relative to the prior year. Adjusted earnings per share to be between 4% behind to 4% ahead of the prior year. Cost-to-income ratio to be below the 53.8% reported in the prior period. The credit loss ratio to be within the through-the-cycle range of 25 to 45 basis points. Overall, the credit quality remains strong. Group ROE to be between 13% and 14% within the group's medium-term target range of 13% to 17%. Lastly, group ROTE to be between 15.5% and 16.5%, this being within the 14% to 18% medium-term range. Our diversified business model and strong balance sheet position positions us well to navigate the current environment and execute on our strategic priorities as we look forward. I will now turn the call over to questions.

[Operator Instructions] The first question we have comes from Harry Botha of BofA Securities.

Could you provide some insight into the slightly lower guidance on the South Africa ROE compared to the previous 19% level that you were looking for? Is it related to revenues or cost for credit impairments? And could you also give us some insights on the South African NIMs, how the deposit optimization plans being playing out compared to some of the deposit pricing pressures that we've seen in the market?

Harry? Okay. I think Cumesh will start off on the SA ROE guidance. Cumesh?

I think just some context to it is that in the first half, we did have a large gain in investment income, which related to Burstone and gains in the balance sheet management, which did not repeat in H2.

Okay Nish. Sorry, what was the second question?

It's just related to the South African NIMs, how they've been progressing in the second half of the year. You had been looking for an uptick based on the deposit optimization side. And I think we have seen from some other banks some deposit pricing pressure.

Yes. I think overall, in the short term, there continues to be slight pressure, but I would say that our NIM has actually held up reasonably well over the period. We'll continue to optimize the deposit base, but that is much more medium to longer-term strategy that's executed. We do see positive contribution from that effort in the current period, and we expect to see material contribution as we move further in time.

The next question we have comes from Alexander Bowers of Berenberg.

Just had a question around loan growth. It looks like U.K. loan growth sort of slowed in H2, whilst in South Africa, I think you got a bit of a pickup versus H1. Could you just sort of explain some of the dynamics behind that and sort of what the current outlook is for both businesses?

Yes. Just to give a high-level view, as we had indicated in November at our interim results presentation, South African activity had been pretty muted given the uncertainty around the election. Then we had a Government of National Unity that came in and a level of confidence returned into the economy and the market, and we saw some improvements. In fact, Cumesh spoke of investment income benefiting from asset price increases at that time as a consequence of the confidence that returned. And we have continued to see some improvement in activity, hence, for our South African business. We have seen on a year-to-year basis, some commendable increase in the loan book given what happened in the first half. Clearly, the U.K. environment has been somewhat different. The autumn statement, as you know, Alex, was received quite negatively by the market. And I think there was general concern amongst, in particular, business people about the impact of some of the policy pronouncements. So the adjustment to that environment took a bit longer than would have otherwise been the case. But Ruth can talk about some of the activity on the ground and some of the elements of that loan growth as we try to explain in the statement, but I'll leave that to Ruth to expand.

Alexander, looking forward, we do see growth momentum building, and we have seen growth picking up in our mortgage lending as rates have been trending downward. On the corporate side, we did see gross originations keep up with the levels they were at the previous year, but what we saw coming through in recent months was a much higher level of redemptions, and that is what has brought the level of loan growth down. So we look forward to more growth as we head forward into the current financial year.

[Operator Instructions] The next question we have comes from Chris Steward of Ninety One.

I've got 2 questions, if I may. The first question, I guess, is that clearly, this is a number that seems to be a little bit disappointing relative to market expectations. It's hard to pin exactly why you're pointing to continuation of positive jaws. There doesn't appear to be any credit quality blowout. Net flows within your South African Wealth Management business seem pretty decent, still a slight slowdown from the first half, but pretty good. Still Rathbones has come in as expected. So it does appear to be a sort of slightly disappointing performance from a revenue perspective across probably the 2 specialist banking operations. Now Ruth has just touched on a slightly improved outlook for the year. Maybe you could just give us a sense of whether the current, if you like, soft patch continues into the new financial year or whether you are slightly more optimistic that you can see a turnaround therein. That's the first question. And then the second question, with the stock trading, and maybe this is linked to the first question, with the stock trading comfortably below book value with the South African return on equity between 17.7% and 18.7%, comfortably ahead of cost of capital in the U.K. between 13.5% and 14.5%, again, comfortably ahead of cost of capital. South African common equity Tier 1 at 14.8%, U.K. at 12.3%, both comfortably ahead of Board target ranges. I mean, what are the plans in order to continue to add shareholder value from a capital management perspective?

Thank you very much, Chris. That second question was quite telegraphed in your comments. So let's take the first question first. As indicated in my answer to Alexander's question, we have seen good activity continue within our South African business, given the nature of the loan growth. And as we look forward, obviously, this is a pretty close trading statement. I don't want to go into too much detail around our expectation, but I would say that we would be positive around loan growth into the new period simply given the momentum that we have seen now. Ruth also indicated that while for the period that we indicated, there was a rather restricted growth in the loan book, there has been activity but higher redemptions as it were. And remember that also within our U.K. business, we also originate and distribute some of the risk we cannot keep on our balance sheet given some of our size limitations. So our outlook for loan growth and activity in both markets would be positive. But we'll be able to unpack our outlook a lot more in detail as we announce our results sometime in May. On the second question, you are correct that we continue to generate capital ahead of risk-weight growth in South Africa, as indicated, we have a pretty elevated CET1 ratio. And as before, at the end of the year, we will look again at the growth outlook in terms of our loan books, one because that is the first order of priority in terms of capital. Second, we will obviously look at any other opportunities that may be out in the market. We have indicated strategically in the past that we would desire to increase over time the contribution of capital-light businesses to the overall mix of revenue. So we will continue to explore that particular strategic objective. And of course, it remains to us assuming that we funded all our growth, and we've looked for any opportunity strategically that we would return excess capital. Obviously, the amount of capital that we have now is much higher than our guided optimal capital levels in SA of 11.5% to 12.5% before all the regulatory changes come through, of course. But at 14.8%, it's simply quite elevated, and we will make some decisions around that when we announce our final results by -- or in later May.

[Operator Instructions] The next question we have is a follow-up from Harry Botha.

Just 2 follow-ups from me, if possible, please. Just to if you can possibly indicate the second half versus first half investment income and trading income trend. You noted the lower trend in South Africa, what is it like on investment income in the U.K. and the trading income as well, if possible, please? And then on the tax rate, is there anything to consider in the second half of the year compared to the first half?

We obviously would like not to go into too much detail on the results as this is a trading update, but I'll ask Nish to talk about -- to the first question and the second question relating to the tax rate. Nish?

Yes. I would say that investment income the broad answer is that it is lighter than the first half, and that's really coming from SA. As we indicated, the valuation movements on Burstone in the first half and a bit of softness into the second half. I think the rest will unpack the results as we get into it. The tax rate, I would say, is fairly similar. We have been absorbing a higher tax rate from a U.K. perspective with that tax rate now at 25% overall, but no real material movement in the tax rate. I think one other item to be aware of is the higher cost for the AT1 instruments. We did redeem some of the instruments that were previously in issue in December. So we'll see that benefit come through late in the quarter and then into the next financial year.

[Operator Instructions] At this stage, there are no further questions on the conference call. Sir, would you like to make any closing comments?

Thank you all for your time this morning and your continued interest in our business. As usual, if you have any further questions that you may want to ask or get further clarification on, please don't hesitate to get in touch with our team. Again, thank you.

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