REG - Investec PLC - Trading Statement

InvestecAnnouncement

20/03/2024 07:00

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RNS Number : 5005H  Investec PLC  20 March 2024

 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

 JSE hybrid code: INPR                          JSE share code: INP

ISIN: GB00B17BBQ50
 JSE debt code: INLV

                                              LEI: 2138007Z3U5GWDN3MY22
 NSX share code: IVD

 BSE share code: INVESTEC

 ISIN: ZAE000081949

 LEI: 213800CU7SM6O4UWOZ70

 

Group pre-close trading update and trading statement
 

20 March 2024

Investec Group today announces its scheduled pre-close trading update for the
year ending 31 March 2024 (FY2024). An investor conference call will be held
today at 09:00 UK time / 11:00 South African time. Please register for the
call at www.investec.com/investorrelations.

Commentary on the Group's financial performance in this pre-close trading
update represents the 11 months ended 29 February 2024 and compares forecast
FY2024 to FY2023 (31 March 2023). The average Rand / Pound Sterling exchange
rate depreciated by approximately 15% for the 11 months to 29 February 2024,
resulting in a significant difference between reported and neutral currency
performance.

 

The comparability of the total Group's year-on-year performance will be
affected by the financial effects of previously announced strategic actions,
some of which will result in the Group's performance being presented on a
continuing and discontinuing basis in line with the relevant accounting
standards.

These strategic actions include the following:

-               Combination of Investec Wealth & Investment
UK (IW&I UK) with the Rathbones Group

-               Approximately R6.7 billion or c.£300 million
share buy-back and share repurchase programme, in line with the Group's
strategy to optimise capital in South Africa

-               Disposal of the property management companies to
Investec Property Fund (IPF) (now known as Burstone Group Limited) and
consequent deconsolidation of IPF

-               The restructure of The Bud Group Holdings
(formerly known as IEP) in the prior year to facilitate Investec's orderly
exit

-               The distribution of the Group's 15% shareholding
in Ninety One in the prior year

We outline the accounting treatment of the structural strategic actions in
note 1 provided at the end of this announcement.

The following commentary is based on the Group's total performance, comprising
of continued and discontinued operations.

 

 FY2024 earnings update and guidance

 

The Group's diversified revenue streams and the success of our client
acquisition strategies across our client franchises have continued to underpin
a solid performance, notwithstanding the uncertain macroeconomic environment
and persistent market volatility that prevailed. Our strong balance sheet and
successful strategic execution since our 2019 capital markets day have allowed
us to support our clients and achieve our FY2024 and medium-term financial
targets.

 

For the year ending 31 March 2024, the Group expects:

·      Adjusted earnings per share between 76.0p and 80.0p or 10.0% to
16.0% ahead of prior year (FY2023: 68.9p)

·      Basic earnings per share between 102.9p and 106.8p or 19.9% to
24.5% ahead of prior year (FY2023: 85.8p), positively impacted by the net gain
from the implementation of the UK Wealth & Investment combination with
Rathbones which was partly offset by the effects of IPF's deconsolidation

·      Headline earnings per share between 70.0p and 74.0p or 4.8% to
10.6% ahead of prior year (FY2023: 66.8p) which includes the cost of executing
strategic actions

·      Adjusted operating profit before tax between £866.9 million and
£909.6 million (FY2023: £818.7 million)

o  UK business, including Rathbones Group adjusted operating profit to be at
least 15.0% higher than prior year (FY2023: £377.8 million). Specialist Bank
expected to be at least 30.0% higher than prior year (FY2023: £303.4
million). This guidance incorporates a provision for the potential impact of
the recently announced Financial Conduct Authority (FCA) review into
historical motor finance commission arrangements and sales

o  Southern African business' adjusted operating profit to be at least 10.0%
ahead of prior year in Rands (FY2023: R 8 977 million, £440.9 million).
Specialist Bank expected to be at least 5.0% higher than prior year in Rands
(FY2023: R8 668 million, £423.8 million). The prior year includes returns
earned on the excess capital which was subsequently deployed to execute the
share buy-back programme

·      ROE to be above the mid-point of the Group's target range of 12%
to 16%.

 

The year-to-date performance which formed the basis for the above expectations
is summarised below:

 

Pre-provision adjusted operating profit growth was above mid-single digits,
reflecting the strength of our client franchises and continued success in the
Group's strategic execution.

·      Revenue growth was supported by balance sheet growth, progress in
our incremental growth strategies as well as a rising interest rate
environment

o  Net interest income continued to benefit from the growth in average
lending books and higher average interest rates

o  Non-interest revenue (NIR) growth reflects the diversified nature of our
business model. Continued client acquisition, improved client activity levels
and higher trading income underpinned the NIR growth. The first-time
consolidation of Capitalmind as the Group seeks to extend its footprint into
Continental Europe while increasing the proportion of capital-light revenues,
also supported NIR growth.  Share of post-tax profit of associates and
investment income were impacted by some of the strategic actions mentioned
above

·      The cost to income ratio was in line with 1H2024 as revenue grew
ahead of costs. Fixed operating expenditure reflected continued investment in
people and technology for growth, inflationary pressures, as well as higher
regulatory costs. Variable remuneration grew in line with profitability.

The Group expects to report a credit loss ratio around the mid-point of the
through-the-cycle (TTC) range of 25bps to 35bps. In South Africa, the expected
credit losses (ECLs) benefitted from recoveries from previously written off
exposures and the credit loss ratio is expected be below the 8bps reported in
the interim results in November 2023. The UK is expected to report a credit
loss ratio within the guided range of 50bps to 60bps communicated in November
2023 and above the upper end of its TTC range of 30bps to 40bps. Given the
challenging macroeconomic and elevated interest rate environment, we have seen
idiosyncratic client stresses with no evidence of trend deterioration in the
overall credit quality of our lending books.

 

For the 11 month period ended 29 February 2024:

·      Within Specialist Banking, core loans increased by 1.6%
annualised to £30.8 billion (31 March 2023: £30.4 billion) and increased by
7.1% in neutral currency annualised, driven by corporate lending in both
geographies and private client lending in South Africa. Customer deposits
remained flat at £39.5 billion (31 March 2023: £39.6 billion) and increased
by 5.5% in neutral currency annualised

·      Funds under management (FUM) in Southern Africa increased by 3.6%
to £20.5 billion (31 March 2023: £19.8 billion), an increase of 13.7% in
neutral currency. In the Southern African business, net discretionary inflows
of R16.4 billion were partly offset by net outflows of c.R3.0 billion in
non-discretionary FUM

·      Investec Wealth & Investment UK FUM is now reported as part
of the Rathbones Group following the completion of the combination in
September 2023. As at 31 December 2023, Rathbones, a 41.25% held Investec
associate, reported FUMA of £105.3bn.

 

The Group maintained strong and above Board-approved capital and liquidity
levels, allowing us to continue supporting our clients and build to scale our
identified growth opportunities.

 

The Group remains committed to its strategic priority to optimise shareholder
returns while creating enduring worth for all our stakeholders. We have made
significant progress on the share repurchase programme announced in November
2022 and concluded the disposal of the property management companies to
Burstone Group. The Bud Group Holdings announced the proposed disposal of
Assupol to Sanlam. Assupol is a significant asset within the group of assets
earmarked to facilitate Investec's and other shareholders' exit from The Bud
Group Holdings.

 

The Group intends to publish revised medium-term financial targets when it
reports its full year results on 23 May 2024.

 

 

Other information

The financial information on which this trading update and trading statement
is based, has not been reviewed and reported on by the external auditors.

 

An investor conference call will be held today at 09:00 UK time /11:00 South
African time. Please REGISTER HERE
(https://links.wcacomms.investec.co.za/els/v2/RZk9heZp08tK/T2V0V1g5eGNodzhBMjJ4a29sQ1dQKzVXUEdFMzdNOUJ1Tjc2VWNycW1sMndwY1VRQWF6Skx0MnIvdnhEVnlwMzBIS1JBYlVTQ055OW1hc2NDekxGNWhlT1RDN09KdExrWnE3SGRQMlV4cGZCZFJIalo3SHUvZz09S0/)
for the call.

 

Year end  results

The year end results for the year ending 31 March 2024 are scheduled for
release on Thursday, 23 May 2024.

 

On behalf of the board

Philip Hourquebie (Chair), Fani Titi (Group Chief Executive)

 

For further information please contact:

Investec Investor Relations

General enquiries: investorrelations@investec.co.za
(mailto:investorrelations@investec.co.za)

 

Results:

Qaqambile
Dwayi

SA Tel: +27 (0)83 457 2134
 

 

Brunswick (SA PR advisers)

Tim Schultz Tel: +27 (0)82 309 2496

 

Lansons (UK PR advisers)

Tom Baldock Tel: +44 (0)78 6010 1715

 

 

Key income drivers

 

    Core loans

 £'m           29-Feb-24  31- Mar-23  % change  Neutral currency

% change
 UK and Other  16,622     15,563      6.8%      6.8%
 South Africa  14,201     14,818      (4.2%)    6.2%
 Total         30,823     30,381      1.5%      6.5%

    Customer deposits

 £'m           29-Feb-24  31- Mar-23  % change  Neutral currency

% change
 UK and Other  20,541     19,116      7.5%      7.5%
 South Africa  18,948     20,440      (7.3%)    2.7%
 Total         39,488     39,556      (0.2%)    5.0%

 

 Funds under Management (FUM)
 £'m                                        29-Feb-24  31-Mar-23  % change  Neutral currency

% change

 Wealth & Investment - Southern Africa      20,547     19,830     3.6%      13.7%
 Discretionary                              12,311     10,704     15.0%     26.6%
 Non-discretionary                          8,236      9,126      (9.8%)    (1.5%)
                                            105,340    40,747

 Rathbones Group plc*
 Discretionary and annuity                             35,291
 Non-discretionary                                     5,456

*  The balance at 31 March 2023 reflects the funds managed by Investec Wealth
and Investment Limited ('IW&I UK'). The balance of £105.3bn reflects
total funds under management and administration (FUMA) as reported at 31
December 2023 by Rathbones Group plc.

Notes

 

1.     Further details on structural strategic actions executed.

 

·      Following the completion of the combination with Rathbones
(effective 21 September 2023), the Group has deconsolidated IW&I UK and
from the effective date applies equity accounting to its investment in the
Rathbones Group (41.25% economic interest). In accordance with IFRS 5
(Non-current Assets Held for Sale and Discontinued Operations), the Group's
interest in IW&I UK will be presented as a discontinued operation for the
current financial year.

·      Subsequent to the disposal of the IPF management companies
(effective 6 July 2023) and IPF's name change to Burstone Group Limited, the
Group's 24.3% shareholding in Burstone Group has been deconsolidated and is
now held as an investment at fair value through profit and loss.

·      Effective 30 May 2022, the Group distributed a 15% shareholding
in Ninety One, with the remaining 10.08% shareholding held as an investment at
fair value through other comprehensive income.

·      The Group holds its 38.3% interest in The Bud Group Holdings at
fair value through profit and loss following the restructure in November 2022.

·      The Group has repurchased R6.7 billion of its shares to date in
relation to the R7 billion share repurchase programme announced in November
2022.

 

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 Listings Requirements. The pro-forma financial
information is the responsibility of the Group's Board of Directors. Pro-forma
financial information was prepared for illustrative purposes and because of
its nature may not fairly present the issuer's financial position, changes in
equity or results of operations. This pro-forma financial information has not
been reported on by the Group's external 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 an earnings measure required to be
calculated and disclosed by the JSE and is calculated in accordance with the
guidance provided by The South African Institute of Chartered Accountants in
Circular 1/2023.

·      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 is defined as net loans to customers plus net own
originated securitised assets.

·      The credit loss ratio is calculated as expected credit loss (ECL)
impairment charges on gross core loans as a percentage of average gross core
loans subject to ECL.

 

 

3.     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:

 

                     11 months to           Year ended

                     29 February 2024       31 March 2023
 Currency            Period end  Average    Period end  Average

 per GBP1.00
 South African Rand  24.31       23.48      21.94       20.45
 Euro                1.17        1.16       1.14        1.16
 US Dollar           1.26        1.26       1.24        1.21

 

4.     Profit forecasts

·      The following matters highlighted in this announcement contain
forward-looking statements:

§  Adjusted EPS is expected to be between 76.0p and 80.0p which is ahead of
FY2023.

§  Basic EPS is expected to be between 102.9p and 106.8p which is ahead of
FY2023.

§  HEPS is expected to be between 70.0p and 74.0p which is ahead of FY2023.

§  Adjusted operating profit is expected to be between £866.9 million and
£909.6 million which is ahead of 1H2023.

§  The UK business' including Rathbones Group adjusted operating profit to
be at least 15.0% ahead of prior year.

§  The Southern African business' adjusted operating profit to increase by
at 10% ahead of prior year in Rands.

§  ROE is expected to be above the mid-point of the Group's target range of
12% to 16%.

(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 - which may cause
the Group's actual future results, performance or achievements in the markets
in which it operates to differ from those expressed in the Profit Forecasts.

·      Any forward looking statements made are based on the knowledge of
the Group at 19 March 2024.

·      These forward looking statements represent a profit forecast
under the Listing Rules. The Profit Forecasts relate to the year ending 31
March 2024.

·      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 compiled using the assumptions
stated below, and on a basis consistent with the accounting policies adopted
in the Group's March 2023 audited financial statements, which are in
accordance with IFRS and are those which the Group anticipates will be
applicable for the year ending 31 March 2024.

·      The Profit Forecasts have been prepared based on (a) audited
financial statements of the Group for the year ended 31 March 2023, and the
results of the Specialist Banking and Wealth & Investment businesses
underlying those audited financial statements; (b) the unaudited management
accounts of the Group and the Specialist Banking and Wealth & Investment
businesses for the 11 months to 29 February 2024; and (c) the projected
financial performance of the Group and the Specialist Banking and Wealth &
Investment businesses for the remaining one month of the period ending 31
March 2024.

·      Percentage changes shown on a neutral currency basis for balance
sheet items assume that the relevant closing exchange rates at 29 February
2024 remain the same as those at 28 February 2023. This neutral currency
information has not been reported on by the Group's auditors.

 

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.

·      The Rand/Pound Sterling and US Dollar/Pound Sterling exchange
rates remain materially unchanged from the prevailing rates detailed above.

·      The tax rates remain materially unchanged.

·      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 judgmental in nature.

·      Valuation of investment properties is performed by capitalising
the budgeted 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
judgmental 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.

·      Management's estimate of the provision recognised for the
potential impact of the recently announced Financial Conduct Authority review
into historical motor finance commission arrangements and sales is based on
information available to management as at 19 March 2024. In January 2024, the
FCA made an announcement regarding its review of the Motor Vehicle Finance
market up to the period ending January 2021. The Group commenced lending into
the UK Motor Vehicle Finance market in June 2015 through its Mann Island
Finance subsidiary. During this period gross core loans in Motor Finance grew
from £11 million as at 31 March 2016 to £555 million as at 31 March 2021.
The Group continues to monitor developments across the industry and will
co-operate with FCA reviews, as and if required.

 

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. The Group was established in 1974
and currently has 7,500+ employees. Investec has a dual listed company
structure with primary listings on the London and Johannesburg Stock
Exchanges.

 

Johannesburg and London

 

JSE Equity and Debt Sponsor: Investec Bank Limited

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