Investec gets into its stride

Investec may finally be close to becoming the bank which CEO Fani Titi wants it to be, after his nearly three years in the job.

The bank has now exited completely from Australia, where it sold its bank book for A$1bn. It sold its Australia Property Fund to a local business, Irongate. It offloaded a prime broking business and disposed of a private equity portfolio based in Hong Kong. And in the UK it exited its once-lucrative, but more recently painfully loss-making, structured product business.

The problem is that the bank needs to sweat the assets it still has to a much greater degree.

Earnings per share came in at a respectable 28.9p for the year ended March, 15% behind that of the 2020 financial year.

But its return on equity of just 6.6% remains below even the less well-rated high street banks such as Absa and Nedbank.

Titi agrees that the group is carrying excess capital, which is one factor behind the bank’s weak return on equity — and the board’s decision to pay a 13p per share dividend.

Prudential Investment Managers equity analyst Stefan Swanepoel says: "This was a 45% payout ratio, at the top end of its guidance range." He believes Investec is now troughing out on return on equity and earnings. "It is trading on a price-to-book ratio of 0.4, which seems harsh."

That ratio is a useful metric to determine how cheap a share is. Consider that Capitec’s price-to-book ratio, for example, stands at 6.5.

But Old Mutual Investment Group analyst Neelash Hansjee argues that Investec’s cost-to-income ratio remains unacceptably high at 70.9%, while its UK bank’s is at a ludicrous 81.3%.

Analysts say Investec also needs to reduce its group investments in which it does not have a controlling interest.

For example, it kept a 25% stake in Ninety One, the former Investec Asset Management. Along with Ninety One management it controls almost half the asset manager, making it takeover-proof in a rapidly consolidating industry. But in due course Investec plans to reduce its holding to 10%.

The best business in the group is its wealth and investment business, in which funds under management increased by 30% to £58.4bn. It benefited both from £1.1bn in inflows and from the substantial recovery in market levels since March 31 2020. Titi says that in the UK it focuses on older clients, whose average assets range from £500,000 to £700,000.

"We are a very large business in a sector in which there is significant technological and regulatory change. This will hit the margins of the smaller players, giving us the opportunity to make some bolt-on acquisitions," says Titi.

In SA the profile of the wealth business is younger, with more entrepreneurs and young professionals, who are more likely to have a loan with the private bank at the same time.

Allan Gray equity manager Tim Acker says that despite Investec’s rally this past year, it still trades on a forward p:e of seven — if it meets management’s guidance earnings of R8 a share, "and this does not take into account the quality of the wealth business".

He says Investec retains the option to spin out its wealth manager, which would undoubtedly command a higher multiple.

The UK bank has remained the weak link in the group, even though the loan book was up almost 9% to £12.3bn as operating profit fell 56% to £44.8m.

In SA, which still accounts for two-thirds of profit overall, earnings at its specialist bank business were flat at R4.9bn.

As for Investec’s corporate customers, business is undeniably tough.

Titi says it is no surprise that the corporate loan book has been falling, given companies’ reluctance, both in SA and the UK, to take on debt with so much economic uncertainty.

While Investec’s SA corporate finance and acquisition book remained at R55bn, asset finance fell 19% to R7bn, while in the UK, corporate finance loans were 20% lower and asset finance slumped 27% to £334m.

Thankfully, this was more than made up for by the growth in its private client loans, particularly in the UK, where the mortgage book grew 29% to £3.2bn and personal loans rose as much as 35%.

It was more muted in SA, where the economy has taken much longer to recover, and where Investec already has a high market share. Still, its mortage book grew 5% to R81bn. Titi says that with interest rates so low, it is not surprising that people with healthy personal balance sheets are looking at property.

As Investec doesn’t operate in the high-risk mass retail market, it aims for a modest 0.3%-0.4% credit loss ratio. After rising to 0.52% in the year to March 2020, its credit loss has settled at 0.35%.

Based on the past year, with the base close to the late-March crash in financial shares, Investec’s share price return looks spectacular. Investec Ltd, the JSE-domiciled of its two listings, has soared 71.5% to its present level of R52.42.

But it needs to prove that it can achieve returns comparable to its peers if that growth is going to prove more than a one-off.

In the trenches

While its former parent has had a standout year on the market, Ninety One — which listed in the worst of last March’s sell-off — has had a less than stellar time of it.

Yet the asset manager, under CEO Hendrik du Toit, appears closer than ever to achieving its goal — once considered a pipe dream — of being a truly global asset manager.

Assets under management increased by 27% to £131bn for the year ended March. Outflows were £200m, while SA remained a reliable cow to milk, as £1.5bn of new money was squeezed out of local clients.

Operating profit was up 9% to £206m, bolstered by improved performance fees, which more than doubled to £45m.

Ninety One has ambitions to get into some of the toughest markets in the world. North American institutional money and China are at the top of the list. Already 13% of funds are sourced from the EU, 12% from the Americas and 19% from Asia Pacific.

But if it’s to be taken seriously in the markets it’s aiming to crack, the asset manager will need to up its performance. In what Du Toit delicately calls a period of “slight weakness” no less than 39% of its unit trusts were in the bottom quartile of performers over one year.

At the moment, SA accounts for 36% of group assets under management, but more like 40% of profit.

Ninety One’s listing date could not have been more badly timed (March 16 2020), though like most financial services shares it has recovered, to trade at around R47 at the time of writing.

There are cheaper shares in the sector but it pays dividends and looks very likely to do so next year. A 2.5% dividend yield and good growth prospects should attract quality investors.