Investec is now firmly one of the big six banks. It is being treated as systemically important and, under Fani Titi, CEO for the past seven years, has focused on providing more predictable earnings.
It’s arguably not as entrepreneurial and exciting as it was in its first 40 years, when it grew out of a small equipment leasing business — first under Ian Kantor, then under the joint leadership of his brother Bernard and Stephen Koseff.
But it is now very much a focused specialist bank and wealth manager, having pulled out of sectors such as private equity, though it is still a shareholder in private equity manager The Bud Group.
Seven years ago it also unbundled Investec Asset Management (IAM) into the separately listed Ninety One. Investec has retained a 10% stake in Ninety One but no longer has board representation.
In the difficult years after the global financial crisis, IAM’s dividend to the group was important to the overall result, but it became less important as Investec stabilised and sold off some of its poor legacy acquisitions.
Investec is predominantly an Anglo-South African banking business, while Ninety One operates globally.
The third important office in the Investec group is its large wealth business in Switzerland, but the core business in Zurich is an offshore product for its South African private clients, not Swiss clients.
The interim results, which were still to be announced when IM went to press, are in line with the prior period, according to the pre-close statement of September.
Titi says the group’s strong capital generation has enabled the bank to accelerate investment in identified growth initiatives, the main one being its mid-market Business Banking operation. This is unlikely to overlap with Capitec’s business banking (the old Mercantile), which focuses on the SMME market, but undoubtedly competes with the new business and commercial clusters at Standard Bank, Nedbank and Absa, as well as FNB Commercial.
Investec was always conservatively (strongly) capitalised under former CEO Koseff— it needed to be credible in the market. But it now has excess capital in its South African home market, and the group has purchased R1.1bn of the R2.5bn share buyback programme announced in May.
The bank also benefited from market volatility, as there was increased client demand for hedging
Investec’s earnings trajectory is not out of line with the rest of the banking sector, with guidance that headline will grow no more than 4% in sterling terms — bearing in mind that both the UK and South African economies are expected to stay weak over the next 12 to 18 months.
Since it disposed of or closed some of its more speculative operations (in Irish property, for example), Investec has had considerably lower bad debts than its competitors. It operates only in the corporate and top end of the retail market after all. The credit loss ratio has a through-the-cycle range of 25-45 basis points. In South Africa it is even lower, at 15-35 basis points.
Investec puts a high premium on personal service, with far more limited use of bots than the big four. Yet it is run as a tight ship, with a cost-to-income ratio of between 52% and 54%.
The Southern African business’s return on equity (ROE) runs at 18.5%, ahead of that of Nedbank and Absa, though behind FirstRand and Standard Bank — and ahead of Standard Bank of South Africa itself.
The UK business now includes a 41.25% economic interest in one of the UK’s largest wealth managers, Rathbones, and the operating profit there is solid, potentially growing 6% in the full year. The UK business’s ROE is expected to be about 13%, within the medium-term target range of 13% to 17%.
Investec is suffering in the short term from the negative impact of lower average interest rates, though not to the same extent as the big four. Investec does not benefit from the “endowment effect” to the same extent, as it does not have a large base of current accounts, which pay little or no interest.
But Titi says there’s growth in average lending books.
Noninterest revenue is disproportionately important to Investec, which can never compete on costs with banks with larger balance sheets.
But the smart people the bank employs have generated strong fees, and there were higher annuity fees from the local Investec Wealth & Investment business.
The bank also benefited from market volatility, as there was increased client demand for hedging, supporting customer flow trading income in the UK.
Investec is a systemically important bank in South Africa — the Reserve Bank would be obliged to help if it got into trouble — but it is highly niched in the UK. It has 120,000 private clients in South Africa but fewer than 8,000 in the UK. However, the British clients are substantially wealthier on a per capita basis.
The bank has market shares of as low as 3% or 4% in some sectors in the UK, but it is highly mature in South Africa, particularly in private banking and wealth management. In the more conservative UK market, Rathbones, with a 250-year pedigree, probably has more upside than the racier Investec brand.
But there are no plans to tamper with the Investec brand in the South African wealth market. It won the Financial Times best wealth manager in Southern Africa award for the 13th year running.
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