Investec shareholders angle for more change from new CEOs
Fani Titi and Hendrik du Toit have their work cut out for them as the bank has struggled to improve its return on equity since the global financial crisis
Investors want Investec’s new CEOs to ring in changes to re-ignite the group’s specialist banking franchise, which has been languishing behind its rivals for nearly a decade.
Fani Titi and Hendrik du Toit, who delivered their first set of results on Thursday, will have their work cut out for them as the sixth biggest bank’s specialist division has been dragging down returns for the broader group.
“The specialist bank has been the key area of disappointment over the past few years, which has resulted in the return on equity the business generates being well below that of their South African peers,” says Richard Hasson, a fund manager at Electus Fund Managers.
Investec has struggled to improve its return on equity (ROE) since the global financial crisis began in 2008. For the six months ended September, ROE improved to 13.4% from 12.1% in 2018. The Standard Bank Group’s ROE, by contrast, was 17.2% in the 2018 financial year, according to data compiled by Bloomberg.
The duo replaced longtime stalwarts, including former CEO Stephen Koseff and MD Bernard Kantor, who both stepped down at the end of September. Investec’s three operating divisions comprise specialist banking, asset management, and wealth and investments, that primarily operate in SA and the UK. Specialist banking is the largest division and accounts for 64% of group operating profit.
“I think shareholders have been frustrated with the profitability of the bank and the larger group over the past few years. So while I think Koseff [and] Kantor ... did a reasonable job of stabilising the business after the global financial crisis, but I agree that it’s time for some fresh ideas and an opportunity to shake things up by the new leadership,” said Harry Botha, a banks analyst with Avior Capital Markets.
Change is on the way
Titi, who primarily oversees the specialist bank, said there is change on the cards for the specialist banking division.
“We are looking at simplifying the structure [of the bank] over the next 12 months and we have already made changes that reflect this. For instance, our corporate banking franchise in the UK had eight divisions; it is now clustered into three around clients’ needs. We will be a smaller group after the de-merger, so we need to re-evaluate our central costs. And we also need to be certain of where our capital can best be used.”
The South African specialist bank has appointed Nick Riley — outgoing Investec Property Fund (IPF) CEO — to lead the investment banking pillar. Riley cut his teeth in the bank’s corporate finance team before being appointed CEO of IPF. According to Titi, Riley will have oversight of the bank’s corporate advisory, equity capital markets and the corporate debt business, principal investments and property franchise. Titi said Riley’s expertise will be utilised to help make better capital allocation decisions.
Overall, Investec reported that operating profit grew 14% to £359m for the six months ended September, while headline earnings per share (HEPS) rose 11.4% to 27.4p.
“I thought the results were better than what was guided for. The performance of the UK bank was really about the reduction in impairments and the strong fee income growth in the corporate advisory business, so outside of that, it was not very exciting, but certainly better than my initial expectations,” said Avior’s Botha.
Despite the solid performance, the share price fell 2.6% to R89.55 a share on Thursday. Said Electus Fund Managers’s Hasson, “The share price weakness was probably more due to Brexit issues in the UK than the results themselves, with numerous UK bank share prices down more than 7% yesterday.”