No sacred cows at Investec
As the bank prepares to split from Investec Asset Management, it is getting rid of poorly performing businesses
One message the new Investec Group top brass aims to convey is that on its watch there are no sacred cows. New CEOs Fani Titi and Hendrik du Toit have shut down the online investment platform in the UK, Click & Invest, which was losing £12.8m a year. On top of this, £6m of capitalised software was written off in the year to March 31.
"We are not a unicorn — our shareholders won’t tolerate heavy IT losses for too long," says Du Toit.
Investec would have been considered a unicorn back in the 1980s and early 1990s — long before anybody used the word unicorn in this sense — when it stood out as an innovator relative to the high street banks. It had a branchless model 30 years before Discovery.
Yet Investec has underperformed the banking sector over the past decade. The group’s return on equity has inched up from 12.1% to 12.9% but that makes it barely half that of FirstRand. To remedy this, it is selling subscale businesses, including its wealth business in Ireland for a welcome €44m.
But to keep access to the EU, Investec has kept the proverbial room above the pub to house its remaining businesses in the republic.
The key to unlocking value, the brains trust seems to think, lies in "demerging" Investec Asset Management (IAM), the more highly rated part of the business, from the rest of the bank.
Both will begin trading separately on the JSE and in London in September.
Coronation financials analyst Neill Young says he considers IAM to be worth 13.5 times earnings (Coronation, a much more domestic SA business, is on 12.3).
"Investec’s banking and wealth business need a lot of work, but the current implied rating is an earnings multiple of seven and a price to book of 0.75 times," he says.
Young says this undervalues the SA specialist banking unit, which has a creditable cost-to-income ratio of 51.7%. For a start, it has a growing private client franchise with increased annuity income. It is also less dependent on its merchant banking activities and on its equity and property portfolio than it used to be. In a subdued economy it still grew core loans by 6.6% to R271bn and deposits by 6% to R342bn.
By contrast, Investec’s UK banking operation needs work, not least because of its huge 77.4% cost-to-income ratio.
"We have been spending money building out the UK private bank, but of course we accept that costs need to be reduced," says Titi.
"We are also reviewing some of our low return on equity holdings. We have a noncore investment portfolio in Hong Kong which we are winding down."
In theory, the wealth business should be an attractive part of the "new" Investec — given that it has a solid market share of the annuity-based private wealth business in the UK and SA.
But this year the market gains of the prior year were not repeated. The division took a hit from Click & Invest, and there were lower transaction-based fees. Investec Wealth will keep the brand and its familiar zebra logo while the institutionally focused IAM will have to take its chances with a new name.
This year is also the first time that Investec has not disclosed its legacy book separately.
Almost all the bad loans, including some reckless Irish property loans granted before the global financial crisis, are now out of the system. The significant reduction in impairments is by far the largest contributor to the 9.4% increase in operating profit to £664.5m. The two other contributors to growth, though at barely £3m each, were the reduction in group costs and improved non-SA asset management profit.
Jan Meintjes, portfolio manager at Denker Capital, points out that without the legacy losses, Investec earned 61p a share in 2018. On that basis EPS fell 10% to the stated 55.1p.
The asset management arm — which will be the new IAM — had flat operating profit of £179m, but there was a one-off cost of £18.7m from the move to new premises in London. With assets of £111bn (R2-trillion) it is almost the size of the Public Investment Corp (PIC) and more than three times the size of Coronation.
Du Toit will be returning as CEO of IAM after the listing in September. Most of the £6.1bn in net inflows was in the two home markets, but about 10% came from the Americas.
Du Toit aims to expand the business into the adviser market, and build new secondary markets out of New York and Hong Kong. And he would like to be known as a caring, green-friendly manager.
Overall, Meintjes says Investec’s new management is taking a much less emotional view of assets, and letting go those with no scale or prospects. Even their presentations this time around were businesslike and lacked the folksy charm of previous CEO Stephen Koseff.
Allan Gray, Investec’s largest shareholder (ahead of the PIC), has waited patiently for more than a decade for the Investec share price to turn. Analyst Tim Acker says the forthcoming split in the share is not a big part of his institution’s investment case. "The group has underperformed other banks for much longer than we believe is justified," says Acker.
He believes that previous management scored numerous own goals, such as buying subprime lender Kensington in the UK on the eve of the global financial crisis. But the legacy book, of which Kensington was the largest component, is now out of the system.
Investec’s results were acceptable and if the group was not splitting it would be a reluctant buy. But the current group is undoubtedly priced at less than the sum of the two parts.