IVTJY - Investec Group (IVTJF) H1 2024 Earnings Call Transcript

2023-11-16 08:39:10 ET

Investec Group. (IVTJF)

H1 2024 Earnings Conference Call

November 16, 2023, 04:00 AM ET

Company Participants

Fani Titi - Group CEO

Nishlan Samujh - Group Finance Director, CFO

Ruth Leas - CEO and Executive Director, Investec Bank plc

Richard Wainwright - CEO/Executive Director at Investec Bank

Conference Call Participants

Presentation

Fani Titi

Ladies and gentlemen, good morning. I always love the zebras galloping along. It really is my pleasure to welcome you to this presentation of our interim results. I will be joined by what I call the A-team. Nishlan will follow me and he will go through the unpacking of the group performance. We will then have Ruth Leas, the Chief Executive of the business in the U.K., giving us a bit more of a feel of why the business has done as well as it has. And of course, Richard Wainwright, who will give us a feel of our South African business. That is the A-team.

So let me start. It is always pleasing to present a good set of results. Obviously, we have alerted the market to the fact that our performance will be good. And as you know, the backdrop has been particularly challenging with high inflation, high interest rates, volatility within markets, given some of the problems, particularly geopolitically. So it hasn't been an easy environment to deliver the results. So on behalf of 7,400 of us, it is my absolute pleasure to present these results. And obviously, we will be joined by my colleagues.

So if you look at the graphic that we have on the screen, we try to manage the business over the long-term. It may be a six-month result presentation, but our focus is always on the long-term. And you can see that over the last three or four years, we have delivered consistent results that have continued to deliver into the promises that we made to the market in February 2019. And we are now at a point where we are comfortably meeting the targets that we set at that time.

Clearly, we have continued to entrench and grow our client franchises. And in these numbers, in the second graphic, you can see that we continue to see good growth in funds under management, good growth in our loan books, and importantly, also good growth in our deposit books. These are the drivers of long-term performance. The performance you see today is actually a consequence of the growth that we saw last year in our client numbers and in the books that we were able to grow from last year.

In this period, we also have concluded a pretty strategic transaction for us, in that we combined our wealth business in the U.K. with Rathbones, consequently creating the U.K.'s largest and leading discretionary fund manager. Very, very proud about the transaction and very hopeful about the benefits that that transaction will create for us. We are also nearing the completion of our share buyback program. We announced that we would be buying back shares worth about GBP350 million. We are close to it. In rent terms, we are now just under 7 billion rent in terms of the buyback.

Nishlan will talk a little more about other strategic actions that we undertook over the last 18 months or so and their impact on the numbers. So if I may just look at the snapshot of the numbers, we have reported adjusted earnings per share. It's a bit difficult to see that far. Adjusted earnings per share of 38.7p, which represents a growth of just under 18% in pound terms, and in rent terms, 39%, a pretty creditable performance.

Adjusted operating profit at GBP441 million represents an 11% increase over the prior year in pounds and a 32% increase in rent. Clearly, you can see the impact of a depreciating rent on our numbers. For our South African shareholders, we thought we would try to get a few metrics reported also in rent. Our cost to income ratio has improved to 53.3%, reflecting the fact that our revenues continue to grow faster than our costs and Nishlan will unpack that a little later. Our credit loss ratio at 32 bps remains within our through-the-cycle target range. So we're quite comfortable with the asset quality of our book. And in fact, our exposures are well covered by collateral.

We also did signal that in the U.K. we will have a slightly elevated credit loss ratio, and Ruth is here to unpack that a little later. I have indicated that our return on equity is now inside of the target range, helped this time by strong operational performance, but also the impact of the share buyback in reducing the number of shares. Richard will tell you that because we used cash from the South African balance sheet, that we have foregone interest earnings in South Africa. I leave that to Richard to unpack a little later.

Lastly, on this slide, if you look at net asset value, which grew in pound terms just under 10%, and net in rent terms about 26%, we have specifically two particular contributions, one being operational earnings, we're generating a lot of capital. The second is obviously the impact of the combination of Rathbones and Investec wealth and investment. We were very pleased that the board declared a dividend of 15.5p, which is an increase of 15% over the prior period in line with the increase in adjusted EPS. So we're quite pleased with the performance.

If we look at the geographic performance of the business, you can see that the important metrics are going in the right way. We have shown you the performance in home currency so that you can see the impact of the business. We have shown you the impact of the rent on our numbers. The loan book in each geography grew quite nicely, higher single digits. Deposits equally have grown pleasingly, funds under management have grown and clearly within the U.K. context, we are now reporting IWI funds under management inside of Rathbones. Indicated the cost to income ratio in South Africa fairly flat, a good improvement within the U.K business. And Ruth will unpack the credit loss ratio of 55 basis points.

In South Africa we continue to see our credit experience being much stronger than where we have guided in terms of our through the cycle range of 20 to 30 basis points. Our return on equity and return on tangible equity very pleasingly within the ranges that we have indicated. The numbers are obviously quite good in terms of financial performance but we manage the business for the interest of all our stakeholders. Sustainability for us remains a key priority.

As you know, we did indicate that we will be going down the route of more granular disclosures. We disclosed our scope 3 emissions last year and we will continue down the route of making sure that we continue to sharpen our disclosures as the standards become better understood across the world. We also have published the commitments both short term, medium term and long-term that we will live by over the next period. As our purpose indicates, we exist to create enduring worth. So we manage the business for the long-term and for all our shareholders.

Nish, I think it's your turn to unpack the numbers. Ruth, I'll make sure that your papers are still here.

Nishlan Samujh

Yes, Fani, that's perfectly on time. Now the pressure is on. Good morning to everyone and it's an absolute privilege to be in front of you. I think just as I unpack the results, let's just set the context because we talk about a tough macroeconomic environment and let's just take a look at some of that.

I think if you look at GDP growth in both markets that we operate in and in several markets, there's obviously been constraints applying. We did see some of the post-recovery from the COVID period and that's pretty much coming through the system but the constraint and the inflationary impact and the battle to bring inflation under control is underway. I think we still hear some conflicting views in terms of how long that will take, but that battle is in play.

Looking at markets, markets have been volatile. I think since September last year we've seen an improvement in markets. Since our March year end, they've actually have pulled back a little bit in certain jurisdictions and have moved forward in certain jurisdictions. But the volatility remains. In terms of the rand, we've said that we have around about an 18.6% depreciation in the rand, sterling and since the year end the South African rand has weakened by about 4.5%, so not that material on the balance sheet overall.

In terms of global interest rates, I think we have seen global interest rates climb sharply and in certain jurisdictions they are having a longer impact. But I think what's important for us as we unpack the Investec results is really to look at interest rates in our two markets. I think whilst we have seen interest rates climb sharply, I think the time where we experience zero rates, particularly in the U.K. bank, since the financial crisis, that time is over. And whilst we anticipate rates to normalize at some point or to come back at some point, it's definitely not to that low level that is reflected on that chart.

From a South African perspective, rates have climbed. It's a little higher than where we would desire it to be and we will expect some normalization of rates, but again just cognizant of the long-term positioning. When we go through these results, we're mindful of short-term measurements, so to some extent some of these strategic actions might have had a negative impact on revenue, a positive impact on earnings per share because of the way accounting works, but I think all of these really position the group well for the future.

The Rathbones transaction which completed on the 21st of September, really created a business with a strong platform and Investec's commitment to that particular market in part of the DNA of our client pool. With Investec holding 41.25% interest in the business, we now effectively will report it as an associate, so you will see revenue recognized as a single line as profitability and that's an after-tax return. So it has created a 2% improvement in our cost-to-income ratio, but overall when Fani quotes the improvement to 53.3%, that's an improvement on a comparative of 55.5% having adjusted for this effect.

I think from a Burnstone perspective, Investec property fund that is now pretty much independent from Investec. We continue to hold just over 24% interest in the underlying fund and we're excited about the business, we're excited about how it is positioned and with the sale of the property management company into the fund itself, it really positions it for the future.

Last year we distributed 15% of our holdings in 91 and we hold just over 10% on our U.K. balance sheet. And then the buyback, we've executed around about ZAR6.8 billion and that's reduced revenue by about ZAR300 million, but you see operating profit increasing by 10% and adjusted earnings increasing by 17% and that's really where the positive impact of these actions are reflected in these results.

And then with regard to our investment in Bud, in the Bud group or formerly known as IEP, we continue to realise the underlying portfolio in a responsible and positive manner. Funds under management, I think last year you would have seen us report funds under management of just over ZAR60 billion, well part of that, £60 billion, 40 billion of those funds under management are now part of the Rathbones group and with the combination we now have a business that manages just over £100 billion of AUM in this market.

The South African business, and I think when Richard unpacks it you will see that that business generated net inflows in this type of market of just over ZAR7.3 billion in the period, something that we are really proud of for the business and that continues to act to be a well placed business in the South African context, managing international clients. Loans and advances growing by 8.7% on a annualised neutral currency basis and customer accounts growing by 3.4% again underpins the growth in the business that will support the future.

In terms of revenue, revenue has now grown by 14.6% to just over a £1billion, in fact close to £1.044 billion for the half year and if we look at the line items again just noting that currency does have an impact so some of the stronger returns from South Africa are reflected in a subdued manner in a sterling set of accounts but we will go through some of the detail.

Net interest income growing by £75 million in this period is really a function of the growth in the book and sustained growth over the last few years as well as higher interest rates benefiting the endowment capital that we have in the group. Net fees and commissions actually grew positively in both geographies and to some extent the constraints in the market is really reflected in this line because you have lower turnover particularly in our private client lending spaces and mortgage origination just given where rates are at this point in time.

In terms of income from investments and associate income, there's about £28 million that we have foregone and that's really the distribution of 91 and not equity accounting IEP so the negative is really the representation of that and for all intents and purposes not real growth in terms of overall investment income in these markets. Trading income reflects continued strong customer flow activity across our balance sheets as well as some of our structural hedging activity coming through that line. Other operating income really marginal improvement over here.

Cost to income ratio improving to 53.3% from 55.6% and again I reiterate these are completely rebased for the business as we look forward. Operating income increasing by 8.6% and operating costs increasing by 4.1%. Now we've provided forward guidance that we anticipate the cost to income ratio to be in the range of 55% for the full year so there is a rebase in our target of less than 63% and we'll communicate that rebase when we get to the full year results.

If we look at unpacked costs, now to some extent again the rand is underplaying the growth in cost because we've continued to invest in our businesses we've continued to add skills and systems that will really underpin the business as we look forward and overall however cost growing on a fairly muted basis with personnel costs growing by just over 5% in a high inflation environment.

Our group investments portfolio, there will come a time when we don't track this in this level of detail but we have about £272 million of capital deployed and against 91 which continues to produce an ROE in our books of just over 20%. The Burnstone Group relatively muted contribution in this current period and the Bud Group we've changed the measurement basis to that of fair value so we're not representing the equity accounted income from the underlying business any longer. And with the ROE of around about 3.9% there is an element of drag on the overall ROE.

Now if we look at the overall performance bringing the picture together, you see that operating profit has grown by 11% from £397.1 million to £441.4 million with South Africa growing by 6% over the period again I just reiterate that there are certain elements that have been foregone because of the strategic actions but a strong contribution on the very very bottom line. ROE in South Africa now at 16% with ROTE at 16.1%.

From a U.K. perspective we see the bank in the U.K. growing by 61% and the wealth business contributing just over 11%. And again heading into South Africa I think I forgot to mention the wealth business growing by 37% in rand terms, a very strong contribution even the underpin of the continued growth in AUM over the period and prior periods.

Group investments, these lines are expected to be red because that's really where we've had the execution with regard to some of the actions that I've mentioned before. But again with the U.K. printing an ROE improvement from 11.1% to 13.6% and return on tangible equity at 16.7% overall. I think just operating profit growing by 14.3%. If we just look at credit loss what we attempted to do on this chart is just to give you some history. Starting at pretty much pre-pandemic and this is a six-monthly view because you can see that we've had some degree of normalization of impairments as we've come out of COVID and the sort of release of some of those provisions held at that stage. We continue to maintain robust provisions on our balance sheet for the overall exposures taking into consideration the level of collateral that is supported.

So if we look at our absolute impairment charge of credit loss ratio of 32 basis points we've indicated that in the U.K. that credit loss ratio is around about 55 basis points and to some degree that represents some individual higher provisioning in certain exposures but nothing that we call out from an overall asset quality perspective because we've really seen robustness in our overall book. The South African business continues to benefit from some recoveries and that credit loss ratio at eight basis points we guide the market to the fact that we will anticipate that over time it will tend towards the 20 to 30 basis points.

And from an absolute number perspective as you look on the left-hand side and the right-hand side of the chart we do end up with a higher level at this stage but we also have higher books so that's really anticipated. Unpacking ROE and capital deployed across the group. I think from a U.K. perspective you see that the capital base is now an average of £2.7 billion there is some increase in the capital base because of the Rathbones transaction on which we recognized a gain as we marked the associate to its transaction value and from a South African perspective with capital at about £1.8 billion a few years ago that was closer to £2.2 billion so we have pulled in capital given the strategic actions that have been taken. That business continues to generate capital and will continue to build.

And again unpacking ROE in the U.K. the differential between ROE and ROTE really represents the nature of being invested significantly in a capital light business. That's been Rathbones. Just to give you some detail around the growth in net asset value really underpinned by growth in profitability in the period with a fair amount of distribution to shareholders, the gain from the Rathbones transaction and some negativity because of the weakening of the rand. And then from a tangible net asset value perspective we have actually separated the investment in our associate identifying a portion that is intangible and that is really what's represented in the £77 million. Now we would have previously had some intangibles in our carrying value of wealth and investment in the U.K.

Our capital and liquidity positions remain robust and strong. You see that our cash and near cash position of £16.4 billion and loans and advances to customers as a percentage of our customer deposits at £76.9 million. In South Africa we report under advanced methodology. Sorry Fani, I used the wrong quote. Yes percent not pounds. In South Africa we report under the advanced methodology and you see that the capital ratio is reduced from 14.7% to 13.2%. Again that's intentional and it was really execution of some of the strategic actions on that particular balance sheet.

In the U.K. we report under standardized with a capital ratio of 11.7% and a leverage ratio of 8.7%. Overall capital ratios again remaining well ahead of in total. So that's the summary of the group. I'm now going to hand over to Ruth. Thank you.

Ruth Leas

Thank you Fani. I see my papers are here. Thank you Nishlan. Good morning everybody and it's a real pleasure to host the interim results here at our offices in London. A warm welcome to Stephen Kossoff one of our founders who's here with us today. A real honor and a pleasure to have you with us in London. I'm going to begin with providing a short overview of our strategic positioning. The strategic positioning of Investec in the U.K. I will then move on to provide some highlights around the Investec PLC figures and provide some details on that. And lastly have a look at where we see growth opportunities going forward.

Next year, Investec Group will celebrate its 50th anniversary and we in the U.K. have been here for 30 years. We recently celebrated that anniversary. So a long time for us in terms of history. Not a long time from a British history point of view but certainly for us as Investec arriving in the U.K. 30 years ago we have been building a fundamentally scalable platform which has reached strong level of scale at this point in time. This is an exceptionally competitive market as you all know. We are competing with the very best of British banks U.S. banks, European banks as well as private credit funds, fintech and everybody else who is here in London which after everything everybody has said is still a very attractive place to do business and we consider it to continue to be a financial center in the world. But a very competitive space so we had to carve out for ourselves a niche or target market areas where we could actually compete. We have to differentiate ourselves from others. So we have found a space in the mid-market in the U.K. and we see ourselves as unique in this space in that we deliver a breadth of capabilities, really a diversity of what we offer in this space.

Our strong competitors typically do one or two or three things of the things that we do. For example, strong competitors in equity capital markets or strong competitors in mortgages or strong competitors in asset finance or in real estate finance. But in terms of bringing this all together in terms of corporate and investment banking activities as well as private banking activities, taking our clients on both their personal journeys and their business journeys here in the small and mid-cap space in the U.K. is something unique and actually we don't have a competitor similar to us of the order of size and scale that we are at and actually providing a seamless experience to clients. These are clients that we have dealt with for many, many years. We have built deep client relationships and we continue to acquire new clients even in this challenging macroeconomic environment, acquiring new clients as well as doing more business with our existing clients.

So today we have a net core loan book of £16.3 billion, customer deposits of £19.9 billion. For the six months to September 23, Investec PLC has delivered £235.4 million of adjusted operating profit and a return on tangible equity of 16.7%. We see this business as high tech and high touch. We're not apologising for being high touch. The mid market space is a place where relationship banking is still alive and well. It is a place where banking is not commoditised, where our pricing is not necessarily the cheapest but where we can actually differentiate ourselves in terms of relationship, in terms of service, in terms of our ability to execute a transaction, to say we'll do something, commit to doing that and do that and be very agile in our approach and always focused on providing exceptional service. In what we've been driving over the last few years since COVID in a connected client ecosystem. We structured the bank as one single bank, one leadership team. We've arranged our sales with the client truly at the centre of what we do. Investec has always been around putting the client truly at the centre of what we do. Arranged around client groupings, private clients, private companies, private equity, listed companies and then of course interacting from a wealth management perspective. Servicing these business needs and the personal needs. This is really resonating with our clients.

In fact our greatest client acquisition comes from referral from existing clients which means that they are really enjoying the client experience with us and it is consistent across different areas of our business. Whether you are interacting with us on the private client side or in terms of corporate and investment banking. On the private client side we have grown our franchise very strongly. We have found a niche where we can compete even in a market like this where mortgage demand has been subdued. We have acquired new clients each and every month and we continue to build for the franchise. So strong momentum here across all our activities, lending, advisory, hedging, transactional banking and deposits. From a deposit perspective we are substantially retail funded across the retail market of the United Kingdom. Our wealth business interacts with thousands of clients on the wealth management side and then of course we have the clients that we interact with in corporate and investment banking.

So what I'm trying to portray to you is that we really touch and interact with a large portion of the community in London and in the broader U.K. and then very much internationally connected to our other businesses in the United States, in Europe, based in Ireland, in the Channel Islands and of course in India. Each of these businesses connecting to the global franchises that we have and growing strongly together with us. These COGS and the momentum in the business really driving together and moving forward strongly.

A snapshot of the results, Nishlan has covered quite a lot of this already so I will just draw out a few highlights to tell you where we stand here. Revenue for Investec PLC, I'm talking to both banking and wealth management here, £595.4 million of revenue which is 24% up from the prior period. If you look at our adjusted operating profit which I mentioned earlier, this is 41.4% up on the prior period. I mentioned our return on tangible equity on the previous slide but looking at return on equity, still strong at 13.6%. And the cost to income ratio improving significantly down to 53.9%. Some detail for you to really unpack how the numbers come together which you can look at later.

We saw 9.1% growth in our net core loans to the 16.3 billion book. This is diversified across different areas of activity. It is that diversity that enables us to grow in spite of challenging market conditions. There are always pockets of growth in areas where, certain areas where there's muted growth, for example in mortgages. Of course mortgage demand is significantly down in the U.K. given the spike in interest rates that we've seen and also given that we deal only with high net worth individuals when doing mortgages. And these individuals have sought to reduce their mortgages, paying down their debts, using excess liquidity in order to do so and therefore redemptions have actually also been high in the mortgage space. But our corporate and other lending has actually grown at a much faster pace.

We have not changed our lending standards. We are as cautious as always in terms of lending in these types of environments, particularly where interest rates have increased so much. What you are seeing in our loan growth is that we are gaining market share in each of the areas where we are doing business. In many of our businesses we are only 1% or 2% or single digit figures in terms of market share. Therefore in order to grow and take advantage of that across 10 or 15 different lines of business, if each one is doing a net increase of approximately £30 million to £50 million, you can reach these loan growth figures quite easily.

Deposit raising, raising there comfortably at 8.4% annualized increase. We are well seasoned to compete in the deposit space. We've always had to pay more than the high street banks in terms of deposit raising. It is competitive now for the high street banks in the deposit raising space. Our brand are rating very good at A1 by Moody's, BBB by Fitch and the general brand recognition around Investec and the way and the service experience we provide in raising deposits has led to a comfortable experience in terms of being able to stay ahead, increase deposits and actually reduce our overall cost of funds at the same time.

Our revenue has increased by 27%. This is a combination of both strong increase in net interest income as well as non-interest revenue. I explained that we've had strong book growth. We are always cautious from a liquidity and cash perspective. Being a non-systemic bank in the U.K., running long cash balances and of course this has also served us well in terms of the benefits coming through from higher interest rates.

On non-interest revenue, we are pleased to see that our fee income has remained resilient and actually increased slightly through this period and again, there are pockets of activity for example, equity capital markets and the world of RPOs and M&A where things might be a little bit slower than other areas and our lending fees coming through strongly and actually in the corporate advisory listed space we have had certain fees come through strongly during this particular period. Trading income from customer flow has also delivered during this particular period.

From a cost perspective, we remain disciplined. We implemented a number of changes when COVID hit back in 2020. We focused on simplifying the business and then put our minds towards focus and fixed operating costs even in this period have increased only 2.3%, well below the prevailing U.K. inflation rate.

Overall operating costs have increased 9.9%. This is reflecting more of an increase in variable remuneration which is reflective of the overall increase in profits that we've seen. Getting to the credit loss ratio, we indicated to the market at the trading update that our credit loss ratio would be above through the cycle range of 30 to 40 basis points and it has come through at 55 basis points. You can see that back in 2019 this was around 41 basis points.

To put this in context you saw the chart that Nishlan put up earlier today of the spike in interest rates. It looks like my daughter's pen slightly being pushed to the side and a sharp line upwards but 14 rate rises in 12 months is something that is not experienced as normal cyclical activity. Clearly that is an unusual impact that we've had to deal with through this last year or so and that type of unusual and strong spike in interest rates would of course affect certain counterparties and that is what we have seen. Small number of idiosyncratic impacts on counterparties. We look at the overall book in spite of these rate increases, strong asset quality, a strongly performing book.

To put it in context, you can see below there total ECL charges of £39.3 million. This has increased £11 million on a total net for loan book of £16.3 million. Just to put that overall in context. So we're very comfortable with the overall asset quality of the book and we saw inflation yesterday print down at 4.6%. We have seen interest rates already pause. So we are guiding to a credit loss ratio for the full year around 50 to 60 basis points. That would be on the basis that current conditions continue as they are. But of course if rates turn and start to come down, you will have a different picture as we go forward. And I think Fani pointed out earlier that our total coverage at 1.1% overall book, very comfortable from a coverage perspective and as a lender we're always focused on loss given default and we take great care in making sure we are well covered in our lending.

Looking at wealth and investment, we retain a 41.25% shareholding in Rathbones. We are very excited for this combination which has brought together £100 billion putting us at the leading private client wealth manager in the United Kingdom. We have already enacted a strategic partnership with Rathbones in terms of our high net worth clients and how we service them going forward and we expect this to bear strong fruit as we go forward in time. Opportunities for us to create funds under management for Rathbones through our high net worth client capability and actually in the last couple of years we'd actually created approximately half £0.5 billion of funds under management in each of the years through to March 22 and March 23 for the wealth business and we expect that to increase in time as we develop this partnership further.

And of course referrals also coming from Rathbones to us and a greater opportunity also to expand our broader deposit and other product offering to the broader Rathbones client base. And now to just round off, growth opportunities. I was just standing here reflecting back to 2020 and the last few years I don't think there has been a time, I think we had an afternoon off maybe from uncertainty, but other than that every so often there has been just another shock and another type of uncertainty each of which I don't think any of us could ever have imagined before we have amazing teams who do a lot of stress testing but each time I don't think that we've actually included the stresses that we've faced. So overall I think we've adapted ourselves as has the rest of the market to being able to deal with uncertainty, not to be flippant about it. Each time the shocks come you learn something new every single day. But what I'm trying to say is that in spite of all of this we are on the front foot as the U.K. Bank in terms of our positioning U.K. Bank and other in terms of where we're placed in international markets and we are now focused on increasing what already is a good scale but increasing that further, increasing the scale and relevance of our established client franchises those client franchises span corporate lending, fund solutions which includes fund finance, real estate lending, aviation finance power and infrastructure finance, asset finance, high net worth lending.

In each of these we have strong capabilities where we are able to originate very very strongly, we are able to portfolio manage, we have many people that I see sitting in the room here who have long tenure with us, they have developed seasoned experience in terms of dealing with clients and dealing with this experience and leading these businesses and we have very good track records in each of the lending activities that we've done. The same can be said for our advisory activities and also in terms of the other activities we do treasury risk management and solutions and all the other things that we do.

So I said earlier we have very small market share, we have a great runway to grow in and just scaling that up and increasing that scale and relevance will deliver a great performance. We also want to grow further in continental Europe, we've been operating in Continental Europe for many many years, over 20 years really, we do lending in Europe we do treasury risk solutions and also advisory, recently we increased our stake in Capital Mind which is M&A advisory in Europe, giving us an immediate footprint across countries, selected countries that we choose to operate in. We only lend in selected countries and of course Brexit has caused some issues in terms of the flexibility with which you can go into Europe and we are working on a more flexible solution now to take forward our growth opportunities in Europe.

Most of our clients who are operating in the U.K. or many of them also have interest in the U.K. this is a giant market on the doorstep of the U.K., we want to be able to access and this gives us a real strong opportunity for growth which we are already experienced in, have lending books in and experience in hedging and advisory in that space already. The third thing which we haven't spoken much about externally but have been busy working on internally for a very long time is advancing our alternative investment fund strategy.

In terms of our overall balance sheet we are limited in terms of what we can take onto balance sheet because we run a very disciplined risk management approach, trying to keep our exposures granular and also the clients that we bank in the good market easily outgrow us over time and they are needing larger and larger facilities to take forward. So we can originate far more risk than we can actually hold on our own balance sheet and if we look over the last couple of years we will have distributed approximately £6 billion of risk which you don't see on our balance sheet just through our general activity that is a very large flow of activity coming through our businesses each and every week and we want to monetize that in terms of looking at the opportunity for earning capital like revenues by bringing in external capital to participate alongside us.

Over the last decade or so we probably raised of the order of approximately 2.5 billion at different times for different funds. Right now we have about £1 billion of committed capital for funds activity that would be in aviation for example, in private credit or in direct lending. These are funds that we have in the U.K. as well as in India and spend these activities that we do in the funds and bringing in external capital enables us to augment our balance sheet activity and our lending activity and actually meet our client’s needs, our clients who are growing stronger and stronger.

So this is in the early stages of development. In the past we have done this in a more ad hoc approach making space for ourselves to do bigger transactions and to facilitate our clients’ needs but we are now looking at this far more deliberately and strategically in taking this forward. Really also in relation to reverse inquiry coming to us with a great interest from external capital looking at these alternative assets which we are actually well experienced in have track record in many of these things so it's early stages but we are looking to take this forward as we go forward as a growth area.

And then both Fani, and Nishlan and myself have spoken about the scale benefits that can be achieved through our combination of invested wealth and investment with Rathbones there are exciting prospects to come through there, clearly it's early days but we will be looking with interest to see those benefits realised as we go forward. Thank you very much, I'll now hand over to Richard Wainwright.

Richard Wainwright

Thank you Ruth. I want to see if I can see, I may need my glasses. I'm going to go on to the next page, I've got to hit it here. Okay, so good morning ladies and gentlemen, it's an absolute honour and a privilege for me to represent these very pleasing results on behalf of 5,000 colleagues that I have in South Africa that managed to do this. And as Fani and Nishlan have said in a very tough, not only macro environment, macro-economic environment, but also very difficult socio-political environment in South Africa and a geo-political environment around the world. So to represent those 5,000 colleagues with results like this is very pleasing. I know one shouldn't do it but Fani led the way yesterday and he pointed out some unsung heroes.

So let me just very quickly thank some unsung heroes in South Africa. These are people that largely go unrecognised but they make a big difference in the life of our staff and in particular our clients. Because very often this is the first touch that our clients will have with investing. And that is our security staff, our frontline reception staff. If you're ever walking to any one of our restaurants in our various offices in South Africa, the people that work in our restaurants and the people that work 24-7 in our client service centre. It's tough to single out people but these people make a big difference in the lives of our people and of our staff. So a special thank you to you. I know we often speak about our bankers, our support staff, our professional staff and our IT staff. These people do make a difference.

So our strategic positioning in South Africa is pretty well known. We are not all things to all people. We are a specialist bank and private client wealth manager that services a very select group of clients. We have been very razor focused on what we want to achieve since we set our objectives in February 2019 and we have proven now that we can achieve these kind of results with the focus, the dedication, the diversification that we have in our business model and the resilience that we've proven. And apologies to my international colleagues kind of reminds me of our Springbok winning rugby team. Diversified, focused on what you want to achieve and able to produce a resilient performance. Kind of reminds me of that.

So I'm extremely proud of these results and as I said it's a great privilege. So for the half year, having produced adjusted operating profits of 4.8 billion, growth of 8% in our core loans now at close to 340 billion. Customer deposits of 460 billion and quite proud of the fact that we now have funds under management in our private client wealth business of 465 billion. What we often don't talk about is we have additional funds under management in the specialist bank adjusting for double counting of about a further 20 billion. So almost reaching the half billion or half a trillion mark. So very, very good well positioned business in South Africa.

I think at a cultural level one of the things that we always remind ourselves whilst we think we are large and we have to thank our founders for the brand and the position that we have in South Africa. What we do culturally is that we continue to remind our people we're actually small. Think small, think entrepreneurial and deliver an out of the ordinary service level to our client. That's what enables us to deliver these kind of results. So our revenue up at 10.5 billion up over 10% for the year.

Operating costs up at 12.2% which has resulted in a slight deterioration in our cost to income ratio but well within our target ranges. Our credit loss ratio well below in fact half of what our guidance is of 20 to 30 basis points through the economic cycles at 8%. Sorry 8 basis points and again a lot of our stakeholders rating agency and analysts often ask me why is that? And again this goes to the Springbok analogy. We have as a society in South Africa very, very, very resilient. In particular in our corporate market and it's been confirmed to me by various rating agencies, international rating agencies that they often surprise that we are outstanding in the economic environment that we're in and the high interest rates. That corporate South Africa has continued to be very resilient in the face of very tough circumstances. So we are partly a beneficiary of that as well.

So just at operating profit up at 4.8 billion and as Nishlan said our return on equity which we've had a very big laser focus on for the last four years now above our cost of capital it's taken a lot of work and a lot of strategic actions to do that. So hopefully the market at some point will give us some benefit for that. Just unpacking the numbers a little bit. The wealth and investment business showing an incredible performance increasing its earnings by 36%. You heard Nishlan speak about new flows 7.4 billion of new flows for the half year into that business and this is largely as a result of the one investing strategy and that doesn't happen overnight. This is a large number of people across the private bank and the wealth business working together headed up by Ramesh Mudaliar [Ph] driving this integrated approach where we service clients holistically similar to what Ruth was talking about in the U.K.

The specialist banking operations showing an increased performance so growing earnings 14.7%. Very, very pleasing and you can see the impact of some of the strategic actions that Fani and Nishlan spoke about under group investments where you've had the 91 performance, the deconsolidation of the Investec property fund and the different accounting treatment now for IEP. And we will have time with our stakeholders and analysts and shareholders to unpack the impacts of that. If you adjust for that, you just look at what our client franchise businesses have done. It's about a 17% to 18% improvement in earnings. And I'll talk about the opportunities that we foresee in that space.

So as we have said, continuing growth in our core loans and advances over 8% and really if you unpack this a little bit you'll see it in the analyst booklet. Where has that growth come from? It really has come from our corporate presence across the various segments and specializations that we have in the corporate market. Around about an 18% growth in corporate. Our private client mortgages and pure private client advances has also grown at around 8.9%. And our real estate residential income producing real estate portfolio is relatively flat and that is a consequence of what's happening in that market. How our clients have responded and how we've supported that and actually we're very pleased with that.

So very strong growth overall from a core loans perspective. Revenue up 14.4% and our cost to income ratio in the bank itself in the specialist bank, well below 50%. This is a leading market position when you compare it to our peers. We're below the best of the rest I would say. A very good performance on costs. Credit loss ratio I think we've said that we're at 8 basis points. Very much less than half of our guidance. You know like Ruth if we do a forward looking we don't see an overall deterioration in our portfolios, our lending portfolios overall. These are largely one source. But given the macroeconomic environment and with interest rates probably going to be a little bit higher for longer. There's speculation of these cuts going to start in March or they're going to start in June. Well March is our year end. No cuts probably before our year end. So we may get some slight deterioration and a move more toward the 20 basis points. But where we are right now, similar to Ruth, we don't see any stresses in the portfolio and there's nothing specifically that we're worried about. So we continue to be well ahead of the curve in terms of portfolio provision.

Just moving on to our wealth and investment. Just to unpack that a little bit as I said. You know funds under management increasing 6.9% to 465 billion. With inflows on the discretionary funds under management of 7.3 billion. Adjusted operating profits up almost 37% and the margin actually improving to 29.5%. And as some of our wealth colleagues pointed out to us yesterday, again this kind of performance doesn't happen overnight. This has been a journey and an investment in this business over a long period of time. A track record that's been built, a culture of service and a growing international presence. I think it is worthwhile talking about our Swiss platform that we've built which does sit underneath the U.K. bank but it is an opportunity for us to offer a Swiss platform for our South African clients which we think is very strategic for us in the medium to long-term.

But just moving on to our growth opportunities. Again, given the macro and socio-political environment in South Africa, very low business confidence, almost zero growth in the economy. As various stakeholders ask me very often how do you expect to get growth? And as I said earlier, if you think that you're small, and we are the smallest of the big five banks, we think there are pockets of environments where we can gain market share. So the first one, and Fani and I have spoken about this for a number of years, is in the private client space. We've had consistent client acquisition growth in our private client space now for about 12 years, I'm looking at Dinesh, probably average around 7% to 8% per year. We would like to accelerate that 10% to 12%. How do we get this growth? Where do we see it? We look at how the world has changed, how professionals have changed, new opportunities to service various professional categories, like in the IT world, like in the financial services world. These would be markets that historically Investec brand was unknown, we didn't target those markets.

So whilst we have ambitions to double our client base, it is difficult in this kind of environment, but we are very focused on client acquisition. So all the metrics that we measure around our private clients, whether it be growth in our client numbers, or in growth in what we service to these clients, whether it be our life offering, our investment offering, all of those are growing fairly strongly and at rates that we're very pleased with. So that's going to give us a lot of sustainability in both our private bank and our wealth business. In the mid-market and Ruth spoke a lot about her positioning in the bank here, in the U.K's positioning in the corporate mid-market.

In South Africa we often refer to this business banking, so Investec has not traditionally been known as a business bank, but we have quietly been working on building this kind of capability. We've invested from an IT perspective in our transactional banking capability, it's largely complete. We are growing our client base here. We think we have a distinctive service offering that is very competitive and compelling for these clients. So we are growing our client base, we have more clients taking on our transactional banking capability and we can complement that IT approach with our well-known service levels that Investec is well-known for.

So we think over the medium term, gaining market share in this, and it is a very competitive environment, we know that, but we think given our approach and our people combined with the tech capability that we have that we can compete there over the next three to five years.

The opportunities on the African continent, whether it be trade finance or social infrastructure, we're doing this in a very disciplined focused way. I do look at our founder down here, who warns us every day, but the role that we're playing together with some of our colleagues in the U.K., we have a very distinctive offering around our export credit agency capability, in our London office and our Johannesburg office, and some of the transactions we've been able to do really is making a social difference on the continent. And we do it in a very risk conscious way using export credit agencies from around the world, and as the continent grows, and many of these countries are growing faster than us in South Africa, there is a lot of infrastructure need, and in particular social infrastructure, and what I mean by that is roads, schools, clinics, hospitals and the like.

So there is opportunity for us there, and then in South Africa finally is just the transition, both the transition to more renewable clean energy, but also the impact of what's happened with the state-owned enterprise of Eskim [Ph]. I think I've been on public record in saying in ten years’ time I don't think Eskim will be producing much electricity in South Africa. It won't attract the capital and certainly doesn't have the people. What you've seen happening in South Africa is many of our clients, whether they be domestic or international, raising funds, coming in and building very large scale power plants. I think that's going to accelerate. We're well positioned to capture that opportunity, not just in the power plants themselves, but the downstream impact. We've recently, for example, just launched under a different band a solo residential business called Recharge. It's now launched. We're going to roll that out. We have numerous clients that are very active in the downstream power sector, whether it be importing solar panels or batteries or manufacturing new types of batteries. That's a very large sector of the economy that's going to grow as Eskim slowly moves out of generation.

We'll end up just probably running the grid. So we think, given our culture, our market positioning, our relative size, notwithstanding the macro, there are growth opportunities for us. So we're very focused on that and hopefully we can continue to deliver for you. Thank you very much.

Fani Titi

Thanks, Richard. I'm going to bring it home. I'm really glad that we could present both Ruth and Richard. Most of you will know that in the next 18 months to 24 months, Richard will be retiring. So this is really an important opportunity for him to present. We have Yanku Meshmudlia [Ph], who alongside Ruth will present in May next year on this podium. And as you can see, the boots are quite big that Richard has there. Richard, thank you for your service to this business. You'll be around with us for quite a long time. Richard is one of the best bankers you can work with. I'm really pleased that we've had the opportunity to work with him and the results are quite fantastic.

Just in closing, because we've taken more time than we had thought we would take, so I'm going to take two minutes to wrap it up. We remain hopeful that we can see the momentum that we have seen into the first half continue. As we said, there's a lot of opportunity on the corporate side. There's a lot of opportunity on the private banking side in terms of lending. When you look at the private banking essay and you look at the overall growth, a big portion of [Indiscernible] being specialised property, we really haven't seen much activity there. But in the banking piece, we have seen quite some good opportunity there.

Ruth has indicated that on the corporate side, there has been quite a lot of opportunity in the areas that we are operating. We expect interest rates to remain high over this period, but the expectation that in the second half next year we may start to see rates coming down as inflation continues to moderate, that expectation may bring confidence into markets and we may see a bit more activity than we have seen. So we hope there will be confidence going into that. So our expectation is for moderate book growth and therefore the level of growth that we have seen in our profitability we would expect to continue. Ruth has talked about where we see impairments in the U.K. business.

On a book of 16.3 billion, comfortable with where we are, we've seen a growth of 60%. Ruth, I won't promise that you will repeat that promise in the second half, but we're quite excited about where we're positioned. You saw in Richard's business a very pleasing level of growth. So our expectation is that we will maintain ROE performance on the upper side of our midpoint, which we obviously would be very pleased with if we are able to achieve that. As Richard indicated, and I think Ruth indicated as well, we are fairly agile as a business. We have small market shares and we are able to be nimble in servicing our clients. You know that we've asked our colleagues here to come into the office for four days a week because we want to keep the energy going. We want to be close to our clients. We want to make sure that our younger colleagues get to learn from the other colleagues. So excited about the environment we're in. Tough, but we have the agility to navigate this environment.

I'm going to rest it there and we can then go into questions. I think we're going to start in this room. Stephen, Philip is standing at the back there. I know you asked about where the chairman is. I think the chairman came maybe a minute late and is just standing room only now. Philip, welcome.

Question-and-Answer Session

A - Fani Titi

Questions from this room. Okay, while we think about questions, shall we go to Johannesburg? Anything from Johannesburg?

Ruth Leas

Fani, I don't think there's any questions here and there's nothing on the webcast. We're going to try a chorus call now. Thank you.

Fani Titi

Over the COVID period, we renovated our building in Joburg and it's a beautiful building for our colleagues to work in. Lush is in Cape Town and even there we've renovated our building and the environment at Investec characterizes the energy that every one of us brings into this business. We don't have any questions in Joburg or on the webcast. Any last question in Johannesburg? Stephen once against me offering an opportunity for a question that I'm offering it.

Ruth Leas

No questions, Fani. You guys have clearly done an amazing job.

Fani Titi

Thank you very much for your attendance and again for my colleagues around the world, thank you so much for looking after our clients, looking after our other colleagues. It was fantastic, Richard, that you recognized those people that we take for granted. I always say to outsiders that if you walk into an Investec building, we don't quite own this one, in Johannesburg we own the whole building. From the time you see somebody who lets you into the building or somebody who takes you to a room or somebody who offers you coffee or offers you food in the restaurant, you know there's something different about this business because there's that personal touch, that degree of ownership, that sense of interest in our clients, in our colleagues. So thank you very much. It's time to get back to work, Richard, Ruth and Nishlan. Thank you so much for your attendance.

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