Investec on track for demerger amid 'challenging' operating environment

Investec updated shareholders on developments for the financial year ending 31 March on Friday, reporting that the operating environment remained “challenging” over the period.

The FTSE 250 company said global equity markets experienced a sharp decline at the end of the 2018 calendar year, before showing some recovery.

Economic growth had been weak in both South Africa and the UK, which were the group's two core banking markets.

Against that backdrop, Investec said its operating profit was still expected to be ahead of the prior year.

The bank and wealth business was expected to report results ahead of the prior year, while the asset management business was expected to report results marginally behind the prior year. Investec had announced its intention to simplify and focus its business in pursuit of disciplined growth over the long term around six months ago.

That process had started with the intention to demerge and separately list Investec Asset Management, the board said, and since then it said it had set out a “clear set of strategic priorities” for both the asset management, and bank and wealth businesses.

The bank and wealth business was focused on a plan to enhance the effectiveness of its operating platform to better serve clients and deliver long-term shareholder returns.

There were five key priorities, the board said, being increasing discipline in capital allocation; managing the cost base for greater efficiencies; accelerating revenue growth; expanding connectivity across the organisation to more fully serve client needs; and bolstering digital capabilities.

The asset management business, meanwhile, was concentrating efforts on its existing offering, by “deepening and strengthening” investment and client capabilities for the long term, scaling its offering through its global distribution model, and positioning for growth.

On the financial front, Investec said its revenue for the year was expected to be in line with the prior year, with annuity income as a percentage of total operating income anticipated to be approximately 77%, up from 76%.

The expected credit loss charge was expected to be “significantly less” than the prior year, with the credit loss ratio expected to be between 0.30% and 0.35%.

Modest cost growth was expected, with the board also stating that overall group results had been negatively impacted by the depreciation of the rand against sterling of approximately 4% over the period.

For the period 31 March 2018 to 28 February 2019, the company said third-party assets under management increased 1.9% to £163.7bn - an increase of 5.8% on a currency-neutral basis.

Net inflows of £6.9bn were generated, while core loans and advances decreased 0.9% to £24.9bn, although that was an increase of 6.0% on a currency neutral basis.

Customer deposits were ahead 1.1% at £31.3bn, which was an increase of 8.1% on a currency neutral basis.

The board said the proposed demerger and separate listing of Investec Asset Management was on track, subject to regulatory and shareholder approvals.

“The group's performance has been supported by growth in assets under management and substantial net inflows, good loan book growth, and significantly improved performance from the UK specialist banking business,” said Investec chairman Perry Crosthwaite.

“The group is committed to a strategy of simplification, focus, and growth with discipline.

“The bank and wealth business and the asset management business are dedicated to pursuing the objectives outlined at their capital markets day presentations.”