Investec ready to face SA, Brexit blues — Titi
Share price of owner of SA’s largest asset manager has its worst drop in more than three years
Fani Titi may find himself in the unenviable position of having to revive the weaker part of Investec in an environment where SA’s economy is barely growing.
Investec, which is planning to spin off its UK-based asset manager and list it separately, had its worst drop in Johannesburg in more than three years on Friday, according to Iress, after it said Brexit-induced uncertainty and a weak SA economy would push its earnings down by almost a fifth.
Investec said its bank and wealth business were expected to report lower profit, while asset management would increase profit compared with the prior period.
In SA, Investec’s corporate banking segment is struggling to grow revenue because of economic growth of below 1%, jointCEO Titi said on a conference call. Growth at the private bank was supported by income from lending, while costs were kept in line with 2018, he said.
SA has yet to show signs of any meaningful economic recovery after a decade of growth stagnation with the SA Reserve Bank on Thursday maintaining its GDP forecast at just 0.6% for 2019 and downgrading its 2020 and 2021 forecasts. A depressed economy hits banks by reducing demand for loans while potential business and consumer bankruptcies increase the risk of debt not being repaid.
Titi conceded at the weekend that the economic outlook would make it difficult for Investec’s SA operations to perform strongly in the short term.
“We will have to tighten things up. But we run this business on a long-term basis, and will still look for new growth opportunities,” he said.
Titi stressed there were many legs in the SA business, and some — like the new transactional banking to the mid-market corporate sector — could see the bank increasing market penetration.
“We’ve always been entrepreneurs, and we think there will still be opportunities in a tougher economy.
“We think we can be both entrepreneurial and frugally minded,” Titi said.
Mergence Investment Managers investment analyst Nolwandle Mthombeni said Investec ’ s trading update was “below expectations”.
“It also doesn’t provide any comfort for the stand-alone bank after the demerger. Ideally, you want to show a good performance before the divisions list
separately,” Mthombeni said. The asset-management business had been “picking up the slack” when the bank underperformed.
Titi is technically joint-CEO with Investec Asset Management chief Hendrik du Toit, but will singularly be in charge of the specialist bank and wealth and investment divisions after Du Toit’s division, which is run from London, separates.
The asset-management unit’s separation is on track for later in 2019.
The two took over the reins from founders Stephen Koseff and Bernard Kantor, who stepped down as CEO and MD, respectively at the end of September 2018.
The share price of Investec, which has been one of the star performers among JSE-listed financial services companies, fell 5.68% in Johannesburg to R86.46, the most since June 27, 2016. That cut its 2019 gain to 9.44%, comfortably beating the JSE all Africa general financial index, which is down 3.26% in 2019.
Investec is not alone in finding the environment difficult to navigate.
Standard Bank, FirstRand and Absa report single-digit increases in their most recent earnings presented in the past month due to subdued economic activity, which continues to affect banks' ability to lend and grow deposits.
The company said headline earnings per share could drop 15%-18% for the period. Abroad, Investec is also weathering the fallout from Brexit, which may see the UK leave the EU without a deal, three years after the shock referendum result that sparked concern about its longterm future, denting consumer and business confidence.
The UK specialist bank would report adjusted operating profit significantly behind the prior reporting period, Investec said.
“Market variability and persistent uncertainty relating to Brexit and global trade wars has negatively affected investment banking fees and trading income,” it said.
Performance of the asset manager was supported by movements in markets, currencies and net inflows of £3.3bn (R61bn), pushing its assets to £121.3bn.
For the group, assets under management grew 6.7% to £178.4bn, the company said. The separation of the asset-management business is on track and regulatory approval was received in August, according to the company.
The trends reported by Investec were not unexpected, but their effect did seem to be greater than expected, said Avior Capital Markets banking analyst Harry Botha.
“Investec’s banking operations have a higher proportion of deal flow — or event-driven — revenues compared to other major SA banks,” said Botha. Many of these revenue streams are under pressure given current conditions.
“Encouragingly, the commentary highlights that Investec continues to attract new customers, resulting in growth in loans, assets under management and certain types of fee income.”
A larger client base increased the level of revenue and profit that Investec could earn when the good times returned, Botha said.
ASSET MANAGER EXPECTS INTERIM HEADLINE EARNINGS PER SHARE TO FALL AS MUCH AS 18% IN THE SIX MONTHS TO END-SEPTEMBER