Maintaining a buffer

SA financial institutions have an uneven scorecard when investing internationally.

Investec paid its school fees acquiring businesses in the US and Israel, which it has since disposed of.

CE Stephen Koseff used to say, only half jokingly, that the group was successful only in countries that played rugby. That isn’t entirely true, as it has failed to build scale in Australia and during the financial year to March it sold Investec Bank (Australia) to the Bank of Queensland for £122m.

Investec sold its Australian professional finance and asset finance and leasing business, which was the group’s original core business in SA back in the 1970s and 1980s.

It remains in less capitalintensive businesses Down Under such as corporate advisory, property fund management — the Investec Australia fund is listed on the JSE — and asset management.

If not quite a multinational, Investec is certainly binational, with two almost equal centres in 12000 SA and the UK. The UK & other accounts for 44% of operating profit, or £261m.

It is materially bigger in both asset management and wealth and investment, or private client businesses, in the UK than in SA. It might well have been equal overall if it had not been for the legacy book. Koseff says the book is the pool of loans written before the 2008 financial crisis, often with very low or negative margins. There is currently £583m in the legacy book, of which £143m is nonperforming.

There are at least two more years of hard work ahead to eliminate the book, he says. But progress has been made, and the market has given credit to Investec as the share is 20% up on its 12-month low.

The book was originally £4bn. It continues to be reduced: UK mortgage business Kensington, which was bought what seemed like hours before the financial crisis blew up, was sold to a couple of bottom-feeding “special situations” businesses.

Investec had even less luck in the Republic of Ireland.

There it managed to sell lossmaking Start Mortgage Holdings to an affiliate of the private equity group Lone Star Funds. But in the interest of transparency it disclosed that it had £14m in impairments from Irish private banking property planning and development loans in 2016.

Investec Bank in SA remains the biggest profit centre in the group, with £252m of operating profit — in rand terms this increased by 12.2%.

Investec has built a powerful franchise as an alternative to the stuffiness of the big four banks.

It has been particularly successful at offering senior executives private as well as corporate banking. Banks such as Absa have imitated this but have never quite succeeded.

And Investec Bank SA has a low-cost model with a cost-toincome ratio of 47.2%, well below its peers in SA.

For all its love of novelty, Investec’s balance sheet remains highly conservative with deposits of £24bn and loans and advances of £17.5bn.

“We need a buffer when the