Zebra’s crossing falters
The success of the firm’s overseas foray will be determined by how well the UK bank performs
Investec is one of the textbook examples of a business which went overseas in pursuit of riches after the relaxation of exchange controls 20 years ago.
Yet what no-one expected happened, as the banking and asset management group significantly underperformed other Sa-focused investment companies, such as PSG.
The unexpected strength of the rand since 2000 didn’t help. But Investec also scored some own goals, making poor acquisitions in the US, Israel and Australia. Investec is now focused on SA and the UK, which are two of the slower growing sizeable world economies, both with less than 2% growth.
The most visible issue for Investec to sort out is the UK legacy book, in investments which seemed like a good idea before the global financial crisis: Irish property developments and cleverly designed syndications.
Investec CEO Stephen Koseff says he hopes he won’t be reporting on that legacy book when the new financial year begins in April 2018.
It has already been sold down or written off from £4.8bn to £425m by September.
Jan Meintjes, a portfolio manager at Denker Capital says Investec was forced to take about £30m of fixed-rate high-interest funding, which only matures in 2021.
In spite of this the combined specialist banking business increased operating profit by 14% to £207m for the six months to September. However, Meintjes points out that the fall in the rand/sterling exchange rate flatters these results.
But Allan Gray portfolio manager Simon Raubenheimer says that both the SA and UK banks are conservatively managed with modest impairments of 0.27% in the UK and 0.29% in SA. He says management would do well to repeat or improve on this next year.
Koseff says Investec is still building up its UK private banking platform: it has serviced high net worth clients before, but primarily as a property lender, not managing the client’s full product needs.
It has certainly moved beyond property in its UK specialist bank, offering finance for aircraft, project finance, private equity and small assets as well as the full suite of treasury services: but it plays in the mid-cap market, while in SA it competes at the top end with RMB, Nedbank
CIB and so on, though with a smaller balance sheet. And it still has footholds in other financial centres. Its New York office helped distribute shares in recent listings such as Steinhoff Africa and Dis-chem.
The problem in the UK, says Raubenheimer, is that the bank has high costs with the cost-toincome ratio at 78%, so it needs to grow the customer base and win a greater share of wallet.
Raubenheimer says the success of the UK bank will determine Koseff’s legacy, along with that of his long-time partner Bernard Kantor.
They will want to see it work well before they retire.
Perhaps if Investec’s only business had been specialist banking it might have been a takeover target, or even been forced to undergo its own version of managed separation.
But it has two more consistent legs, Wealth & Investment (W&I) and Asset Management.
W&I is the second-largest discretionary wealth manager in the UK after Brewin Dolphin with £31bn under management. It is also larger than blue-blooded Cazenove as well as Old Mutual’s Quilter Cheviot unit. W&I had net inflows of £1.5bn and operating profit was up a healthy 15% to £49.5m. It will work closely with the re-engineered Investec Private Bank, which will often share premises.
Closer to home, Koseff says that the launch of the new life insurance unit was not a reaction to Discovery setting up a bank.
He says the two groups have a good relationship, with Investec managing the assets in Discovery’s unit trusts. There are definite cultural similarities between the groups.
Koseff says the banking models are quite different. Investec is launching life insurance as an added value product for its private clients — it has no plans to send an army of agents and brokers out into the field to sell it.
And Investec has a much narrower target market in banking than Discovery.
“In private banking we offer a high-touch model, offering the range of investment needs in what we call One Place. It isn’t all about accumulating points and rewards.”
Investec Asset Management is still widely considered to be the best-quality business in the group. It still makes up a little more than a quarter of the group earnings. But for the six months to September, it had a flat result, with operating profit up just 1%.
Koseff says the result can be explained by much lower performance fees in SA. The group will have to get used to that as the Financial Services Board is clamping down on performance fees, particularly for pension portfolios. But it still had net inflows of £2.1bn, adding £1.3bn in the Americas. and £927m in Asia and the Middle East.
This was offset by £731m of outflows in the UK and Europe, mainly in lumpy dull institutional portfolios. The business still has 57% of its assets in emerging markets, predominantly SA; the 43% balance is in developed markets. It has two of the largest 10 funds in SA, Investec Opportunity (balanced) Fund with R45bn and Investec Money Market with R33bn.
Investec remains purely an active manager, with no plans to enter the low-margin, scalebased index fund market.
It’s a strategy that could lead to cannibalisation, so there are risks.
Raubenheimer says Investec is undervalued so Allan Gray’s clients have a substantial holding in the share. He believes that at the current share price, the UK bank is thrown in for nothing, giving potential upside.
Some clarity on the future of Koseff and Kantor would be helpful.
Surely they won’t wait for the tanks to arrive at the Grayston Drive, Sandton offices or for impeachment proceedings.
But it seems the time to go is approaching.