‘Hard’ Brexit could chase away Investec clientele

A HARD Brexit, which would prompt many firms to move their offices to cities in the EU, could take Investec’s target market — well-paid executives and managers at large international organisations — with it.

Bradley Preston, chief investment officer at Mergence, sees a scenario where many high-income-earning professionals, who deal with institutions related to banks such as law and accounting firms, will have to leave the UK. “Those are all current or potential clients for Investec. That’s a risk Investec is exposed to,” said Preston.

CEO Stephen Koseff isn’t particularly worried about setting up in the EU, since the private bank has offices in Ireland and Luxembourg, but he does see the uncertainty around the economy as an immediate concern.

“I don’t think that it can be that dramatic on us, other than the initial impact of the Brexit vote on the pound because the pound has taken a big smack,” Koseff said.

Preston said Investec was also exposed to the UK property market through its banking business, and market conditions did not inspire much confidence. Relocation of firms to the EU would have an impact on rental demand too.

There is also the matter of gaining passporting rights to operate in the EU, an issue on which Koseff is hoping EU officials will be lenient.

Investec has a branch in Ireland and an asset management business in Luxembourg. The question for Investec, said Koseff, would be whether it would have to convert its branch in Ireland to a separately capitalised bank to continue doing business in the EU, or whether it would still be able to continue operating as a branch.

“We don’t know yet what the rules will be,” Koseff said. “But hopefully we won’t have to go through too many regulatory hoops. I’m sure that we’ll have greater supervision from Ireland once Brexit happens.”

The conditions giving firms the right to operate in the EU could attract more onerous regulation, which would be an extra cost for business.

Interim results presented on Thursday were encouraging. Headline earnings per share were up 19.2%, to 489.5c from 410.5c in the previous comparable period.

Progress with Investec strategy, while slow, was positive, although operating costs are a red flag.

“The one thing that was disappointing is the growth in their costs. There’s so much that they are investing in in the UK with the specialist bank,” said Preston. The cost-to-income ratio rose to 67.1% from 66.2%.

The lender’s results for the specialist banking unit were down compared to the previous comparable period due to a change in accounting treatment. The unit’s operating profit fell by 7.1%.

The bank also faced headwinds at its Hong Kong business due to an investment write-down.

Despite these challenges, Preston is upbeat about the company’s prospects.

“A lot of the strategy makes sense and I think the business is still very attractively valued. There’s quite a lot to like about the investment taste of Investec.”