Investec’s UK business is showing signs of pressure even as the South African lender expects its overall earnings to grow, highlighting the cost of its continued expansion in Britain.
Investec said on Friday, September 18, that its UK Specialist Bank is expected to report adjusted operating profit 3% to 7% below the previous comparable period when the group releases its half-year results.
The weaker UK performance stands in contrast with the wider group outlook. Investec expects adjusted earnings per share for the six months ending September 30 to come in between 41.7 pence and 43.3 pence, representing growth of 3% to 7% from 40.5 pence in the previous period.
The group is also expecting adjusted operating profit before tax of between £479.2 million and £496.2 million, compared with £468.1 million in the previous period.
The figures show a clear difference between Investec’s two main geographic businesses, with stronger activity in Southern Africa helping to offset weaker performance in the UK.
Investec’s UK Specialist Bank Faces Profit Pressure
Investec’s UK business, including its interest in Rathbones, is expected to record adjusted operating profit 2% to 6% below the previous period.
Within that figure, the UK Specialist Bank alone is expected to be down between 3% and 7%.
The UK business is also expected to report a return on tangible equity (ROTE) of between 12.3% and 12.7%, near the lower end of the bank’s previously guided range of 12.5% to 13.5%.
Investec expects the UK credit loss ratio to be around the upper end of its through-the-cycle range of 35 to 55 basis points.
That does not mean Investec is abandoning its UK strategy.
In fact, the bank is continuing to spend money and add people as it tries to expand its corporate banking franchise and build a larger relationship-led business in the UK.
Why Investec Is Still Expanding in the UK
Investec has been building its UK corporate banking operation around mid-market companies that need more specialised banking and financial services.
In July, the bank announced the appointment of Terry Koizou as Head of Client Relationship Management for UK Corporate Banking.
The appointment is part of a wider plan to build a dedicated mid-market relationship team that Investec expects to grow to more than 40 relationship managers.
Investec said the team is being built to provide a more personalised banking service to entrepreneurial businesses across the UK.
The bank’s UK corporate banking business offers services including lending, treasury and risk solutions and advisory support to mid-market companies.
This expansion is important because Investec is trying to increase the number of businesses using its banking services rather than relying only on its established specialist banking and wealth-management franchises.
The bank previously said it aims to provide relationship banking to 1,000 mid-market businesses across the UK by FY2030, in a market it estimates contains more than 60,000 companies.
South Africa Is Providing the Stronger Growth
While the UK business is facing pressure, Investec’s Southern African operations are providing a stronger contribution to the group’s earnings outlook.
The bank expects adjusted operating profit from its Southern African business to be up to 6% higher in rand terms and up to 14% higher in pounds sterling compared with the previous period.
Within Southern Africa, the Specialist Bank’s adjusted operating profit is expected to be up to 4% higher in rand terms and up to 14% higher in pounds sterling.
Investec said its year-to-date revenue growth has been supported by increased activity levels, higher average advances and positive net inflows into discretionary and annuity funds under management.
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The Southern African Wealth business has been particularly strong.
Funds under management in the business increased 13.8% to £30.7 billion, according to the company’s trading update.
Investec’s Loans and Deposits Are Also Growing
The bank’s balance sheet has continued to expand despite the mixed performance between its regions.
Investec said core loans increased 6.3% on an annualised basis in neutral currency to £37 billion.
Customer deposits increased by 2.8% on an annualised basis in neutral currency to £46 billion.
The growth in lending suggests that customers are continuing to use Investec for financing even as the group deals with pressure on margins and higher costs associated with its expansion plans.
The bank also said the overall quality of its credit book remained sound, with the group credit loss ratio expected to remain within its through-the-cycle range of 25 to 45 basis points.
What Is Driving the Difference Between the UK and South Africa?
Part of the difference comes down to where Investec is currently seeing stronger lending activity, wealth inflows and revenue growth.
In Southern Africa, the bank is benefiting from higher average advances and strong inflows into its wealth business.
The UK, meanwhile, is undergoing a period of investment as Investec expands its corporate banking proposition.
That expansion comes with costs before the additional relationship managers and new clients have had time to generate enough revenue to offset those expenses.
This is an important part of understanding the latest figures.
The weaker UK Specialist Bank result does not appear to represent a decision by Investec to reduce its presence in Britain. Instead, the bank continues to invest in growing its UK franchise.
Investec Is Building a Bigger UK Corporate Banking Business
Investec’s strategy is increasingly focused on building relationships with entrepreneurial and mid-market companies.
The bank describes its UK business as providing a combination of debt and equity capital, treasury and risk solutions and advisory services to businesses.
Its corporate banking operation is designed around relationship managers who work closely with clients and connect them with specialist teams across the wider Investec group.
The July appointment of Terry Koizou is therefore more than an isolated senior hire.
Investec said his appointment forms part of the build-out of its client relationship management capability as the bank expands its UK Corporate Banking business.
The bank has also appointed other senior executives as it develops the UK corporate banking operation.
That means some of the pressure visible in the latest UK figures is happening alongside continued investment in future growth.
Ireland Could Give Investec More Room in Europe
Another part of Investec’s international strategy is its presence in Ireland and wider European markets.
Investec already operates in Ireland through several regulated entities and has an Irish presence at The Harcourt Building, Harcourt Street, Dublin 2.
Its Investec Bank plc Irish Branch is authorised by the UK Prudential Regulation Authority and regulated by the Central Bank of Ireland for conduct of business rules.
Investec also operates Investec Europe Limited, which is regulated by the Central Bank of Ireland. The company describes its Irish operation as providing banking and financial services to businesses and clients.
The Irish operation is therefore already part of Investec’s European footprint.
A broader banking presence in Ireland would potentially give the group more capacity to serve corporate and wealthy clients across European markets, although the current UK performance shows that expanding an international banking franchise also brings additional costs.
The Numbers at a Glance
| Measure | Expected result |
|---|---|
| Adjusted EPS | 41.7p–43.3p |
| Adjusted EPS growth | 3%–7% |
| Headline EPS | 38.1p–39.7p |
| Headline EPS growth | 4%–8% |
| Adjusted operating profit before tax | £479.2m–£496.2m |
| Pre-provision adjusted operating profit | £531.4m–£548.4m |
| UK business adjusted operating profit | 2%–6% lower |
| UK Specialist Bank adjusted operating profit | 3%–7% lower |
| Southern African business operating profit | Up to 6% higher in rand terms |
| Core loans | £37bn |
| Customer deposits | £46bn |
| Southern African Wealth FUM | £30.7bn |
| Southern African Wealth FUM growth | 13.8% |
The figures are Investec’s expectations for the six months ending September 30, based on performance through August 31.
What the Investec Update Means
For someone looking at Investec from outside the banking sector, the easiest way to understand the update is this: the group is growing, but that growth is not coming evenly from all of its markets.
South Africa is currently producing stronger growth, particularly through lending activity and wealth-management inflows.
The UK is more complicated.
Investec is spending money to expand its corporate banking business, hire relationship managers and attract more mid-market companies. At the same time, the UK Specialist Bank is expected to produce lower adjusted operating profit in the first half.
That creates a gap between the money being invested in the UK today and the additional income the bank hopes to generate from the expansion over time.
Whether that investment delivers the expected growth will become clearer as Investec adds more clients and expands its corporate banking team.
Investec’s Bigger International Ambition
Investec is no longer simply operating as a South African bank with a small overseas presence.
The group has substantial operations in both Southern Africa and the UK, alongside its wealth-management and specialist banking businesses in other markets.
Its UK strategy is particularly important because the bank is trying to expand its presence among mid-market companies while maintaining its existing specialist franchises.
Ireland also gives Investec another base from which to serve European clients.
The strategy therefore involves accepting investment costs in markets where the bank believes there is room to build a larger business.
The latest trading statement shows both sides of that strategy.
The South African operation is producing strong growth, while the UK business is currently absorbing some of the costs and pressures associated with expansion.
When Will Investec Release Its Half-Year Results?
Investec’s September 18 trading statement was a pre-close update ahead of its half-year results for the six months ending September 30.
The company said the update was based on the five months ended August 31 and that its expected results remained in line with guidance previously provided in May.
The full half-year results will provide a more complete picture of how the UK and Southern African businesses performed during the period.
For now, the main figures point to overall earnings growth, stronger Southern African performance and a decline in UK Specialist Bank operating profit.
Conclusion
Investec’s latest trading update tells two different stories at the same time.
The group expects adjusted earnings per share to rise between 3% and 7%, with adjusted EPS forecast at 41.7p to 43.3p.
But the UK Specialist Bank is heading in the other direction, with adjusted operating profit expected to fall 3% to 7%.
South Africa is helping to offset that weakness, with the Southern African business expected to deliver up to 6% growth in rand terms and strong growth in its wealth-management business.
At the same time, Investec continues to invest in Britain, including its plan to build a mid-market relationship team of more than 40 managers.
The result is a bank that is still pushing ahead with its international expansion even as the latest numbers show that building a larger UK franchise is coming with near-term pressure on profitability.