Londiwe Buthelezi
INVESTeC’S earnings a share could potentially be flat in the 12 months to March as the rand depreciation proved to be significantly adverse.
The specialist banking group expects that its revenue generated in the year to this month will be marginally behind the prior year, though on rand terms it would have recorded a 15 percent increase.
But Investec, which generates a significant amount of its profit from its South African operations, reports its financial performance in pounds.
In the year under review, the rand depreciated by about 20 percent against the pound.
On Thursday, when Investec held its pre-close investor briefing, it indicated that if it was reporting in rand, its adjusted earnings a share would have increased by between 22 percent and 27 percent. However, in pounds, the expected increase was between 0 percent and 7 percent.
Although the exchange rate set Investec back on a reporting basis, the group’s operational performance drew applause.
“What the results show is that, had the rand not depreciated by 20 percent over the period, they would have reported better earnings in pounds and would still have grown in rands, too,” said Jean Pierre Verster, an analyst at 36One Asset Management.
He said that while a weaker rand was clearly bad for Investec in terms of the reported results in pounds, it conversely boosted the group’s earnings in rands as it benefited from the multiplication of UK profits by a weaker rand on translation.
Investec owed much of the growth projected for the period under review to its wealth management division and the South African specialist banking division.
The company said wealth and investment business recorded net inflows of £1.1 billion (R19.7bn) by the end of last month. Assets under the division’s management had increased by 10 percent on a currency neutral basis to £40.6bn since March 2013.
The South African specialist banking business was expected to report pre-tax operating profit substantially ahead of the R2.557bn reported in the prior year. UK specialist banking experienced a significant decline in impairments in the year to March.
The division’s credit loss ratio was approaching normal levels with Investec expecting to remain at 0.40 percent as reported during the interim period in September 2013. The credit loss ratio had decreased from 0.65 percent last March.
The group as a whole expected a credit loss ratio of approximately 0.7 percent of its core loans and advances, a slight decline from 0.71 percent in September last year and 0.84 percent in the quarter to March last year.
In Fitch’s South African banks review last year, the rating agency noted that Investec’s different loan book composition would set it apart from the big four banks when it came to impairment charges. Its impairment charges were expected to remain stable at lower levels than that of the other banks.
Verster pointed out why the current credit and banking cycle affected Investec differently from the big four, first pointing out that it had its own problems, which were a different set from those of other banks.
“A material part of its income comes from wealth management and asset management so you can’t just look at it as a South African banking operation only,” Verster said.
Another crucial distinguishing factor was its exposure to higher-income groups only in South Africa while the big four banks had customers across all income groups.
“Looking at Woolworths’s results as well, (Investec’s performance) is understandable. The upper-income individuals are doing well because they own financial assets that are exposed to the stock market and the stock market has been doing well,” he said.
Investec Limited rose 45c to R79.15 on Thursday.