Rand slide, UK weakness hurt InvestecComment on this story
The rand’s depreciation and a bad performance in UK specialist banking has added Investec to the list of banks that delivered a “disappointing” financial performance as it could not balance its revenue growth with the rise in its operating costs.
The specialist banking group reported yesterday a 1 percent increase in its total operating income in the nine months to December, while operating costs went up 4 percent.
Although operating costs remained flat when acquisition costs were excluded, Jean Pierre Verster, an analyst at 36One Asset Management, said the benefit of the acquisitions in the UK wealth management business were offset by the failure to raise operating income more than expenses.
Verster said a disappointing performance from the British specialist banking division combined with a weaker rand/pound exchange rate had dragged Investec’s performance down as the South African specialist banking division was evidently strong. Australia also showed a recovery compared with the previous year.
Investec posted a 5 percent increase in operating profit in the nine months to December.
The increase in profit was before goodwill, acquired intangibles, non-operating items and taxation and after non-controlling interests.
The operating profit got a boost from the asset management and the wealth and investment divisions, which recorded improved performances as they continued to gain net inflows. Investec, whose reporting currency is pounds sterling, recorded net inflows of £2.8 billion (R37bn).
It said recurring income as a percentage of operating income rose to about 71 percent from 69 percent in the 2011 period due to higher average funds under management. Since the end of its financial year last March, third-party assets under management at Investec increased by 7 percent to £103.3bn – an increase of 12 percent on a currency neutral basis.
On the upside, Investec unsurprisingly had a better handle on bad debt, recording a 20 percent decrease in impairment losses on loans.
Credit loss charges as a percentage of average gross loans decreased to 0.83 percent from 1.12 percent in March 2012.
Investec’s low loan loss impairments were recently lauded by Fitch Ratings in its peer review of South African banks. The rating agency said the bank’s unique loan book composition was likely to keep impairment charge ratios at lower levels while the recent growth in unsecured lending would lift impairment charges of the big four banks in the near future.
Decreased impairments aided the performance of Investec’s Australian specialist banking business.
Verster said because the market in which Investec lent was in the upper end comprising affluent professionals, there was a lower risk of non-payment of debt compared with the other local banks.
“The decrease in impairment losses is a positive but when you compare their operating costs, which are up 4 percent with a 1 percent increase in income, it shows that Investec is in a bit of a squeeze and the results are slightly disappointing and below analysts’ expectations,” Verster said.
Investec’s core loans and advances were flat at £18.1bn but on a currency neutral basis they were up 7 percent.
Loans and advances as a percentage of customer deposits rose to 70.9 percent from 67.8 percent last March.
Investec Limited fell 2.68 percent to R64.59 on the JSE.