SA’s FY operating profit growth beats that elsewhere
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SIKI MGABADELI: Investec came out with its annuals today, reporting a 16% growth in operating profit for its South African businesses to R387m, beating its UK and other countries’ operating profit growth of 11%. For the first time Investec’s revenues have broken the £2bn mark, and CEO Stephen Koseff says that shows the strength and resilience of the group’s businesses in the face of macro uncertainty in our two key markets. Investec declared a final dividend of 13p, taking the dividend for the year to 23p. That’s a 9.5% increase on the previous year.
Stephen Koseff joins us now. Stephen, thanks for your time today. I think last year this time we were talking about the macro environment, with Brexit in the UK and the low-growth scenario in South Africa. I imagine that for the full year period that’s been a massive theme for the operations of the businesses.
STEPHEN KOSEFF: Look, I think the referendum vote in the UK was about June 24 last year, and that was quite a shock. Then you had the Trump election in November, another shock. And then we've had a lot of issues in South Africa where you had attacks on the old minister of finance throughout the period last year, and then subsequently his removal at the end of March. So it was a very, very eventful year – and all those events created a fair amount of volatility.
Equity markets ended up the year very strongly in most jurisdictions. For South Africa they were flat. The rand actually appreciated quite a lot, relatively speaking, compared to the previous year. So it was like things were all over the show, some positive, some negative.
SIKI MGABADELI: A roller-coaster for that rand strength also helped and played its part in the performance of the South African business.
STEPHEN KOSEFF: It helped the translation of rands into pounds quite strongly. It's the first year in five that we've had the rand appreciate as opposed to depreciate. So that had a positive impact on the results.
SIKI MGABADELI: The one thing for your business is that not only do you have the geographic diversity but you also have the diversity in income streams. Do you think that then helps to balance things out in times of uncertainty?
STEPHEN KOSEFF: Ja, I think it helps you deal with shocks to the system. The fact that we have quite a significant portion of what we call capital-light revenues helps sometimes, whereas capital-intensive revenues help at other times, depending on which way markets are going.
In this year we had a lot of support from stock markets rising around the world, and from the currency that helped boost our third-party funds under management to over £150bn. That’s about three times more than they were six or seven years ago. So we've seen a lot of progress across a lot of fronts.
SIKI MGABADELI: Talk us through the rationale again for the transfer of assets from the specialist bank in South Africa to Investec Equity Partners.
STEPHEN KOSEFF: This was originally part of our private equity business. In private equity you want to buy something and then sell it every few years. Our people who ran this business believed it was better. They had very good strategic assets, and considered it was better for them to move from owning 30/40% of the assets to having control, ultimately owning 100%. That would have required, from our perspective, too much investment, so we brought in partners and we made it an industrial holding company as opposed to a private-equity business.
That has caused the change in accounting policy from fair value to equity accounting. What happens is equity accounting is the only recognised operating profits after tax. In your income statement where it's fair value you revalue the asset every year, and that would therefore delay the recognition of profits. So that’s really the shift in accounting.
SIKI MGABADELI: On the banking side are you seeing good growth in lending activity?
STEPHEN KOSEFF: It has moderated in this past year, so our overall loan growth in neutral currency was about 8.5%. In the previous year we had very strong growth. We obviously want to manage the growth well because the more you grow the more capital you need, so you’ve got to try and keep all these things in balance.
We are still seeing activity. I think the weakness post Pravin-gate and the fact that confidence was affected in broader society may slow the growth down in South Africa. We are still seeing reasonable growth in the UK, notwithstanding the fact that you’ve got an election coming up and you’ve got potential for a hard Brexit.
SIKI MGABADELI: Any concerns with impairments?
STEPHEN KOSEFF: Not at this point in time,. We are still operating at the lower level of our range. We did see an uptick in impairments in South Africa in rand. Overall our impairments were flat, a bit down in neutral currency. But we are not seeing any major strength. There was some stress that year in some of the mining loans that we did historically. We've sort of closed that business down. But overall not material.
SIKI MGABADELI: How far are you in your plans to scale up the Irish Wealth and Investment Management business?
STEPHEN KOSEFF: I think we are still trying to build it organically. It's still not at scale and we are seeing very good progress. We've had good inflows over the past year, in particular the past six months. It will still take some time unless you are able to make an acquisition. But we haven’t got any acquisitions on the table.
SIKI MGABADELI: And your outlook then, given the uncertainty in the different geographies?
STEPHEN KOSEFF: I think the outlook is navigating the macro issues. Every day is a different story. We are coming from an emerging market and we are quite used to it. We are used to the volatility. Volatility is good for us. What is bad for everyone is when there is a lack of confidence in the system. Hopefully we can navigate a lot of the political noise that is taking place and we can see that we can encourage the narrative in South Africa to shift from being very anti-business to being more business-friendly.
You can't create jobs and you can't get growth if you are business unfriendly. I hope the politicians actually understand that. The narrative that we are hearing over the last year has been shocking for the creation of jobs and growth. So I think it's important for our society to shift the narrative.
In the UK the economy is pretty stable and, notwithstanding the fact you’ve got a Brexit coming, you’ve are not living in that 2008 period. Things are pretty stable and people still have confidence. They are nervous on Brexit because it affects some people and not others. Some people win, some people lose, but overall the system is still stable.
SIKI MGABADELI: We'll leave it there. Thanks for your time today. Stephen Koseff is CEO of Investec.