Higher rates work well for Investec

A newly slimmed down Investec (INVP) presented a decent performance as the South Africa and London-based bank continued to benefit from the impact of increased interest rates. However, the question for the bank, and one which faces all banks as the year progresses, is whether its current profitability will be sustained once expected rate cuts start to filter through.

For its part, management seems confident enough to forecast a return on tangible equity (RoTE) of 16 per cent for 2025. This is slightly complicated by the split between Investec Plc and its private banking arm, and an average is taken – the Plc should achieve a RoTE of 13 per cent, with the private side achieving 18.5 per cent RoTE for the year.

When the impact of discontinued operations is excluded, FY2024 underlying operating profit is £884mn, a rise of 8 per cent in sterling terms.  

Unlike the churn seen at other banks, Investec’s deposit base stayed largely stable at £39.6bn, with the funds entering the business from depositors and non-wholesale sources. Investec’s UK wealth arm is now discontinued and accounted for as an equity investment.   

Investec's cost-to-income ratio improved to 53.8 per cent, from 54.7 per cent in 2023. However, one negative point was an unexpected £30mn provision for the industry-wide Financial Conduct Authority (FCA) motor finance review – an investigation into historic commission payments that may have seen consumers unfairly pay more in arrangement fees for car finance.

Consensus forecasts put Investec on a forward PE of 6.6 for 2025, which puts the company broadly in line with its peers in the sector, but it is difficult to spot the momentum from here. Hold.

Last IC View: Hold, 516p, 16 Nov 2023