Investec gorges on interest rates

Investec (INVP) has always been something of an enigma for UK-based investors with the hybrid specialist banking, wealth management and asset management business model rarely moving in lockstep over the course of a business cycle. However, there were signs in these results that the combination of a cost-saving reorganisation program and a benign environment for interest rate margins in both the UK and its South African home market, meant the interims had a gloss that had largely gone missing in the past few years.

The surest sign that management has started to get on top of costs was a cost ratio that, at 60 per cent, is the envy of most UK institutions of a similar size. However, the jewel in the crown is still the interest income that Investec’s banking business and invested assets are generating. Interest income was up by over 31 per cent for the half to £605mn. The core loan book saw an expansion of 7 per cent, mainly due to a combination of steady corporate activity in South Africa and the resilience of the UK mortgage market prior to the mini-budget.

Compare that performance with the relatively anaemic effort put in by the asset management business, where fee income was essentially flat at £398mn as brisk South African wealth management fees were offset by muted capital market activity in the UK - listings and fundraisings were progressively pulled during the half. The souring outlook for the UK economy was reflected in the higher-than-expected credit loss provision that tripled in the half to £30mn.

Overall, a reasonable half for Investec and the current market shows that interest rates are going to continue to benefit financial institutions. The forward rating of 8 times forward earnings for 2023 is roughly in-line with the rest of the sector. Hold.

Last IC view: Hold, 379p, 22 Nov 2022