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Investec surges on rates but outlook is unclear

The South African company turns in a decent performance despite problems at home
May 18, 2023
  • Interest rates help float earnings
  • Trouble at home could cause issues

Investec (INVP), the dual-listed South African lender and fund manager, can be satisfied with an annual performance that saw its share price finally erase much of the huge discount to tangible net asset value under which the company had long laboured. Most of this increase in earnings performance is entirely attributable to global rises in interest rates, which helped to boost Investec’s capital generation across its various businesses. However, the company, like most based in South Africa, has severe worries over the state of that country’s economy and a political environment that its management recently described as, “the most uncertain since the end of the Apartheid era”.  

The company’s combined asset manager/banking model can make analysis somewhat tricky, but it was clear from the results that asset management underperformed, in line with the rest of the industry, as declining asset prices offset the effect of £377mn in net fund inflows. This meant total funds under management fell by 4.5 per cent to £61bn. Encouragingly, despite inflationary pressures, the cost-to-income ratio improved to 59 per cent on the back of rising revenues. Meanwhile, with bank deposits in the global spotlight after ructions in the US secondary banking market, Investec saw a constant currency increase in deposits of 5.8 per cent to £39.6bn as savers took advantage of improved rates to push more assets into cash.

There were also signs that credit conditions have started to normalise and reflect historic averages when it comes to loan book impairments. Investec booked £81.1mn of expected impairments, compared with £28.8mn in 2022, which chimes with research that banks in all jurisdictions are starting to see more scope for bad loans as interest rates rise towards long-term averages and the suppression effect of the pandemic ebbs away.

The company also must seek regulatory and shareholder approval for the recent tie-up between wealth manager Rathbones (RAT) and Investec’s own wealth management division, Investec Wealth & Investment UK, to create a £100bn discretionary fund manager in which Investec owns a 41.25 per cent share. Management expects that full permissions won’t be finalised before the fourth quarter of this year.

In valuation terms, Investec is not expensive for the sector at a price/earnings ratio of eight times consensus forecasts for 2024. However, questions over the health of its home market and the outlook for stagnating interest rates offer little attraction. Hold.

Last IC view: Hold, 465p, 17 Nov 2022

INVESTEC (INVP)    
ORD PRICE:435pMARKET VALUE:£4.1bn
TOUCH:434-436p12-MONTH HIGH:556pLOW:336p
DIVIDEND YIELD:7.1%PE RATIO:5
NET ASSET VALUE:456pLEVERAGE:10
Year to 31 MarTotal operating income (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20182.2963751.224.0
20191.9551540.424.5
20201.8131017.511.0
20211.9969752.025.0
20222.2898085.031.0
% change+15+41+63+24
Ex-div:17 Aug   
Payment:04 Sep