Market takes dim view of Investec’s update – maybe needs to look a bit deeper

Stephen Koseff, Investec

Banking group Investec’s share price took a 3% hit today in the wake of the group’s traditional pre-closing period information session with shareholders. CEO Stephen Koseff came to the CNBC Africa studio to talk about ongoing struggles in Australia and a growth of only 3% in lending in South Africa. He quipped off air that if Investec were reporting in Rand, everyone would have been comfortable with the 8% operating profit improvement. But with the primary listing on the London Stock Exchange and the reporting currency British Pounds, the bottom line will be “marginally lower”. Hence the drop in the share price. Sterling has gained 14% against the Rand in Investec’s financial half year. As always Koseff’s interview provided full value. There’s a measure of optimism evident in his outlook. The shares have done nothing in the last six months. After today’s pull-back to R67 they are starting to offer value.  – AH 

ALEC HOGG: Well, welcome back to Power Lunch. The management of Investec has sat down with investors for their pre-close briefing today. Chief Executive Stephen Koseff is with me: you’re the only guys in the country who do so.

STEPHEN KOSEFF: Ja. Most people just do quarterlies. We do it every two months.


 STEPHEN KOSEFF: History. Tradition. We started doing it in 2002 / 2003 – I can’t remember exactly when. South Africa had a bit of a banking crisis and we needed to talk to our investors and we’ve kept up the tradition and I think that we talk to shareholders formally every two months. So I think we keep them up to date with where everyone is.

ALEC HOGG: Well, it sure does. This is for the first half of the year up to September. We’re in mid-September so you’ve got pretty much most of the numbers in. Stephen, the initial reaction from the market though, to the fact that you are down in Pound Sterling terms and up slightly in South African terms, was not very positive. 

STEPHEN KOSEFF: Ja, I think it was quite a difficult trading period. Certainly we had to take a lot of measures in Australia and we also are taking some measures in our UK bank but the rest of the business did quite well. So it is like a Tale of two Cities. The South African Bank has done particularly well and the asset management and wealth management businesses are going according to plan. So it really is the difficulty that we’re having in dealing with the two banks.

ALEC HOGG: You’ve been struggling in Australia for a while now.

STEPHEN KOSEFF: Ja, since the financial crisis. I think we’ve had to change the business model quite substantially and we’ve taken the decision now to simplify the business quite dramatically and take all those things that create complexity which require a lot of overhead because I think we’ve gone on to a broader front. So we’re narrowing the focus, making sure that it’s strategically aligned with what we’re doing around the rest of the world and we had to go through the pain – our CEO resigned in April. We sent someone from here who runs our global private bank. A big portion of the business in the future is the private bank in Australia. So he’s taken it through a strategic process and we just completed that and we have taken out – so far – 70 heads, which is a very, very tough thing to do.

ALEC HOGG: How many people do you employ?

STEPHEN KOSEFF: We had 480, roughly. It changes.

ALEC HOGG: About 20% then?

STEPHEN KOSEFF: Ja, we’ve taken just under 20% of the head count and hopefully that simplifies the business a lot and enables us to move towards getting a decent return because we have not seen that post the crisis.

ALEC HOGG: So Australia is in recovery mode. In the UK though, one of the issues that was brought up was the decline in the asset management business. Now when I looked through, you said there were net inflows in your report.

STEPHEN KOSEFF: Ja. I said think we had net inflows of £1.2bn which is quite a lot in Rand when you work out the number. That’s to the end of August and the actual stock markets were down at the end of August so we would have lost some of our funds under management to levels of stock markets. They’re a bit up now so if you looked at it today… Who knows where life will be by the end of September? I think the previous guy on the show was talking about some of the geopolitical issues and the volatility on the macro front and that’s why it’s quite hard to predict exactly where one will be at the end of September.

ALEC HOGG: But there’s no reverse in the asset management side, is what you’re telling us?

STEPHEN KOSEFF: No. I think there’s some impact of papering because one of the key areas of activity is emerging markets and you saw money flow out of emerging markets, but net you were still able to grow funds under management by £1.2bn.

ALEC HOGG: You’ve got a very successful private bank in South Africa – your home. You have been introducing that into the UK. How’s that going so far?

STEPHEN KOSEFF: It’s still very early days. Obviously there’s a cost to doing that, but I think historically we made a mistake in the UK not building up a private bank franchise. We were more of a money lender in what we called the private bank and we’re now trying to build a transactional business like we have in South Africa, but it takes time for that to get up to scale. Certainly a similar thing we’re trying to do in Australia, so having cards, having transactional accounts and integrating them globally is where we’re going. And you saw more recently we launched our transactional banking in iPad about six months ago. I think that’s taken off pretty well including our wealth offering on the iPad. We’ll introduce our international products onto that platform in the not too distant future, so we’re doing a lot to try and extend our offering to the private client globally. I don’t see a lot of money in the early days.

ALEC HOGG: iPad offering…because your market presumably would pretty much all have iPads.

STEPHEN KOSEFF: 90% of them have iPads.

ALEC HOGG: Have you seen a big swing from using their desktops/laptops to actually iPads?

STEPHEN KOSEFF: Ja. We had immediate sign-up of quite a high percentage of them.

ALEC HOGG: Other good news in South Africa – and I guess that’s where we need to focus as well – is the impairments being down, so the bad debts write-offs are lower.

STEPHEN KOSEFF: Ja, that’s global. It’s a global number but South Africa is also lower at the moment and we are starting to see a normalised situation. [The] South African economy has been fairly tough with what’s been going on the mining front and the knock-on effect on small business, but we do expect lower impairments in South Africa this year.

ALEC HOGG: So with bad debts falling are you starting to get more aggressive in your lending?

STEPHEN KOSEFF: No. I don’t think we want to be too aggressive. We are growing our lending but we still have to be cautious because the world is still volatile.

ALEC HOGG: So that’s really the overriding…

STEPHEN KOSEFF: No. We grew our loans by about 3% for the first five months.

ALEC HOGG: Which was very low.

STEPHEN KOSEFF: But if you annualise it you get up to six or seven.

ALEC HOGG: That’s not growth, Stephen. What I’m getting at – in South Africa anyway – with the restructuring that’s happened there, Standard Bank is very aggressive in the market now. We’re seeing that their numbers are growing and certainly from the people I’ve talked to in your target market they tell me ‘if you want to borrow money, Standard are more likely to lend it to you than RMB, Investec etc.’ Is that an unfair comment?

STEPHEN KOSEFF: I think that’s quite a new theme then from Standard Bank. Maybe because they lost some of their shine in the last few years when they were busy reorganising. I don’t know.

ALEC HOGG: To answer, though.

STEPHEN KOSEFF: We’re not seeing that it’s… We lose some business but we’re still growing and obviously sometimes price is an issue but I don’t think in our core client base we’re losing a lot of business. We’re still seeing a fairly big/fairly reasonable demand for credit. There are a lot of infrastructure projects going on and that hasn’t been paid out yet but that pipeline is building up and there is a fair amount going on the ground. But the South African Economy as you are aware, has not been in a great place. However, we did do very well in our South African Specialist Banking businesses period.

ALEC HOGG: So it’s caution when it comes to lending money. It’s still growth in the asset management side, but markets are difficult.

STEPHEN KOSEFF: Ja, markets are choppy. Hopefully we get some kind of… The developed world looks like it’s starting to get a lot better. If that sustains then that does affect the developing world in two ways. Firstly, there’s an outflow like we’ve seen, but then the developing world economy starts improving because we do export to the developed world. So then you start getting the positive effect of growth in the global economy, which is what we haven’t really been seeing other than what has been driven out of emerging markets. The rest of the world was pulling us back. Now it’s turning the other way. If China doesn’t fall off track – because it looks like its recovering – it will have lower growth, but 7% on 7.5 trillion is not too far from 11 on 5 trillion so I think it adds the same kind of GDP to the world. You could be getting into a much better economic space, but the political factors have caused this stop / start scenario and one would like a period where the stop / start scenario dissipates and you get a clean run.

ALEC HOGG:  Stephen Koseff, Chief Executive of Investec. With the market not terribly excited about the results to begin with, but it seems as though Stephen is looking for a brighter picture into the future.

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