Investec MD Kantor on results, bloody noses and being stripped for success

Investec has its critics. I’m not among them. As you’d expect of one who has watched brothers Ian and Bernard Kantor and three close friends from the East Rand – Stephen Koseff, Errol Grolman and Larry Nestadt – build a major global business from scratch.  So results interviews with one of the two co-founders still in harness – MD Bernard Kantor or CEO Koseff – are always a treat. As was today’s chat, via Skype, with Bernard – a one-time bookie’s pencil who remains as passionate as ever about the racing industry. Unusually, we never touched on our shared love of God’s noblest creature today, not even Investec’s sponsorship of the greatest horse race on earth, the English Derby. But we did get to engage on his group’s latest financial results, how one recovers from getting a bloody nose (in Australia and Kensington) and the way such tough experiences have made Investec’s founders wiser and more circumspect. – AH

ALEC HOGG:  Joining me now is Bernard Kantor, the Managing Director of Investec.  Today, financial results out…  Bernard, it looks like you guys are getting back to almost like old times: PE of 20, profits up 29 percent in the past financial years.  It’s a long way I suppose, from where the good times were, but you certainly have streamlined the business.

BERNARD KANTOR:  Yes Alec, it’s been quite an active year for us.  There are a couple of things that we’ve done which, over the long term, you’ll see will just make us much leaner and more agile.  One of the beauties of having stability, a strong capital base, and a lot of liquidity is you also have to be agile.  We want to go back to being a franchised business.  For example, Kensington, where we had no relationship with the client is something, which is not ideal for us.  The Australian business that we disposed of was unfortunate, but we found we were just really not in a position to compete in Australia.  The big banks there are very powerful and the rate they would pay – I’m just trying to simplify it – the deposit rate they would pay is what we could aspire to, but can’t really get there because the commercial banks there are very, very powerful.

ALEC HOGG:  Was there any parallel between what happened in Australia and what happened some years ago in the United States?

BERNARD KANTOR:  Alec, in a sense yes, but the big commercial banks in Australia are very, very powerful and they always have been.  Many banks have gone there, trying to break that (I’m not going to call it a monopoly) the strength of those banks, and they haven’t been able to.  Unless you’re a High Street bank with the huge capital base that they have there…  Some of the most powerful banks in the world come from Australia, so you’re just going to battle to compete.  We’ve slimmed down.  We’ve gone from 500 people to 19 and we’re very specialized now.  We’re not regulated any more by ACRA and we will provide specialist services advisory.  We managed some funds from there.  We had an Aircraft Fund.  We have a Property Fund, which is managed out of South Africa.  We have areas of expertise, which we still maintain.  It’s more like the Old Investec that you would know, so we’re delighted about that.  That, coupled with the sale of Kensington – and of course, that process is well on the way.  We’re not in a position to give any certainty on that yet, but it’s well on the way.  We disposed of the Trust Group.  We also disposed of an asset finance business, so we are much leaner and we’re where Investec should fundamentally be.

ALEC HOGG:  The whole Kensington story, without raking over old wounds…  When you bought it at the time, you might recall that there was quite a lot of criticism and the team at Investec felt it was a good decision.  With hindsight…

BERNARD KANTOR:  Yes, Alec.  Hindsight is a wonderful skill.  The world has changed.  We bought it specifically to write the paper and like every good investment bank in those days, you’d parcel it up and sell it off.  Well, that market vanished, and the securitisation market disappeared, and that was the biggest market in the world.  We did consider it and we gave a very low score in terms of probability, but that’s what happened and that’s unfortunately, what caught us.  In a sense, we rode out the storm.  The business is in great shape – a business that can make a lot of money.  I just don’t think it suits our profile at the moment and as a result, we thought it best that we sell it.  We certainly got a lot of capital back.  Remember, the capital is not the capital in your balance sheet that you get back, but it’s your risk-weighted assets that comes off your balance sheet and therefore, your capital ratios go much better.  We’re also now in a position where we’re very comfortable about complying with BAR-3 in 2016 and our Courtier-1 should be well over 10 percent.  Overall, we’re delighted.  It’s not a bad business.  It’s most probably better housed within a bigger banking group, one of the big hedge funds, or existing credit funds because there cost of funding much cheaper.  It’s been a difficult experience, but I think we’ve learned a hell of a lot.

ALEC HOGG:  But I hope it hasn’t changed you.  You’ve always been prepared to ‘have a go’ – you, Stephen, and the team at Investec.  You’re not conservative, old-fashioned, or non-opportunistic.  Would it change your risk profile perhaps, into the future now that it didn’t work out – Australia didn’t work out the way you thought?  You had many successes, but you only get those successes by actually trying things.

BERNARD KANTOR:  Yes, Alec.  I don’t really know how to answer that question.  Fundamentally, we have become more conservative.  We haven’t lost our entrepreneurial flair – not by any stretch of the imagination – but I think life teaches you and if you don’t learn from experiences, then I’m afraid you’ll achieve nothing.  I do think we are older and wiser, and I have many grey hairs.  When I go through customers or security now, they say ‘good afternoon, Madala.  Let me help you with your bags’.  Life has moved on.  I don’t know where it’s gone and whilst we are still very entrepreneurial, maybe we wouldn’t do some of the things that we did in the past, again.  We’d just be a bit more diligent – well, that’s also the wrong word.  We’ve always been diligent – more circumspect, unless there’s a better word.

ALEC HOGG:  You say you’re getting ‘Madala’.  People are perhaps I hope, affording you more respect with the loss of hair that comes with it.  What about you and Stephen?  From the founders of Investec all those years ago, more than three decades back, are you guys going to be like Buffett and Munger, and be there for the next 20/30 years…well into your eighties and even nineties?  Alternatively, are you thinking that you might be handing over?

BERNARD KANTOR:  Alec, I think succession is a critical issue because it’s really about succession.  We have incredibly good people running the businesses, whether it’s asset management (and Hendrik is no stranger to anybody), whether it’s the private wealth management business (and there, Steve Elliot and Henry Blumenthal will be well known to everybody), and in the specialist bank we have terrific people, both here and in London.  I guess it’s a matter of structure and it’s a matter of when Stephen and I would be ready to step back a bit and allow others to move in.  As long as we’re adding value, we’d be less inclined to move away too quickly.  I guess when you look at our ages, we have another three or four years in which to build this succession, put it in place, and see a restructure through that will allow them to come to the fore.  That’s most probably the time – in the back of our minds – that we’re working on.  At the same time, if we don’t add value, can’t add value, and the board are gatvol of us or tired of us, then we’ll move on.

ALEC HOGG:  Well, maybe in three years, you’re going to say ‘in another three years’ time’, because I think one can never substitute the wisdom that comes from experience and you guys definitely have that.

BERNARD KANTOR:  Yes.  Again, you can measure it by my grey hair.  Alec yes, anything’s possible but certainly, we will not be running the business in three years.

ALEC HOGG:  It’s interesting to see – getting into the details of the numbers – the recurring income that you highlighted up there, that’s gone from 68.5 to over 7.5 percent now.  Is that something that, since the financial crisis, has become important for banking organisations?

BERNARD KANTOR:  Yes, it actually started before the crisis, Alec.  When we started restructuring, we bought a business called Rensburg in the wealth management area.  The funds under management have grown just in the U.K. over the last 15 years, from ₤2.5bn to over ₤25bn – that’s just in the U.K.  Over here, they’re well in excess of ₤20bn, so that has been the strategy, which we worked on for a long time.  I must say…from asset management – exactly the same rationale – they do not attract capital.  For banks today, with the high capital ratios that are required by the regulators, it’s important to have businesses that can contribute, and that do not utilise capital.  Yes, a lot of this is because of the crisis, but a lot of it was a strategy, which we started.  When I look back in South Africa, if you remember we bought Ferguson Brothers.  We then bought the book from Merrill Lynch, so we’ve always been acquisitive in those areas.  The prices now have gone well beyond what we can afford, but we have critical mass and you can see the results have been fantastic.  They’re up 30 percent to ₤66m from ₤50m last year, and everything is only now getting the benefit of rationalisation from the more recent acquisitions, so that business is going.  Hendrik just plods on.  Hendrik has a fantastic foundation.  In Rand, his earnings were close to 20 percent.  Unfortunately, in Sterling it was two-point-four percent.  That aside, it is an incredibly powerful, strong business with a very good foundation and that manages in excess of ₤60bn, so we are delighted with our non-capital utilising businesses and that strategy – yes- was enhanced even further by the crisis.

ALEC HOGG:  I see your impairments are down as well in this year.  Are you starting to lend again?  Are you seeing opportunities now to maybe release those tight straps bankers have had on credit for some time?

BERNARD KANTOR:  Yes, Alec.  The impairments are down one-third (by one-third) from ₤250-million to about 160/166-million.  We’ve never stopped lending if the truth be known. When we see a good deal – even through the darkest days – we did whatever we could, so we never closed the doors to anyone who wanted to borrow from us.  What we’ve simply done now is that we found many more opportunities and certainly, from the sale of the businesses we have the capital to do it.  We’re very well positioned.  I think we have current surplus liquidity of about ₤9.6bn or ₤9.4bn – almost evenly split between the U.K. and South Africa, so we’re in a very strong position at the moment and we are gaining traction.  Most people in South Africa know who we are.  Certainly, in the U.K. we are now busy growing into the very nice reputation, brand, and image we built.  Yes, I think we’re very well positioned, Alec.

ALEC HOGG:  Bernard Kantor is the Managing Director of Investec.

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