Investec interims to “shoot lights out “ – thanks to 19% weaker Rand

The Stephen Koseff who came through to the CNBC Africa studio today was a much happier man than the one who visited us over the past couple years. Interims to end September will reflect positive the first results of medicine imbibed on sub-prime businesses in Ireland and the UK, and the underperforming Australian operations. What’s more, a 19% weaker Rand will push profit growth beyond expectations – for SA shareholders that is. Investec has come through the fire. It is returning to a point where it positively reflects what can happen when one successfully globalises South African businesses. AH

ALEC HOGG: Welcome back to Power Lunch. Stephen Koseff, the Chief Executive of Investec is with us in the studio to discuss developments in the group’s core business areas with your pre-close update to investors. Stephen, it looks good. The Pound has made it look good – or rather, the Rand weakening against the Pound – but reading through the commentary you put out this morning, it looks like the first six months of this financial year, you’re going to be shooting some lights out.

STEPHEN KOSEFF: I don’t think we said ‘shooting lights out’.

ALEC HOGG: But you’re up in Pounds.

STEPHEN KOSEFF: Yes, in Rands we’re shooting the lights out. We should be up in Pounds. The big thing for us is the strategic initiatives we embarked upon at the end of the last calendar year, are now being executed. Two still have to be completed, but they’ve all been executed.

ALEC HOGG: Have they all worked the way you thought?

STEPHEN KOSEFF: Well, I think we did very well in Australia and the other two were much more difficult assets to deal with because of the history. The U.K. went through a crisis. Ireland’s house prices collapsed 60 percent, so those were assets where we had to pick our moment in which to sell and life is improving, and so there are buyers for that type of asset now.

ALEC HOGG: You almost had to hold onto Kensington, for instance.

STEPHEN KOSEFF: We had to manage it. We had to manage it through to a point where it was in a saleable condition. At Kensington, U.K., we got out okay. Kensington, Ireland – we took a bit of a smack, but that was always expected.

ALEC HOGG: Yes. Ireland has been a disaster for lots of reasons.

STEPHEN KOSEFF: It’s recovering quite strongly, but you need a broad base to cover across the whole country and we felt that strategically we needed to clear these assets in order to concentrate on our core business.

ALEC HOGG: So Ireland’s gone now as well.

STEPHEN KOSEFF: The mortgage business? Yes.

ALEC HOGG: Do you still have exposure to Ireland that is troublesome?

STEPHEN KOSEFF: We have our old private bank exposure, but it’s not big and we have quite a nice little business there.

ALEC HOGG: I saw John Green this week from Investec Asset Management and he was telling me about consulting to people in Japan and Singapore. How wide around the world are you guys?

STEPHEN KOSEFF: Investec Asset Management is very global, so it operates in most geographies in the world, in managing money for either the State’s Pension Funds or Sovereign Wealth Funds, so they really manufacture the product and their capability in South Africa, which is in Cape Town and in London. They have some capability in Singapore/Asia, including China (and you need to have some capability there). The rest of it is distributed across the globe – sales offices in New York, sales offices throughout Europe, and sales offices in Asia.

ALEC HOGG: So for Investec, the main stakes in the ground are South Africa and U.K.

STEPHEN KOSEFF: That’s where the banks are. We do have a bank in Channel Islands in Mauritius and in Switzerland, but our main banking businesses are South Africa and U.K. Advisory and origination businesses: we’re still in Australia, Hong Kong/Beijing, Mumbai, New York, and in Canada but those are not banking businesses. They do banking business by originating transactions, but they’re not banking businesses. We don’t want to be banks there.

ALEC HOGG: This decision that the Scots have made not to break with the Union: did it affect your business at all? We’ve heard that some of the banks were concerned.

STEPHEN KOSEFF: I think mainly the banks with head offices in Scotland were worried because they’d have to re-domicile themselves. For us it made no difference.

ALEC HOGG: And the regulation that’s been coming in post the global financial crisis. We know the regulators are trying to get their hands on it.

STEPHEN KOSEFF: Big claws and big teeth.

ALEC HOGG: Is it hurting?

STEPHEN KOSEFF: It’s something you just have to adapt to. It’s intrusive. The word is ‘intrusive’. They’re very intrusive. Some of the global regulators were sleeping at the wheel pre the financial crisis. They’re now very wide-awake and they’ve strengthened the regulation. They’ve strengthened the laws. They’ve strengthened capital requirements and strengthened liquidity requirements. To be in the game, you have to be able to comply so we just have to up our game to meet those obligations.

ALEC HOGG: But if your reserve requirements…if the regulations become tighter, perhaps you’d have to adjust your return on equity into the future, too.

STEPHEN KOSEFF: You’ve seen. We were all earning 20-something/25 percent return on equity pre-financial crisis. We’re targeting, just to get above 12 at the moment, and that’s in Pounds. On our Rand business, we’re up at about 15/16, but we’re way from the 25’s and we’re never going to get back to the 25’s with the amount of capital we have to hold.

ALEC HOGG: And that point is interesting, but we’ve been seeing FirstRand getting to 22 in this market. What makes them…?

STEPHEN KOSEFF: Well, they have a big retail consumer business in an emerging market, which is South Africa and maybe a bit in Africa. It’s different. You’re not ever going to get that in the developed world out of banking – not with interest rates of zero.

ALEC HOGG: And it’s unlikely that you would be able to sustain that, even for someone like FirstRand.

STEPHEN KOSEFF: Yes. I don’t know whether they can sustain it or not. It’s a very good return on equity. The other retail banks are a lot lower.

ALEC HOGG: Stephen, well I look forward to seeing these because people with Rand liabilities are going to get terribly excited. Just one last point: it was interesting to note that your Third Party Assets under Management now in London, are about half the size of the South African GDP: 2.16-trillion.

STEPHEN KOSEFF: Yes, that’s our Global Funds under Management – 2.16.

ALEC HOGG: Now if there ever an example of globalising a South African business, that has to be one instance because you could never have gotten there in the South African market.

STEPHEN KOSEFF: No. We’re the third biggest wealth manager in the U.K. as well, so we also rate that as a good achievement for us.

ALEC HOGG: And do our leaders in this country like the fact that we have another African champion?

STEPHEN KOSEFF: I hope so. We’re still a zebra. We’re running around the world in our zebra kit. We acknowledge where we’re from.

ALEC HOGG: Indeed, Investec always does. Stephen Koseff, the Chief Executive of Investec…just ponder that for a minute. Here’s a company that was only started, just over 30 years ago in South Africa. Assets under Management outside of the country are now about half of the South African GDP, so if they’d stayed here there’s just no way they’d be anything like the size they are today. What a success story.

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