Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Investec Group dedicates itself to banking (consumer, corporate, and investment) plus wealth management (73% and 25%, respectively, of Operating Profit) across South Africa (59% of Operating Income) and the UK (41% of Operating Income), backed by a robust Deposit base.AUM are growing forcefully: by 30% YoY. (32% expansion in South Africa and 26% in the UK). AUM is centred in the UK at £41.7bn while South Africa accounts for £16.7bn.FY21/20 results show mediocre trends as at other South African banks. The system is marked by flat top-line growth, OPEX restraint, mild erosion of CIR, lower rates impacting NIM/Spread lower, moderate deterioration in Asset Quality, reduced Provisioning, though Liquidity and Capital Adequacy are moving in the right direction.  A FV of 7%, a PBV of 0.59x, a Dividend Yield of 3.83%, and an Earnings Yield of 8.6% are not unappealing. INLis especially attractive based on the price paid by Standard Group to acquire Liberty (&gt;1x BV). <a href="https://senspdf.jse.co.za/documents/SENS_20210715_S448730.pdf" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://senspdf.jse.co.za/documents/SENS_20210715_S448730.pdf&amp;source=gmail&amp;ust=1626787764731000&amp;usg=AFQjCNHI7r1Ev3ceZPnvyjS0gbVe9VTWhg" rel="noopener">https://senspdf.jse.co.za/documents/SENS_20210715_S448730.pdf</a>The South African Deposit base is more or less rated in line with FirstRand which leaves the UK operation (47% of Deposits, 46% of Credit) valued at little or nothing.In addition, if the medium-term ROE targets are met, the current PBV of 0.59x is too low. Given that current ROE stands at 5%, management aims to hit 11-15% in the UK and 15-18% in South Africa over the next few years. This will come from efficiency gains from cost-cutting and greater digitalization/technology adoption. Even a pre-pandemic ROE of 12% puts shares on a PER of just 5x. We believe that the bank, as elsewhere in South Africa, is resilient. It has a diversified model. The bank is making progress on simplifying the structure of the operation by demerging Ninety-One and exiting its Australian business.

Investec Group dedicates itself to banking (consumer, corporate, and investment) plus wealth management (73% and 25%, respectively, of Operating Profit) across South Africa (59% of Operating Income) and the UK (41% of Operating Income), backed by a robust Deposit base.AUM are growing forcefully: by 30% YoY. (32% expansion in South Africa and 26% in the UK). AUM is centred in the UK at £41.7bn while South Africa accounts for £16.7bn.FY21/20 results show mediocre trends as at other South African banks. The system is marked by flat top-line growth, OPEX restraint, mild erosion of CIR, lower rates impacting NIM/Spread lower, moderate deterioration in Asset Quality, reduced Provisioning, though Liquidity and Capital Adequacy are moving in the right direction.  A FV of 7%, a PBV of 0.59x, a Dividend Yield of 3.83%, and an Earnings Yield of 8.6% are not unappealing. INLis especially attractive based on the price paid by Standard Group to acquire Liberty (&gt;1x BV). https://senspdf.jse.co.za/documents/SENS_20210715_S448730.pdfThe South African Deposit base is more or less rated in line with FirstRand which leaves the UK operation (47% of Deposits, 46% of Credit) valued at little or nothing.In addition, if the medium-term ROE targets are met, the current PBV of 0.59x is too low. Given that current ROE stands at 5%, management aims to hit 11-15% in the UK and 15-18% in South Africa over the next few years. This will come from efficiency gains from cost-cutting and greater digitalization/technology adoption. Even a pre-pandemic ROE of 12% puts shares on a PER of just 5x. We believe that the bank, as elsewhere in South Africa, is resilient. It has a diversified model. The bank is making progress on simplifying the structure of the operation by demerging Ninety-One and exiting its Australian business.

Investec Group: Deposit Base and Book Value Do Not Reflect Medium-Term Targets

South Africa

Investec Limited is an international investment and private banking group. The Group provides corporate and investment banking, private banking, securities trading, asset management, property trading and management and trade finance services.  Dually-listed company with INVP LN.

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Investec Ltd (INL SJ)

Investec Group: Deposit Base and Book Value Do Not Reflect Medium-Term Targets

INL is undervalued based on its medium-term targets for Profitability and interrelated Efficiency. Stands out in South Africa. Benefits too from a...

Paul Hollingworth

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