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

Investec Ltd

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