Investec ponders how best to return money to its SA shareholders

Investec is considering share buybacks or the declaration of a special dividend as two potential options available to it as it considers how to return surplus capital to shareholders of its SA business.

The firm’s common equity tier 1 (CET1) ratio, a measure of a bank’s capital against its riskweighted assets, was at 14% in its SA business at the end of its financial year at March 31 2022.

However, with the bank’s adoption of the advanced internal ratings based (AIRB) approach, a risk management framework used by financial institutions, this would rise to 16% for the SA business after its financial year end. By comparison, the CET1 ratio for the UK business was only at 11.7% at end-March 2022.

CEO Fani Titi said this surfeit of capital in the SA business opens up significant “optionality” in terms of what to do with the money, which in an interview with Business Day on Thursday he said may include share buybacks or the declaration of a special dividend.

He stressed no decision had yet been made on what option would be exercised, while the timing of the capital distribution would be between now and end-March 2024, pending approval by SA regulators.

“We have more capital than is necessary [in SA], so the idea would be to reduce the level of capital through a potential set of options,” said Titi. “Those would range from … a special dividend

… buybacks … so on and so forth. That’s what we meant by optionality … the possibility that we would have to look at returning capital beyond our growth needs to our shareholders on some basis.”

As a dual-listed company that trades on both the London and Johannesburg stock exchanges, Investec’s capital is not fungible between its SA and UK balance sheets. The ringfencing of its capital pools in each of its two main geographies also means it would require foreign exchange approval from the Treasury and the Reserve Bank to move money between the two entities.

While it has growth ambitions in SA and the UK, its strategy for the two markets is rather different given its relatively smaller size in the latter. In SA, it plans to significantly grow its wealth business by leveraging its strong position as a private bank for well-off individuals. In the UK, it is largely focused on gradually increasing its market penetration in what is a far bigger and more resilient economy.

“There are very few competitors that offer both banking and wealth under one umbrella together with an international offering,” Richard Wainwright, CEO of Investec Bank, said of the group’s plan to grow its SA wealth business. “That’s very appealing to high and ultra-high net worth individuals.”

Titi and Wainwright were speaking after the private bank and wealth manager announced that headline earnings per share (Heps) — a measure of profit that strips out one-off items — rose more than 100% to 53.3p (R10.56) in the year to endMarch.

Funds under management increased 9.2% to £63.8bn at the financial year end, supported by net inflows of £1.9bn and improved market conditions, though this was tempered by volatility in the final quarter of the reporting period.

The bank’s overall revenue grew 21.3% to just more than £1.99bn on the back of the postpandemic recovery, which also reduced expected credit loss impairment charges by 71% as defaults eased in both geographies. Investec also trimmed its cost-to-income ratio to 63.3%, down from 70.9% the previous year.

“We have delivered a strong set of results this financial year with growth seen across our businesses,” Titi said.

Investec’s strong results allowed its board to propose a final dividend of 14p per share, taking the full-year dividend to 25p per share, up from 13p the previous year.

The bank said that with the pending distribution of the 15% stake in Ninety One to shareholders, it would have returned

an aggregate value of about £1.6bn to shareholders on the successful demerger.

On April 28, shareholders approved Investec’s proposed distribution of 15% of Ninety One, the asset manager that was spun out of the bank in 2020. The distribution of the stake is expected to be effective on May 30, pending final court approval.

Despite the bank’s strong showing in its latest financial year, its share price fell as it warned that the expected slowdown in global economic growth amid accelerating worldwide inflation and rising geopolitical tensions posed elevated downside risks in the near term. Investec shares dropped 1.55% to end at R91.26.

However, in giving guidance on its longer-term expectations for its 2023 fiscal year, Investec said it expects revenue to be underpinned by higher average interest rates, which boost the value of its lending books and support profit margins. Despite worsening inflationary pressures and continued investment in new technology, it also aims to keep its cost-to-income ratio below 63%.

Nevertheless, higher interest rates are expected to see credit loss impairment charges normalise, which would lift its group credit-loss ratio from just 8 basis points towards a revised through-the-cycle range of 25-35 basis points.

Titi said while it is logical that banking clients will come under pressure from the rising cost of living, Investec’s high-end client base is likely to be comparatively less affected. “We do believe that our clients are likely to navigate this environment much better than the average client in the high street,” he said.