Mid Cap Darlings – Investec Limited


Mid Cap Darlings – Investec Limited

Published Date: 2019-10-10 | Source: INCE|Community | Author: Sifiso Skenjana

Mid Cap Darlings – Investec Limited

Why did the Zebra cross the road? I also do not know, but what I do know that this bank is probably the only reason you are likely to bump into a zebra crossing the road in Sandton. Investec is a financial services firm that offers its clients corporate investment banking, asset management, property trading, wealth and investment management, and private banking and trade management and trade finance services.

Business Model: As a typical bank, Investec's sources of income can be categorized as either net interest income, investment and associate income, net fees and commission incomes, trading income and other operating income. Net Fees make up the largest portion of the bank's revenue mix. However, over the last year, net interest income and trading income experienced the highest growth.

Macro Landscape: Banks are primarily impacted by the health (or lack thereof) of the economy. South Africa Inc has in many instances been critical but stable, and that would have material impact on business confidence, transaction volume and value and as well as business and individuals' ability to pay off their debt obligations. On the asset management side, global geopolitical pressures continue to bring volatility in the local and global capital markets. This spurred the price of gold to high levels of growth as people run to gold as a safe haven in times of global economic and political stress.

Results (Year ended 31 March 2019): The group experienced a 9.4% increase in operating profit and a return on equity (ROE) of 12.9%. The South African businesses reported a lower increase in operating profit at 1.8%. The company continued struggling with cost containment with costs rising faster than revenue; which resulted in the cost to income ratio rising to 69.9%, up from 68.3% in the previous year. Despite a tough operating environment that saw many businesses file for liquidation and many people lose their jobs, Investec was able to reduce their credit loss ratio from 0.61% in the previous year to 0.31% to close off this year.

Growth Prospects: The proposed demerger and separate listing of the asset management business is said to be progressing well, which is expected to be a good driver of value for shareholders. Assets under management grew 7.3% while their specialist banking offering continues to show value with an 18% increase in operating profit. As long as there is business activity, Investec continues to generate revenue, despite a depressed consumer market. It must be stated that their retail clients are not as vulnerable to changing market dynamics as their lower-income counterparts, which brings some resilience to the bank's earnings base. The share price has declined materially over the last 2 years, and Investec may just be offering good value now for investors. But again I ask - why did the Zebra cross the road?

About The Analyst: The Mid Cap Darlings is brought to you by the Awkward Economist - Sifiso Skenjana. He has a breadth of experience in portfolio management, economic research and investment strategy and management consulting. He is the founder and financial economist at AFRA Consultants. He is currently pursuing his PhD.

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