Investec's (IVTJF) CEO Stephen Koseff on Q1 2016 Results - Earnings Call Transcript

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Investec Limited (OTCPK:IVTJF) Q1 2016 Earnings Conference Call May 19, 2016 4:00 AM ET


Stephen Koseff - CEO


Stephen Koseff

Welcome everybody Johannesburg and London and I think we’ve also on TV in South Africa. I think if we start off just give you an overall picture. I think from our point of view, we think we had a decent year, I think we enhanced our plant offering by deepening our core franchise and growing our client base. So we’re seeing very good traction from our clients, we had a good levels of activity notwithstanding client volatile markets, we saw strong loan growth, strong deposit growth, we also saw very strong inflows into asset management and our wealth and investment businesses. And I think we also made a number of changes to our personal by bringing in the next generation and after I show you from September, they can join me in presenting.

So we’ve made a lot of progress, we’re [indiscernible] the system and there is quite a lot of energy in our organization. So I think it has been a year of continual change and adjustments, but also navigation of choppy waters. So when you factor all there into account and our operating profit pretty similar to the balance we gave middle of March up 2.5%, 13.5% in the neutral currency basis. Our adjusted earnings per share of 4.8%, 15.7% on a neutral currency basis. And on dividend up 5% in sterling, for those of you who want to know what the rand dividend is, seeing as I’m talking to Africa, it’s went from ZAR3.63 to ZAR4.72 [ph], up 13.7%. We used to have [indiscernible] to come to these meetings and he said he needed a bigger dividend to pay the one year we packed out of the [indiscernible] and anytime we’ve ever cut it was in 2008 at the start of the financial crisis and he was very upset because he said he couldn’t buy shoes for his grandchildren. Well he doesn’t come anymore, but I hope if he’s still a shareholder he can buy shoes.

And we look at the operating environment, clearly if you look at the top new line next the Rand depreciation of the Sterling side was really we swam upstream 17.6% year-to-year average rate 16.3% quite difficult to swim against that tide, we see equity market strengthen, the only equity markets that is up a bit in the last year was South African market, but that’s because the Rand was so weak and many of our companies are global, so in Rand they were up, if you look at the in Sterling or in dollars they would [indiscernible] some of the other markets, Europe market down 18%, [indiscernible] down 7% and Dallas [ph] sort of in the period.

So difficult and volatile operating environment. I think, if you look at our business model and it is diversified and I’m talking -- from here I’m talking on gain. I’ll give you a little bit of color of our legacy, when I get into specialist bank. But you’ve seen the mix of the business shift back to what it was pre the financial crisis as the developed world improves and the developing world has some difficulty.

So moving -- trending back towards the 50-50 that we saw if you went back 10 years. I think we saw increased contributions from our UK and international business they was will 12.8% in Sterling, so that was up 8% in Rand that’s of after-tax. I think the business is still well diversified, we’re seeing again this specialist bank improve relatively speaking, but we saw good underlying performance, strong asset and wealth management business in terms of flow, so there we have contributed 35% of our ongoing results.

If we look at our earnings drivers, our third-party assets under management were down slightly in actual terms, because of the currency effect up 3.8% in neutral currency. So we got into, I think 5.2 billion -- 5.3 billion pounds of net inflows as a group and I think that is a pretty big number, if you take the company like [indiscernible] which is a much bigger asset and wealth manager than we are globally, they got 10 billion pounds, on 300 billion pounds, we got 5.3 on 120 billion pounds. So it demonstrates that there is good flow relative to the amount of money that you manage. If we look at our loans and deposits in home currency, these grew pretty strongly, deposits up 16.6%, loans up 17.3% on a currency neutral basis. On an actual basis in Sterling 6% each.

So again that demonstrated this activity and I’ll give you some color on that when we talk more about this specialist bank with some people saying why we’re growing so far . So all that did support growth in operating income up 2.5% in pounds, net interest income, you can see I’ve giving the natural currency line, it show the faster growth trajectory than if we talking Sterling, but the actual numbers are in actual currency as oppose to neutral currency.

Net interest income up 6% fees and commissions down 2.9% and obviously the big effect on that is the rand, investment income up 11.9% and trailing income from customer floats a smallish number, but it still was up quite a lot last year, it was slightly negative this year and nicely positive. So overall you know we're still seeing -- the earnings drive is growing and therefore the underlying earning's growing if I take out the effect of currency. If you look at the impact on cost to income ratio, cost to income ratio down from 66.5 to 65.8 that's in actual currency and that's operating income increasing 2.5% and we're trying to break the 2 billion mark but the headwinds in the rand are holding us back on that and cost up 1.4% so we did see the crocodile open its jaws a little bit and hopefully we can continue to open it.

We've seen a growth in headcount and that's -- we had an acquisition in South Africa we started at a 176 people. The rest of the growth in headcount is from growth initiatives that we undertake as an organization and you know we are trying to grow the franchise, we are trying to grow the underlying business, we have quite large digital initiatives, these will require people we need to put people in front our client because we're growing our client base so we have been growing our headcount as well.

If we look at impairments, obviously you can see we peaked at £310 million that was post the euro crisis, we're now down to a £109.5 million down 15%, slightly higher than the guidance we gave you but you know we had to take into consideration the outlook that we faced when we finalized the impairment numbers, but still more or less in line with the expectations. And you can see the bulk of them are actually from the legacy activities that the closed down book but still you know we've seen good performance on our line portfolios from a credit quality perspective. So if we look at the on-going performance you can operating profit before tax up 0.6, 9.9 on a currency neutral, attributable earnings up 3.2%, 12.4 on a currency neutral basis and adjusted EPS up 2.3% I don’t know if that works, 11.4 on a currency neutral basis.

So still ongoing, still seeing some growth, short of the equity down and naturally a consequence of the weakness in the rand because obviously all our capital is in rand. And the project advance giving you up 6% and line's up 6% and I'll give you the numbers on a currency neutral basis. If you look at the business in rand I think you see a different picture and as I'm talking in South Africa I think these numbers are important to South Africans, irrelevant to anyone from anywhere else in the world but operating profit up 16.8% to just over 12 billion, adjusted earnings 8.7-8.8 billion up just under 20% and EPS up 19% -- 18.7% and that's why you got that much bigger dividend.

So comparing to our financial target you know we got a target of ROE between 12 and 15 on an ongoing basis, this is you know gone from 13.8% to 13.9%, saturator base of 10.6 delivered slightly below the bottom of the target, but I think what's important is once we cleared the legacy which will still take us a few years you will see that aligned to the steps to the ongoing target.

I talked about the EPS numbers and we’re below in this particular period a target of 10% above UK retail price index which obviously inflation is pretty low, but still our growth in this particular year was below that level. Of course the income targets is still slightly above and our dividend cover still within the target range on a statutory basis. So overall if you see the return on equity going from 7.9 which was that bad period post the crisis to 11.5 on a statutory basis and 12.1 to 13.9 on an ongoing basis.

There was a period where we did a little bit better I think we had some lumps in that year, in March 2013, but overall you can see that we -- if we can push this 13.9 up to the 15, globally. I think that's a good number for us globally. 15 to 16, but it still will take some time.

And capital I think we’re slightly off our target and at holding company level we’re comfortably within our target at bank level and that's clearly a consequence if quite strong asset growth in the period. So you know that's the situation we could still manage, but when you look at -- we got a very low very decent leverage ratio, we're comfortable with our capital ratios where they are, when you factor in the fact that we're not a money centered bank, only 30% of our income comes from net interest income, a lot comes from fees and commissions, when you look at capital and you value our asset manager and wealth managing business is at zero and it allows businesses to generate a hell of a lot of cash.

So we're really comfortable with this capital position. And I think if you look at our loan growth, obviously we have strong loan growth, it is very diversified in South Africa, it comes from multiple sources. The three big areas would be from our residential mortgages to our high income channel lending to higher growth [ph] channel, these are very, very wealthy people and we believe that this segment of our book has very low risk. And then we have our corporate secured activity, which also has done quite well in this period.

And I think what’s happened in South Africa is the really far major bank lenders, the large international banks are withdrawn with all the noise on the street and the competition does appear to be less than it was if I went back a few years. The UK is different economy, its economy that’s been growing, it's an economy that’s been recovering from a financial process you still some level of dislocation amongst major UK banks and therefore it is quite easy to grow. And we grew our core lands by 13.5% again very, very diversified. And we believe that not sustaining the effect that we grew we have very descent comfortable land portfolio that has some resiliency in it.

And I think we also learned a lot from the financial process. We relooked at our risk appetite policies in 2009, we saw where we made mistakes and we tried to be very strict on not making those repeat parts of the mistakes. You can see our exposure to mining is 2% of our book and actually the major mining groups in South Africa agriculture 1% that would be large corporate not general agriculture in the UK 2% of our book is exposed to mining. So we don’t have big exposure to that segment of the market, which has been extremely volatile.

And we learned in our days from not mining project finance is something that you [indiscernible] a big hiding one this is not multiple revenue sources. So we vacated on that front. So if we come back to our businesses, we look at enlisted asset management going as in its current form for 25 years I think from managing ZAR200 million to ZAR1.6 trillion in the 25 years, or £75 billion, I think it has been a good story. This has been a difficult year for us 52% of the management just come from emerging markets, 48% from developed markets and hence not to standing the fact that was a good underlying momentum the operating profit is down 9.5%.

We saw growth in the UK and actually a decline in South Africa and we told you about that before that some of our funds in South Africa weren’t performing historically the last few years and that had some outflows, that is now turned around and we’re now getting inflows. So, we did good inflows into our African business this year of about ZAR4 billion or ZAR5 billion from losses after last year.

So the operating margin, operating costs were down slightly, operating income down worse than operating margins that we also have been affected by performance fees, but obviously the weak currency from the emerging market businesses. And then if you look at assets under management by asset class you can see that again solid net inflows but negative market and ForEx movement took away £5 billion from funds under management. So, outweigh the inflows of £3.2 billion.

I think if you look at the strategic parties, its very client focused business. You have to deliver for your clients. What we’re trying to do is scale our multi-assets and our global equities business, we turned South African around and so it’s again going on the front foot in South Africa and I think it is an opportunity for us at this point in time and the significant opportunities in the Americas, Europe and Asia Pacific regions. And I think that’s something that we trying to focus on as an organization. As I said we not its UK, it's a pretty global business, it is run globally we have manufacturing in South Africa the UK and now Singapore. And I think it is a business that will be affected by what’s happening in the global world. But we are making great progress.

If you look at our -- we have very strong institutional success. We’re going to start also pushing the advisor channel, which is the large IFA groupings or private banks, anyone who has a lot of money to look after, so we can get our products on their shelves. And so we continue to nurture a number of limited long-term growth opportunities. It's important for us to continue to invest in our people and motivate and meet them.

So overall, we have got a lot of independent recognition and you can read that yourself I am not going to go through all of it. But it is a well-run business with good momentum in a difficult world. You can look at the flows. The flows -- we did get positive flows everywhere. Last year we had a big negative flow in the African business to primarily be South Africa. This year we had positive flows in all our regions, some are bit slower than the previous year but still we’re getting positive flows which is important in this kind of environment.

I think you also have to be very cautious on outlook for asset process, there is a lot going on in the world. We have municipal elections, we have the break-set referendum in the UK, we have American Presidential Election and even in Australia you have a General Election in the next few months.

So, there is a lot of uncertainty in the world, there's a lot of noise in the world, so these are things that have fit this kind of business. And that, what we will is know is when the world turns you get a lot of momentum. So we just have to manage ourselves through these times of periods. So, again if you look at our wealth and investment business, this is more a UK assay business, the assay, part of the assay business is clearly international as a lot of clients want international exposure. So we have a strong performance in the assay business up 19% in rand, and that would have also been due to increased penetration of our market plus increased levels of client activity. UK was up 11% and benefited from mainly positive net organic growth and some investment gains in some of our portfolios.

So, overall we did see quite a good performance in the UK and South Africa. I think if you look at the operating margin, it was up about 3%, 3.6% and costs were up 1.8%, I think we consistently trying to improve this operating margin but we also have a lot of strategic initiatives that we need to execute over the next while including our online platform and digital offering which I'll talk about in a moment. So, this business will net inflows of £2.1 billion, funds in the management £45.5 billion slightly down from last year mainly because of the weaker equity markets and the weaker rand, funds in South Africa were up 11.7%.

So, overall a decent story, I think investing for long term sustainability is in South Africa we'll continue to try and drive our annuity revenue base, we continue to internationalize our offering, we've established a presence in Mauritius and we were supporting it with the [indiscernible] clients, excess to global private equity. And we continue to leverage the One Place platform, so those of you in South Africa understand that One Place is where you can do your banking both locally and internationally as well your wealth management locally and internationally. We've also launched that now in the UK recently and then we've launched a new business segment called Investec Philanthropy Services to help manage money that people want to set aside for philanthropy with their families, family offices or non-profit organizations and we continue to enhance our platforms.

In the UK we will launch Click and Invest towards the latter part of this year, let’s say September, I'm used to RT [ph] projects that where they say there by date and they're always delayed, but we do believe that it'll be September, October, November somewhere around there. Our private office which is really connecting very high net worth client to which is slightly different to our average client in the UK and it is very core to the Investec brand that we offer that channels a decent banking and wealth management service.

The strong collaboration of the private bank and we're investing money in financial planning and clearly we're out there as wanting to be an active participation in any kind of consolidation cycle that takes place. And we have continued to try and build our international capabilities, we have a platform in Ireland, we have [indiscernible], we have Switzerland, we just opened up an office in Hong Kong and if we ever invest in [indiscernible] office, in the whole we will see if there's an opportunity for us to put wealth management into that office, leveraging of our overall capabilities.

So, if we look at our outlook obviously South Africa is kind of be very challenging with what is going on the ground here with GDP growth, with the political developments, with the potential writing actions, we're know S&P on the ground at the moment, and we got a sort of like a reprieve from Moody's the other guys packed to all the noise, I'm not sure we'll get the same reprieve from S&P. And then until this breaks of stories is out of the way, you're going to have negative investment interment in the UK and that a lot I think will depend on which rate break it does, so booking say 70% stay in, hope they are right because we’re a supporter of staying in Europe. We believe that's good for business and we believe that it's the right thing for the Brits to do.

So, our opportunities is -- continue to deliver to your clients, continue to make sure that you're offering them a decent range of products and services, and continue our nationalization strategy and continue to invest in both our people and our businesses. And we think we have a fairly resilient business model. And we have a very good and strong brand.

So, we're quite confident on that business. I think if you look at our specialist bank you can -- we're only up 4.3% for the specialist bank, but look at the underlying numbers, our South African business is up 12.2, our UK business up 20.9 less impact that currency has on us. Clearly the South African business is still bigger than the UK business and that's why it does have that kind of impact but we are seeing good growth in underlying. Across the income ratio 59% still a bit above where we would like to be in that but we did see income growth also across income of 4.5 cost up 1.2, so where the crocodile did quite well openings his mouth and we guide Utela [ph] on lands and deposits.

I think legacy we might continue to make good progress we are down to £583 million, if I was reporting we did have some success again in April where we bought the numbers down further probably across to the £555 million, but this is hard work and to continue to be hard work for the next three to four years we made a loss of 78 from a 107, lot of the expenses were extraneous items and those will come down probably £4 million to £5 million, and we hopefully will see payments come down quite significant in next year to within three years’ time or two years’ time they will probably almost be relevant.

But still it is hard work. We’ve focusing on it and we are having some good success and a lots depends on market conditions that you can see that it is getting into the final phase. I think [indiscernible] 10 years to get cost our financial crises. So this is exactly what it is almost 10 years on. We still had a year of 2015 years to go for 10 years on, but to take out the effect to the financial crises 10 years. And we can see that coming through in our business.

I think looking at our income just we have quite a nice mix of the income overall net interest income only about 13%, we have investment income, we have trading income from customer flows, those are the three and then obviously the big level of the income fees and commissions. I think we try and build a domestically relevant, but internationally network business, we booked a solid high network franchise, we’re very strong in the mid-cap space, so in the UK we are not going as broad as we are in South Africa at this point in time so we concentrate in high network up to mid-corporate and I think we got a very good mid-caps corporate finance franchise, a very strong small to medium size business corporate treasury business and then we have some specializations fund finance, asset finance, income finance and pound infrastructure finance.

So when you strip back the industry, I think the business is going to get into pretty good shape and we have a significant number of key initiatives that this is where we have a mess of Gulf [ph] opportunity as an organization and we get our private banking business right in the UK. Alongside the wealth and engagement business, it will transform how the [indiscernible] value us. So that's what we are trying to focus on.

And I think if we look at the strategic initiatives, we all have shifted from a product base model to a client centric model based in this to do what we’ve starting to see down in South Africa that's our private comp base and these are the products as oppose to that’s our product and who can we sell it to. It’s a very different mindset and we've had to shift that model to this mindset. As I said our focus is on the higher network and active entrepreneurs, there is lot of collaboration between the private bank and the wealth and investment business and then we continue to try and deepen our franchise in the mid-corporate and entrepreneur corporate market and trying to integrate all these offerings, which I'll talk about at the backend of this presentation and then we enhance that with the digitization strategy.

So again we are in a volatile environment both the macro economic and political and I'm not talking about South Africa I'm talking about the UK and the break set is obviously -- going to be a challenge over the next so I clearly think audit will be over by the 23rd of June and we will know which way we are going,

So looking at the South African bank you can see that post the crisis life was flattish, because difficult to go earnings the last three years we’ve seeing strong growth in earnings and I think that the business is in very good shape and I think that was strong growth in both the corporate bank and a turnaround in the private bank is what's we are seeing, because the private bank was the bank took the heat in the financial crises. So we believe that we have a high quality specialist business banking solution to corporate institutional and private clients we have a leading private bank over the many years the leading corporate advisory business higher recorded corporate institutional bank and leading property business I mean when you look at that add all those together I think we've been able to continue to provide our clients with very good service very personalize service and ability to execute quickly. And you see already about just under 16% to 15% for this business and it has come up quite a lot over the past two years but it is a significant business for us and it continues to be a key driver of our South African business.

We also have strong ability to originate manufacture and distribute which is also something that we do in this business. So, I guess for us you know we’re going to continue to drive and grow business organically the environment is instructed [ph] there is a lot of noise out there on the street and we’re to navigate the bumps in the roads and the mine fields as we walk. But we know we have a quality client base and a quality business and we think that we can still navigate the difficult waters.

So we try and diversify our revenue streams and we’re trying to build sustainability which is primarily we’re trying to achieve. So the big headwinds here are more the economy and the noise on the street and, but it’s something that we’re adept at actually navigating. So we’re not negative, we’re positive, but it is a tough environment. I think South Africa is fortunate that it has very strong financial sectors, it’s fortunate that it has national treasury exposure and it has a strong central bank and the other things that we’ve to continue to guard. So these are important things for us as a country because if those institutions weaken it will weaken the South African financial sector quite dramatically and ultimately weaken the economy.

And then I think you all will be aware in the last six months we’ve created and invested equity partners. We sold down a whole lot of private equity assets and we brought in some strategic investors, so 55% including management we earn 45% we transfer the shares -- the investments on the 11 of January, 2016 what they’re trying to build here is a diversified investment holding company which does hold a number of strategic stacks, scalable stakes in certain select industries and then try and develop those industry clusters into significant players in their segments of the market.

So we’re quite optimistic on the potential business, at the year-end study on December we’ve no accrual income in this business for the last quarter because we will approve income a quarter in arrears annually. So next year we’ll have a full year of income accrued, but it will always be a [indiscernible] 1 billion we received ZAR2.5 billion cash back in the sale and the vehicle would have together with the cash that it has plus the call on investors, plus some kind of debt capability ZAR10 billion of additional equity to invest over the time. So, we’re quite excited about the potential for this business and hopefully one day we’ll be able to give you a big nice present.

So, when you look at the balanced business model you can see that we generate 42% of our revenue from fees and commissions. We generate 30% from other fees so annuity fees 42%, 13% from transactional fees, 30% net interest income and investment in trading 15%. So 45% capital intensive, 55% capital out, we continue to try and drive capital out. I think it’s important for us to drive capital out, but also be not be scared of some of the capital intensive activities, but also manage that very carefully. So this is something that we’ve been doing for years, you can see where we were in 2010 we generate a lot more from capital intensive as oppose to capital lighter we’ve had that big growth through our strategy in wealth and investments in our strategy in asset management.

So overall if we look at what we said last year from a business perspective we want to focus on investment performance in asset management and trying to focus on growth so we grew 10% in currency neutral. We focus on 90% of our performance in asset management is up performs at 10 year benchmarks. So this is a long terms business and we have to focus on long term performance, some of our shorter term performance has been weaker but we already fixed the South African issues, so I think we’re getting quite confident on going forward and we want to build and leverage our wealth and investment business.

So we have continued to do that and you saw quite decent growth there. And then we’re trying to grow our specialist banking business by building the private plant and corporate institutional franchise businesses in our core geographies and we saw generally a strong growth in our core earnings drivers. On taking advantage of investment opportunities we did execute invested equity partners and we have positioned the new generation of leadership by appointing these young, much younger group of people in to key leadership positions and that’s always good to have wisdom and energy, I love the movie, The Intern, because that’s a young startup having an internship with 65 year old matching wisdom of the elders with the energy of youth and that’s been wasted, you see a lot of young people with a lot of energy and we’re driving our digitalization strategy, you continue to see several stock launch over the quarter. I think in addition to that, we have got a very strong client strategy, I think therefore our clients, our client at a percent [ph] of our business and we need to continue to push delivering a service to our clients.

So part of this is a digital strategy, but if you look at our overall business. People often question, using a corporate and the private client area, how come -- isn’t it, its two very different and we’ve always seen as type of client that we deal with both corporate and private clients is a lot of integration, our core purpose in life is to help people create wealth that you do on the banking side and to manage and preserve well if you do on the asset and the wealth management side. And we get a lot of benefits through very focused clients approach both on our corporate side and our private side, which enabled both our wealth management businesses and our asset management businesses and that’s something that we’ll continue to focus on.

So we’re not a product driven business, I think that’s a people have to understand investing in the client driven business with got very, very long-term relationships with clients. And we see the benefit of building those long-term relationships every single day that we operate. So we’ve had clients that have started out with us many, many years ago, people that we refinanced when we were young, graduates who are now CEOs of large corporations of financial directors or in their own businesses and we see the benefit of having a long-term approach to that client base.

In fact today, I’ve got letter from a guy who used to do properties syndication with me here to thank me, in 1991 we had done a proper syndication in the mid-80s and we found that when we looked at our information on the properties syndication, we felt we’ve mislead the client and we brought out of 20 that we did, we both fired back in. And that guy thanked me today because his father was 90 and it was able to have a decent life because we exercised that kind of judgment.

So that was, I don’t know what -- we in 2016, this is something we did in 1991 and I’ve got later today from the guy, and I’m thinking the thing [ph] his name is Paul Hanson, he used to fight with me about the JCI deal in 1998 run standard bank retail clients and he wrote to me, I don’t know why he writes me -- I don’t know y he writes me letters today. But he writes me a letter to-date, I swear I read it 10 minutes ago, I mean before I came in here. So that demonstrated, that we have a long term approach towards clients and clients come first.

Clients and our people, you put them, you look after you people, you look after you’re clients, you build a long-term business. So I’m not going to go into a speech on the digitalization strategy. It is an important strategy for us, it is an important channel, it does bring us into this new world, it does enable us to compete with RoboAdvisors [ph] and all those other funny stuff that will one day blast like peer-to-peer, we’re really starting to blow up. But we are high-tech organization and one of our Directors who is in the high-tech space system, they coming into this, people come up and ask all sorts of questions and so this is a project, we trying to launch the reminder of other start-ups, that you missed [ph], that’s the culture. So not trying to do crazy stuff, but continue to deliver, Bruno’s [ph] going to shout at me any minute, for being too long.

So again in summary, strong business, well position for growth, difficult market, we have a very strong culture and we have approach like in an integrated way towards our clients. We believe that we’ve built domestically very relevant businesses that are internationally networked. We believe that whether our strong client focused together with our opportunistic capability, because we are opportunistic at the end of the day able us to switch between markets and take advantage of what opportunity that arise, I think that’s how we navigated the prices. Whenever there is trouble on the street, there is always a big opportunity [indiscernible] market’s up with ZAR70 billion and then four weeks later was 227 billion, not it’s back to about 160, but at 70 billion people thought, might have thought, where is this thing going. And three or four weeks later at 220 billion.

So in prices there is always opportunity and I think as I said we have unique culture, we attract of those talent and we allow innovation to thrive. So we believe that with the next generation coming through, we do have the depth of leadership in strong management that can focused on driving growth. So we believe, we’re well positioned to sustain growth in our principle markets and macro environment as we said earlier clearly uncertain that we used to living in uncertain time. But we are still see very good levels of activity supporting underlying performance.

So hopefully that sustains itself and we committed to providing our shareholders value and our clients exceptional experience. So that’s the story hopefully, we can still continue to do the dividend growth.

And I’m now going to do questions, I’ll start off in London. I got questions in London deck? [Multiple Speakers].

Question-and-Answer Session

A - Unidentified Company Representative

Are there any questions? No Stephen no questions from London.

Stephen Koseff

[Indiscernible] okay. Okay, we come back to Questions, being going on too long.

It's be yours but a question I won't even ask.

Unidentified Analyst

Mr. Koseff you've advised that the cost to income ratio has come down -- improved, so it has improved it's come down at 65.8 and that's very pleasing. However I matched that against your target of just below 65, you're not far from the target already, so my question is why don't you set yourself and your staff a much tougher target and get below 60%. Because once you get below 65 there might be a feeling that you've achieved this and you can all now rest easy. I suggest you make that target below 60.

Stephen Koseff

Let me explain to you. We have two business that are -- use very little capital but use a lot of people. We have investment initiatives that we have to keep investing in, in order to remain relevant. So the two businesses that require that are people driven as opposed to financially leveraged are asset management and wealth management that cannot live with a cost to income ratio of 65 okay. Asset management probably almost, someday, wealth no chance. In South Africa or UK no chance. So you have to recognize that as those business have brought back 35% of our revenue, hopefully one day they'll be much higher because they don't use any capital. You will never get below that 65. So overall as a group yes we said -- below 65, so we'd like to be between 60 and 65. But we still have to get into, in fact on a neutral currency basis it’s 64.9. So we're just getting there. But we can't generate and drive revenue and we try and manage costs, but we have to build out strategic initiatives.

Not if we're going to damage our franchise, not if we're going to stop investing in our core propositions. So we have to spend money to build up people, to build our infrastructure, to remain relevant, to remain competitive. And that all costs money and a lot of it come from -- you know it's not rand spending its past or dollars, so we have to end, you know the demand and regulations. If I go back 20 years I'd didn't know what a compliance officer was, I didn't know what an embedded risk manager was, I didn't know what operational risk was. Today you must know the armies of people we have in managing these risks around the world. Empty money laundering offices. Know your client, repay premium client, every time there is a noise about a client, you got to then try and repay for them and see if there's something that you missed. It's an expensive business with big barriers to entry.

Are you asking a question, you’re the founder of our business, the founder of our business, and he’s asking me a question today. So now I don’t know where to hide. Stand up and [indiscernible] you’re the founder of our business.

Unidentified Analyst

Stephen we touched on yesterday, we're a little -- lot of intensely operational and maybe useful just to look forward a bit. And one of the items you touched on yesterday, we didn't really get into, whereas what impact do you think that negative interest rates should have on our business.

Stephen Koseff

On our business? Well we're really living with 0.5% base rates in the UK, so obviously if you have negative interest rates your free money is invested negative as opposed to positive and that's why you always see ROEs in developed growth businesses are lower than ROEs in developing business because prime is 10.5, bases 7. So you're reinvestment rate is like 7 in South Africa versus half in the UK. So you have a natural 6.5% gap, so that's what happens to banks. And if you’re get into a negative interest rate environment then it is very hard to generate any kind of income on your pre money, and that could be the challenge. Maybe they make up a little bit of it in spreads because I do find that the spreads that we earn in the UK are higher than the spreads that we would earn in South Africa when we lend to an individual and a corporate and that's partially to make up for the negative interest rates or the very low interest rates, so not great for banks but not great for investors and not great for anyone. But it's good for borrowers.

Unidentified Analyst

What would you advise the authorities?

Stephen Koseff

Now you ask me an economic question. Take away all the positive we don't get any money on it the Reserve Bank. We give a lot of money to the Reserve Bank, we earn nothing on it. I was trying to explain yesterday that you were saying, well the ROE [ph] revenue should be a lot higher because of negative affiliates spend in the UK, we don’t put any money on the Central Bank that earns enough, if we put money in the Central Bank we earn base rate. And so that’s why you have to put a certain percentage of our short-term liabilities with the Central Bank and on that we earn nothing, they call it vault cash. And I don’t know [indiscernible] how much we got there to get from one minute to the next. How much we look at the Central Bank earning nothing -- there you go, 8 billion earnings zipped.

So this sort of luck balances out. That cost of 30 basis points before we start, that right? [indiscernible] 20, other day it was 50. You transfer approximately more than that to your colleagues they’re far run their treasury, besides what people pay for their money, [indiscernible] scale in you.

What else we got? You got more balances here, no please just stay keep it.

Unidentified Analyst

Thanks. [indiscernible] from Corry Capital. Just a question regarding funding, and in the face of a looming downgrades what it does -- how you stress tested and what’s being downgraded to [indiscernible] is what do for Investec’s funding? And how you had mitigated that risk?

Stephen Koseff

So I think the big issue would be on our dollar liabilities, because I think there will be a shortage of dollar, so we bringing on dollars and we not partying with them that easily. So we would be very, very circumspect on whenever someone wants to borrow dollars from us, where we will price and we will effect in the cost of replacing that dollar. So we have gone very long in anticipation and we have run downgrades stress test scenarios, worse than downgrades stress test scenarios, we’ve had [indiscernible] trial stress test scenarios. Now that’s not good for profitability, but we have to make sure that whatever scenario we run make sure our organization is resilient.

So you see we run our organization with lot of liquidity as a matter of course so we have £11 billion globally of surface cash that is mid-50s of our liability base and almost probably over 30% of our global balance sheet. So that’s how we run ourselves and our business divisional heads want to actually go light on liquidity and we say no, we’ve lived through many, many cycles as an organization and one thing you need to make sure is we’ve got cash. When I stop talking shift out there or alternatively you get noise, you get a ramp. So we believe that we’re quite resilient and we’d be factoring and obviously since it's a [indiscernible] of the amount and the nuclear backing was placed we recognized that this downgrade is a big loomer [ph] in our country.

Unidentified Analyst

You’ve been talking about the asset management business, you said that it seems to be building up now and inflow is building up now although last year it has been an assets.

Stephen Koseff

No, we had a net inflow of £3.2 billion, so we need that asset [indiscernible] being down by £5 billion this currency in market that we had a net inflow of £3.2 billion.

Unidentified Analyst

Isn’t that at risk now? If we look at what’s happening on the JSE over the last 12 months there has been a net foreign outflow if we look at what’s happened so far this year-to-date it's actually generating momentum, now is it fundamentally basis there is more each month, in this the real risk? Would you care to comment no managing that please?

Stephen Koseff

You are looking in the South African perspective, we’re a global firm. So South Africa how much in that part ZAR20 billion what do you manage [indiscernible] ZAR20 billion the [indiscernible] about 22 billion into the yen you can see that of our £76 billion if we manage only 25-odd is South African. So the risk is global. We’re both a global firm. Yes, you can ask but [indiscernible] answer your questions better than me because he’s on the street where are you now in Eurogauge and then where you Shanghai, I ask him he know, he’s everywhere.

Unidentified Company Representative

I think you mostly confusing too which is one is foreign investors in South African coming in of course I think they’ll be withdrawal continued withdrawal from emerging markets in general, that is a vulnerability for our business because about a half the assets we invest, we invest in emerging markets in some way or some form or another with Asia or Africa or Latin America wherever. That can withdraw but if you look at the South Africa business in particular we expect very strong inflows in the coming year because the contractual savings industry continues and people do put money away and they’re probably less likely to buy properties in a time of [indiscernible] than putting away for their children and financial assets. So we don’t see that as and also relative to other firms our position is strong.

If you look at the rest of the world, we have other significant product unrelated to the emerging markets where we see pretty good opportunity but if markets get really tight and you got to a sort of a world where the interest rate increase is too sharp in the U.S. of course flows will -- you've seen it in asset management globally, they've had weakest flows over the last six months than they had previously, but I don't think that issue about foreigners was going from South Africa. In fact our business is more than two thirds non-African in nature and therefore better protected than anything else you’d find here.

Unidentified Analyst

Steve you got to make a short comment --.

Stephen Koseff

One short.

Unidentified Analyst

One short. You can't state build -- you can just invest and the buildings and the infrastructure in the businesses which you can't take them back to America, factories are here. So, see these are as factories as we'll see [indiscernible] gather to the factories. So, I think Dave the currency not the [indiscernible], so in fact the [indiscernible] is too is that the currency goes down, the value of the assets in rand goes up, so I would expect them to do even better than you’re suggest you.

Stephen Koseff

Dan, two thirds of our soft market is non-South African at the end of the day, if you take the market cap [indiscernible] it’s got nothing to do with South Africa. And next one probably you seen it hold up in rand.

More questions. Are we finished?

Thanks very much for attending and let's hope the world is better when next time we meet. Thank you.

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