Half-year Report

Unaudited condensed Financial Statements for the six months ended 30 September 2020

Unaudited condensed Financial Statements for the six months ended 30 September 2020

Investec Bank plc

(Incorporated in England and Wales)

(Company Registration Number: 489604)

Interim Management Report

This Interim Management Report is issued by Investec Bank plc, a subsidiary of the listed entity Investec plc, in accordance with the UK Listing Authority's Disclosure and Transparency Rules and has been prepared in accordance with IAS 34 "Interim Financial Reporting". Unless stated otherwise, comparatives relate to the six month period ended 30 September 2019 (1H2020). Further information is contained in the Investec Bank plc unaudited consolidated interim financial report for the six months ended 30 September 2020 (1H2021). The comparability of 1H2021 to the prior period is impacted by the economic effects of COVID-19 which prevailed over the period under review. Adjusted operating profit refers to operating profit before amortisation of acquired intangibles, strategic actions and taxation and after non-controlling interests.

Performance overview

Over the period, we operated within a challenging economic backdrop, impacted by COVID-19 and associated lockdowns, particularly in the first three months. This resulted in reduced economic activity and increased market volatility. Interest rates were sharply lower and client activity declined. Investec Bank plc (the bank) reported adjusted operating profit of GBP46.7 million for the six months ended 30 September 2020 (1H2020: GBP113.2 million).

The balance sheet remains strong, supported by sound capital and liquidity ratios.

Key features of the period under review:

• Third party funds under management (FUM) increased 13.6% to GBP38.0 billion (31 March 2020: GBP33.5 billion)
• Net core loans increased 1.0% to GBP12.0 billion (31 March 2020: GBP11.8 billion)
• Customer accounts (deposits) increased 2.1% to GBP15.8 billion (31 March 2020: GBP15.5 billion)
• Cash and near cash balances increased 3.0% to GBP6.2 billion (31 March 2020: GBP6.0 billion)
• Capital ratios* remained sound with the bank reporting a total capital ratio of 16.2% (31 March 2020: 16.5%), a common equity tier 1 ratio of 11.5% (31 March 2020: 11.5%) and a leverage ratio of 8.0% (31 March 2020: 8.0%)
• The annualised credit loss ratio on average gross core loans subject to expected credit losses was 0.60% (1H2020: 0.28%; 2H2020: 0.97%).

*Including the deduction of foreseeable charges and dividends as required under the Capital Requirements Regulation and European Banking Authority technical standards.

Business unit review

Wealth & Investment 

Adjusted operating profit declined 5.2% to GBP28.9 million (1H2020: GBP30.5 million).

The business continued to report positive net organic growth in FUM over the period, with an annualised rate of growth of 1.9% - in line with the first half of the prior period. Net inflows of GBP315 million, along with favourable market movements and investment performance, contributed to FUM increasing by 13.4% since the start of the financial year. Operating income, down 4.4% on the prior period, was impacted by lower FUM at key billing dates relative to the prior period, the sale of the Irish wealth business in 2H2020 as well as lower interest rates; partly offset by an increase in transaction volumes.

Operating costs reduced by 4.3% or GBP5.6 million to GBP126.2 million, despite incurring once-off headcount reduction related costs and a GBP2.3 million increase in the Financial Services Compensation Scheme (FSCS) levy (1H2020: GBP3.8 million). The cost to income ratio was 81.4% (1H2020: 81.2%).   

Specialist Banking

Adjusted operating profit declined by 78.4% to GBP17.8 million (1H2020: GBP82.7 million). Increased equity capital markets activity and good levels of lending turnover across private client and certain corporate client lending areas was offset by hedging costs related to our structured products book. These hedging costs contributed GBP53 million to the profit reduction of GBP64.9 million.

Our client franchises have shown resilience notwithstanding the two months of hard lockdown at the start of the reporting period. The private client banking business saw good origination and client acquisition. The mortgage book ended the half year on GBP2.8 billion, an increase of 10.8% since 31 March 2020. Net new client origination was c.8%, moving us closer to our target of at least 6,500 high net worth clients by March 2022 (c.5,400 clients at 30 September 2020).

Net interest income declined by 1.7% with growth in average core loans offset by lower interest rates. Non-interest revenue decreased by 44.5% as the recovery in equity capital market fees and an increase in investment income was offset by lower lending fees and risk management and risk reduction costs associated with hedging our structured products book following market dislocation and dividend cancellations. We anticipate a similar level of risk management and risk reduction costs in the second half of the 2021 financial year in particular, as we continue to reduce the risk on the book. Risk reduction costs include the purchase of protection against a repeat of the severe market moves experienced in March and April 2020. For the 2022 financial year we expect risk management and risk reduction costs to be less than half of that anticipated in the current financial year, and progressively reducing in the 2023 financial year. This guidance is subject to assumptions, which if altered, may result in a different outcome to management expectations.

ECL impairment charges increased, resulting in an annualised credit loss ratio of 0.60% (1H2020: 0.28%), below the annualised 2H2020 credit loss ratio of 0.97%. The increase since 31 March 2020 was driven primarily by updated assumptions applied in our models to capture the deterioration in macro-economic variables since year end.

Operating costs decreased by 12.6% period on period primarily reflecting lower variable remuneration and a strong focus on cost discipline. Due to lower revenues, the cost to income ratio increased to 79.3% (1H2020: 71.9%).

Net core loans grew by 1.0% to GBP12.0 billion (31 March 2020: GBP11.8 billion) with strong growth in mortgages and other high net worth lending offset by a net book reduction in corporate and other lending. While there was good activity in some parts of the corporate space, particularly in fund finance, redemptions largely offset this.

Further information on key developments within each of the business units is provided in the Investec group's interim report published on the Investec group's website: http://www.investec.com.

Operational review

Funding and liquidity

As at 30 September 2020, Investec Bank plc had GBP6.2 billion in cash and near cash balances (31 March 2020: GBP6.0 billion), representing 39.3% of customer deposits. The bank continues to maintain a conservative liquidity and funding profile. Loans and advances to customers as a percentage of customer deposits amounted to 75.5% (31 March 2020: 76.3%). The bank comfortably exceeds Basel liquidity requirements for the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The LCR and NSFR are calculated using the relevant EU regulation, applying our own interpretations where required. At 30 September 2020 the LCR reported to the Prudential Regulation Authority (PRA) was 353% for Investec Bank plc (solo basis) and the internally calculated NSFR was 125% for Investec Bank plc (solo basis).

Capital adequacy*

Capital remained comfortably in excess of regulatory requirements and the bank continued to meet the Investec group's internal board-approved capital targets of a minimum common equity tier 1 capital ratio above 10% and a total capital ratio range of 14% to 17%. As at 30 September 2020, the common equity tier 1 ratio of the bank was 11.5%, the total capital ratio was 16.2% and the current leverage ratio was 8.0%. 

*Including the deduction of foreseeable dividends as required under the Capital Requirements Regulation and European Banking Authority technical standards.

Credit quality and counterparty exposures

The bank lends mainly to high net worth and high income individuals, mid to large sized corporates, public sector bodies and institutions. The majority of the bank's credit and counterparty exposures reside within its principal operating geography, namely the UK.

Expected credit loss (ECL) impairment charges amounted to GBP39.7 million (1H2020: GBP16.0 million). The bank's annualised credit loss ratio for the period was 0.60% (31 March 2020: 0.69%; 1H2020: 0.28%). Since 31 March 2020, gross core loan Stage 3 assets reduced by GBP34 million to GBP345 million. Stage 3 assets (net of ECL impairment charges) as a percentage of net core loans subject to ECL was 2.2% (31 March 2020: 2.4%).

Taxation

The tax charge on adjusted operating profit was GBP8.2 million (1H2020: GBP19.7 million), resulting in an effective tax rate of 18.2% (1H2020: 17.6%).

Financial impact of strategic actions

In pursuit of the Investec group's objective to simplify, focus and grow the business, a number of strategic actions were effected in the prior period, namely; closure of the Click & Invest operations, sale of the Irish Wealth & Investment business, restructure of the Irish branch, sale of the UK Property Fund, and the closure and rundown of the Hong Kong direct investments business. In the current period, these strategic actions negatively impacted profit before taxation by GBP2.2 million (1H2020: GBP37.9 million). Refer to page 20 of the Investec Bank plc unaudited consolidated interim financial report for the six months ended 30 September 2020 for a detailed breakdown.

Outlook

Given the uncertainty around the evolving economic downturn and the very low interest rate environment, together with the possibility of negative interest rates, the outlook for the current financial year remains unpredictable and challenging. While the impact of COVID-19 has been felt across our business and the outlook is still uncertain, we remain confident in the fundamentals of our business and in our long-established client relationships.

We entered this crisis with experience from the Global Financial Crisis to navigate through very difficult circumstances, as well as having high quality, diversified income streams, and considerable strength with respect to our high levels of liquidity, strong capital and low level of gearing. We have continued to make progress against our strategic objectives, positioning the business for growth in the long term, and expect to substantially complete our simplification process by the end of the financial year. We are therefore confident that our business model will continue to be resilient and enable us to emerge from this crisis strongly positioned to further support our clients and deliver on our strategic objectives.

On behalf of the board of Investec Bank plc

Ruth Leas

Chief Executive Officer

Note to the commentary section

This interim management report includes an unaudited consolidated condensed set of financial statements produced by the bank for the six months ended 30 September 2020, which can be accessed via the following link http://www.rns-pdf.londonstockexchange.com/rns/1358H_1-2020-12-1.pdf This document will also be available on Investec's website at https://www.investec.com/en_gb/welcome-to-investec/about-us/investor-relations.html, and via the National Document Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism 

These unaudited consolidated financial results have been prepared in terms of the recognition and measurement criteria of International Financial Reporting Standards, and the presentation and disclosure requirements of IAS 34, (Interim Financial Reporting).

The accounting policies applied in the preparation of the results for the period to 30 September 2020 are consistent with those adopted in the financial statements for the year ended 31 March 2020. 

Interest Rate Benchmark Reform (IBOR reform) Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Phase 2 of the IASB's IBOR project addresses the wider accounting issues arising from the IBOR reform. This was published in August 2020 and is awaiting endorsement. The amendments are effective for annual reporting periods beginning on or after 1 January 2021 with early application permitted. Conversion from LIBOR to alternative risk-free rates (RFRs) is expected to increase as RFR-based products become more widely available and key market-driven conversion events occur.

Re-presentation of balance sheet items

Software of GBP7.1 million (31 March 2020: GBP7.0 million; 1H2020: GBP8.8 million), which was previously reported within Intangible assets, is now reported as a separate line item. The prior period has been re-presented to reflect the same basis.

The re-presentation of software was done to provide users enhanced clarity on the values used to calculate net asset values and the various ROE ratios for the total Investec group.

Events after the reporting period

The significant judgements and estimates applied to prepare the interim financial statements as at 30 September 2020 reflected the impact of COVID-19 and the resulting impact on the economy as at the balance sheet date. These judgements, specifically those relating to the impairment of loans and advances and valuation of fair value instruments, were determined by considering a range of economic scenarios including the adverse impact of COVID-19 and by applying the guidance issued by various international regulators and standard setting bodies.

The action of various governments and central banks, in particular in the United Kingdom, provides an indication of the potential severity of the downturn and that the recovery environment could be significantly different from past crises with a duration which is also difficult to predict. Subsequent to the balance sheet date, it was announced that various vaccine trials proved to be more than 90% effective and resultingly had a very positive impact on global markets. It still remains very difficult to predict when a full scale role out of the vaccine will take place. In the UK previously launched schemes have been extended in an attempt to mitigate the economic impact of COVID-19.

The group believes that the significant judgements and estimates made at the balance sheet date took account of the impact of COVID-19 and the results of subsequent event procedures performed by management up to 18 November 2020 did not identify additional information that requires these judgements and estimates to be updated. Management is satisfied that there were no such items of sufficient significance to warrant additional disclosure. However, should the COVID-19 crisis cause disruption to global economic activity for a longer period than forecasted, this could put additional upward pressure on the group ECLs and downward pressure on other valuations.

Investec Bank plc owns the appointed asset manager of Investec Australia Property Fund (IAPF). On 18 November 2020, the IAPF shareholders voted to purchase the asset management company for an amount of AUD40 million subject to certain conditions.

The group is further not aware of any other events after the reporting date as defined by IAS 10 Events after the Reporting Period, that would require the financial statements to be adjusted or which would require additional disclosures.

Enquires and further information:

Investor Relations

Carly Newton

Investec Bank plc

Telephone: 020 7597 5546 / 020 7597 4493

30 Gresham Street, London, EC2V 7QP

United Kingdom           

INVESTEC BANK PLC

DIRECTORS' RESPONSIBILITY STATEMENT

The directors are responsible for preparing the unaudited consolidated condensed financial statements in accordance with applicable law and regulations.

UK Listing Authority Disclosure Guidance and Transparency Rules require the directors to prepare unaudited condensed financial statements for the half-year.  The directors have elected to prepare the consolidated financial statements under International Financial Reporting Standards (IFRS) as adopted by the EU.

The directors are responsible for the preparation, integrity and objectivity of the consolidated financial statements that fairly present the state of affairs of the bank at the end of the period and the net income for the period, and other information contained in this report.

To enable the directors to meet these responsibilities:

• The board and management set standards and management implements systems of internal controls and accounting and information systems aimed at providing reasonable assurance that assets are safeguarded and the risk of fraud, error or loss is reduced in a cost effective manner. These controls, contained in established policies and procedures, include the proper delegation of responsibilities and authorities within a clearly defined framework, effective accounting procedures and adequate segregation of duties
• The Investec plc group's Internal Audit function, which operates unimpeded and independently from operational management, and has unrestricted access to the Investec Bank plc's Audit Committee, appraises and, when necessary, recommends improvements in the system of internal controls and accounting practices, based on audit plans that take cognisance of the relative degrees of risk of each function or aspect of the business
• The Investec Bank plc Audit Committee, together with the Internal Audit department, plays an integral role in matters relating to financial and internal control, accounting policies, reporting and disclosure.

To the best of our knowledge and belief, based on the above, the directors are satisfied that no material breakdown in the operation of the system of internal control and procedures has occurred during the period under review.

The bank consistently adopts appropriate and recognised accounting policies and these are supported by reasonable judgements and estimates on a consistent basis and provides additional disclosures when compliance with the specific requirements in International Financial Reporting Standards are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the bank's financial position and financial performance.

The financial statements of the bank have been prepared in accordance with the Companies Act 2006 and comply with IFRS as adopted by the EU and Article 4 of the International Accounting Standards (IAS) regulation.

The directors are of the opinion, based on their knowledge of the bank, key processes in operation and specific enquiries that adequate resources exist to support Investec Bank plc on a going concern basis over the next year. These financial statements have been prepared on that basis.

The unaudited consolidated condensed financial statements have not been audited or reviewed by the Investec Bank plc's auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

Signed on behalf of the board

Ruth Leas

Chief Executive Officer

27 November 2020

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.