Half-year Report

Investec Bank plc

Incorporated in England and Wales

Registration number 489604

Unaudited condensed Financial Statements for the six months ended 30 September 2021

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 2020 (1H2021). Further information is contained in the Investec Bank plc unaudited consolidated interim financial report for the six months ended 30 September 2021 (1H2022). Adjusted operating profit refers to operating profit before amortisation of acquired intangibles, strategic actions and taxation and after non-controlling interests.

Performance overview

Our performance reflects higher income levels and significantly lower impairment charges, partly offset by increased operating costs. Our underlying client franchises showed resilience with continued momentum in client acquisition which underpinned loan and deposit growth within banking, and net inflows in wealth management. 

The prior period was negatively impacted by the effects of general economic contraction brought on by COVID-19 related lockdowns which affected client activity levels, net interest margins, valuations, and impairments. In this reporting period, we have experienced the positive effects of higher client activity, favourable liability repricing and sustained market improvement. Additionally, risk management and risk reduction costs associated with the structured products book were immaterial in the current period.

Investec Bank plc (the bank) reported adjusted operating profit of GBP128.5 million for the six months ended 30 September 2021 (1H2021: GBP46.7 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 7.2% to GBP44.7 billion (31 March 2021: GBP41.7 billion)
• Net core loans increased 11.1% to GBP13.7 billion (31 March 2021: GBP12.3 billion)
• Customer accounts (deposits) increased 4.8% to GBP17.0 billion (31 March 2021: GBP16.2 billion)
• Cash and near cash balances increased 6.7% to GBP7.3 billion (31 March 2021: GBP6.9 billion)
• Capital ratios* remained sound with the bank reporting a total capital ratio of 16.0% (31 March 2021: 16.4%), a common equity tier 1 ratio of 11.7% (31 March 2021: 11.8%) and a leverage ratio of 7.9% (31 March 2021: 8.0%)
• The annualised credit loss ratio on average gross core loans subject to expected credit losses was 10bps (31 March 2021: 56bps; 1H2021: 60bps).

*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 increased 46.1% to GBP42.2 million (1H2021: GBP28.9 million).

The business achieved record FUM during the period, reporting £44.7 billion at 30 September 2021 (31 March 2021: £41.7 billion), supported by net inflows of £627 million.

Revenue grew by 12.1% supported by higher market levels, positive net organic annualised growth in FUM of 3.0%, as well as favourable investment performance. Commission income returned to normalised levels as the exceptionally high trading volumes seen at the onset of COVID-19 were not repeated.

Operating costs were higher by 4.4% driven by continued investment in technology, increased discretionary expenditure as COVID-19 related restrictions eased and the normalisation of variable staff compensation in line with business performance. One-off costs in the base of c.£3.5 million (relating to headcount reduction) were not repeated.

The UK domestic business (which accounts for 97.1% of FUM) reported an operating margin of 26.0% (1H2021: 20.5%), while a combined operating margin for UK & Other of 24.3% (1H2021: 18.6%) was achieved.

Specialist Banking

Adjusted operating profit increased by 383.8% to GBP86.3 million (1H2021: GBP17.8 million).

Revenue grew by 19.0% influenced by lower cost of funds, increased loan origination, FX flows, reduced structured products book costs, and client acquisition within Private Banking. Corporate lending activity increased across portfolios supported by new client acquisition.

Net interest income increased 23.6% driven by lower cost of funding and higher average lending books, partially offset by the impact of the disposal of the Australian corporate book in March 2021.

Non-interest revenue increased 9.0% mainly attributable to:

• Lower risk management and risk reduction costs associated with the UK structured products book (£1.2 million in 1H2022 vs £53.0 million in 1H2021), offset by
• Decreased investment income due to lower net realisations in the current period, and
• Reduced balance sheet management and other trading activities, driven by costs associated with the early redemption of a senior bond and interest rate hedges on the balance sheet.

Expected credit loss impairment charges decreased 87.4% to £5.0 million, resulting in an annualised credit loss ratio of 10bps (31 March 2021: 56bps; 1H2021: 60bps). Specific impairments in the period and run-rate ECL charges on the performing book totalled £8.1million and the effect of updated macro-economic scenarios together with the new management overlay and in-model adjustments resulted in an ECL release of £3.2 million.  This includes an increase in post-model ECL overlay provisions of £5.0 million to £21.0 million, taking into consideration the uncertainties that management believe remain in the environment.

Operating costs increased 8.3% driven by higher variable remuneration and discretionary spend in line with revenue growth. The increase was offset by cost savings from reduced headcount across the business. Fixed costs were well contained over the period. The cost to income ratio reduced to 72.5% (1H2021: 79.3%).

Net core loans grew by 11.1% (12.4% excluding Australia) to £13.7 billion (31 March 2021: £12.3 billion) driven by strong private clients book growth (up 19.6%) in the period and continued client acquisition. Demand for corporate credit was strong across several portfolios with book growth of 7.8% (9.5% excluding Australia) since year end.

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 2021, Investec Bank plc had GBP7.3 billion in cash and near cash balances (31 March 2021: GBP6.9 billion), representing 43.0% 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 80.4% (31 March 2021: 75.8%). 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 2021 the LCR reported to the Prudential Regulation Authority (PRA) was 280% for Investec Bank plc (solo basis) and the internally calculated NSFR was 123% 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 2021, the common equity tier 1 ratio of the bank was 11.7%, the total capital ratio was 16.0% and the current leverage ratio was 7.9%.

*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 GBP5.0 million (1H2021: GBP39.7 million). The bank’s annualised credit loss ratio for the period was 10bps (31 March 2021: 56bps; 1H2021: 60bps). Since 31 March 2021, gross core loan Stage 3 assets reduced by GBP57 million to GBP275 million. Stage 3 assets (net of ECL) as a percentage of net core loans subject to ECL was 1.6% (31 March 2021: 2.0%).

Taxation

The tax charge on adjusted operating profit was GBP16.3 million (1H2021: GBP8.2 million), resulting in an effective tax rate of 12.7% (1H2021: 18.2%).

Outlook

The macro-economic environment is improving; however, global recovery remains uneven. Underlying consumer and business confidence will continue to be tested by the ongoing presence of COVID-19, along with the consequences of Brexit.

The changes made to simplify and focus the business are bearing fruit, positioning us well for the future. Our resilient business model and strong balance sheet will support our drive to achieve sustainable long-term value and growth for our colleagues, clients, shareholders, and societies in which we live.

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 2021, which can be accessed via the following link http://www.rns-pdf.londonstockexchange.com/rns/0861U_1-2021-11-30.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 2021 are consistent with those adopted in the financial statements for the year ended 31 March 2021. 

Balance sheet restatements

Current taxation assets and other assets

As at 31 March 2021, current taxation assets, which were previously reported within other assets, were reported as a separate line item in accordance with IAS 1 Presentation of Financial Statements. As at 30 September 2020, current taxation assets of £34.3 million have been re-presented to reflect the same basis.

Gilts and Total Return Swaps reclassification

As at 31 March 2021, amounts previously reported within sovereign debt securities, derivative financial instruments and securities arising from trading activities were corrected to present them as reverse repurchase agreements and cash collateral on securities borrowed. This change in accounting treatment was made where sovereign debt securities have been purchased at the same time as total return swaps with the same counterparty, such that the combined position has the economic substance similar to secured lending. The 30 September 2020 balance sheet has been restated to give a consistent presentation. This change has no impact on the income statement. The impact of this change in the prior year is below:

Cash flow statement restatements

As at 31 March 2021, amounts previously reported within loans and advances to banks were correctly presented as cash and cash equivalents. This change was made to include items previously reported as loans and advances to banks identified as short term in nature, with a maturity date of less than three months, which therefore met the definition of cash and cash equivalents.

The change at 30 September 2020 was £0.6 billion, from £1.0 billion to £1.6 billion in on demand loans and advances to banks.

Contingent liabilities

The group assessed its exposure to legal proceedings and the appropriateness of related provisions recognised on the balance sheet as at 30 September 2021. It was concluded that the provisions held as at 31 March 2021, in relation to the matters set out in Note xx of the Investec Bank plc Annual Financial Statements, continue to reflect our best estimate of the potential financial outflows that may arise.

Enquires and further information:

Investor Relations

Investec Bank plc

Telephone: 020 7597 5546 / 020 7597 3593

30 Gresham Street, London, EC2V 7QP

United Kingdom 

Investec Bank plc

directors’ responsibilitY STATEMENT

The directors (the names of whom are set out below) are required to prepare the financial statements on a going concern basis unless it is not appropriate to do so. In making this assessment, the directors have considered information relating to present and future conditions. Each of the directors (the names of whom are set out below) confirm that to the best of their knowledge these condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 “Interim Financial Reporting”, as adopted by the UK, and that the interim management report herein includes a fair review of the information required by the Financial Conduct Authority’s (FCA’s) Disclosure Guidance and Transparency Rule (DTR) 4.7.2R and DTR 4.2.8R, namely:

• An indication of important events that have occurred during the six months ended 30 September 2021 and their impact on the condensed consolidated interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
• Material related party transactions in the six months ended 30 September 2021 and any material changes in the related party transactions described in the last annual report

Signed on behalf of the board

Ruth Leas

Chief Executive Officer

30 November 2021

Investec Bank plc board of directors:

Executive directors

Ruth Leas (Chief Executive Officer)

Kevin McKenna (Chief Risk Officer)

Fani Titi

Non-executive directors

Brian Stevenson (Chair)

Moni Mannings (Senior Independent Director)

Henrietta Baldock

Zarina Bassa

David Germain

Paul Seward

Lesley Watkins

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