Conference Call Transcript 21 May 2020 2020 ANNUAL RESULTS - - PDF document

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Conference Call Transcript

21 May 2020

2020 ANNUAL RESULTS PRESENTATION

Fani Titi Ladies and gentlemen, good morning and welcome to our financial year 2020 results presentation. I’m joined by Nishlan Samujh, our Finance Director, and Kieran Whelan, the Chief Executive of our Wealth & Investment business in the UK. We have an apology from Richard Wainwright who is joining a meeting with the president to discuss the reopening of the economy. As you know Richard is the incoming Chairman of the Banking Association of South Africa, so he is representing the Banking Association. We are also joined from their homes in London by Ruth Leas, the Chief Executive of the bank in the UK, and David van der Walt, our Group Executive

• Director. Our Chairman, Perry Crosthwaite, and the directors have joined us from their homes around the globe.

This morning we address you from a rather empty auditorium in our offices in Sandton. We hope that you can watch this webcast safely from your homes as we battle the pandemic that is COVID-19. In a matter of months

• ur lives have been disrupted irreversibly. So let me start the presentation by reading out a quote from Nassim

Taleb, the author of The Black Swan. The system delivers these events with regularity – in other words disruptive events. The problem we have today is that these events are delivered so much faster. So the effects

• f the pandemic on human life have been devastating, and it has scarred our sense of personal safety, our

national security and mental wellbeing. Its effects on the world economy have been unprecedented in both scale and speed. As Nassim said in the quote, the issue is how much faster the impacts unfold. So how have we responded as Investec to this pandemic and the crisis? First and foremost, we focussed on the safety and wellbeing of our colleagues, providing them a safe environment to work from and supporting their general wellbeing. We have transitioned into an agile and a digitally enabled workforce to provide an uninterrupted service to our clients. We have provided relief to those clients in need and to the businesses that we needed to enable them to weather this particular storm. In this time of crisis we use our creativity to provide innovative solutions to our clients and helping some of them to restructure their affairs or their businesses or to raise debt or equity capital where appropriate. We have moved swiftly to support those communities hardest hit by the pandemic, providing support ranging from food relief to education. You can see on the screen the activities that we have supported. In total we have committed over £3 million or R71 million in relief, supporting hundreds of thousands of our fellow citizens in desperate need. Our global executive team and then board have heeded the call to make a solidarity contribution of 30% of salary for three months to charity. The profits we are reporting today will naturally be lower given the environment, but this moment in my view may yet be Investec’s finest hour because of how we have responded to the crisis. I’m hugely impressed by the response of our people to this crisis and I’m proud of every one of our 8,500 colleagues around the world. I know they will be disappointed by the much lower

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bonuses given, the performances and the environment, but we can be proud of the contribution that we are making to society. It has obviously been a very difficult year and a difficult trading environment through the course of the year. And this was then exacerbated by the advent of COVID-19. Despite the impact of COVID-19 on the results – and we will go through that in some detail – I do hope that you will take away from the results the following five

• messages. One, our client franchises have proved very resilient. This is borne out by the increase in core loans

and advances of 9.2% in neutral currency, the increase of 12.6% in customer deposits to £32 billion, and the funds under management recording net inflows of £599 million. Two, we have robust levels of capital and liquidity with which to weather the crisis. Let me add that we will quickly and prudently put this capital and liquidity to work to support our clients in the real economy. Three, we have provided prudently for expected credit losses. Nishlan will take you through the substantial increases in the credit loss ratios as a consequence of COVID-19. So, we are comfortable with our loan book

• exposures. Four, good progress has been made with our previously announced strategic initiatives. We de-

merged Ninety One in March. Operating costs were significantly reduced, being 7% down on last year, and bold actions were taken in dealing with non-core and subscale areas, as will be evidenced later. And lastly, while we look ahead with caution we remain confident in the long-term opportunities for Investec. We are committed to making a positive difference in society through the work that we do. Before we get into the numbers it is worth remembering that both our home markets were already facing headwinds pre COVID-19. I know the results are generally coloured by COVID-19, but even before that we had some headwinds, the Brexit related malaise in the UK through most of 2019 and a recessionary environment in South Africa. Since then both economies have been tipped in a deep, sharp recessionary shock and the global world economy as well has been hard hit. Both economies continue to be under substantial lockdowns and forced to combat COVID-19. That is why we are presenting to an empty auditorium this morning. We are now expecting unprecedented reductions in GDP in 2020 in both markets. We have assumed peak to trough GDP contractions of 9.4% and 10.9% in the UK and South Africa respectively. As Nishlan will explain later, this is factored into our outlook and forms the basis of our provisioning charges taken at the year end. This is an area

• f great interest to the market I’m sure. Have we been prudent in our assumptions and stringent enough?

Now moving to the numbers. Since we updated the market at the pre-close on the 20th March, which is just two months ago, the severity of the COVID-19 crisis has deepened very considerably. The impact on our business is much more significant. We estimate an impact of £105 million on adjusted operating profit. In Rands this impact is about R2.3 billion. Nishlan will go through this in some detail shortly. As a result we have come in slightly below the bottom of our guided range. Adjusted operating profit per share of 46.5 cents was 23.6% lower than the prior period, thus narrowly missing the bottom end guided of 23%. While overall this is a disappointing

• utcome, we are clearly in exceptional times and there are a few points to highlight with these numbers.

Adjusted operating profit was down some 17% to £609 million after absorbing the £105 million COVID-19 impact mentioned previously. This was achieved despite a significant increase in the credit loss ratio to 52 basis points, this compared to 31 basis points in the prior year. The result in part reflects the careful management of

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costs, which as I’ve stated were down 7%, with a cost to income ratio of 68.2%, up only 1% despite the revenue challenges experienced as a consequence of the operating environment. Operating income before impairments was down 7.5% in the period. The lower net asset value reflects Rand weakness of 17.8% over the year partially

• ffset by profit generation and the uplift from demerger. Reflecting clear regulatory guidance for banks in both

South Africa and the UK, no final dividend will be paid to shareholders at this moment. Given this regulatory guidance dividends will therefore remain under review throughout the course of this year. Finally, it is worth reminding shareholders that in March they received approximately 73p of value per share in the form of Ninety One shares following the demerger. Now let me take you to the overall business unit performance. The UK banking business recorded pleasing growth in the loan book supporting net interest income. And I’m particularly pleased with the progress made in the UK private bank. As you know this was an initiative that we backed as a management team. The UK private bank saw mortgage book growth going up by 36% to £2.5 billion. Performance in the bank was also supported by strong cost control as already mentioned. The business saw higher credit loss charges and lower investment and trading income. Profits as you can see on the chart were down £85 million from the prior period, of which decrease £55 million was attributable to COVID-19 impacts. Now moving on to the South African banking

• business. This business recorded adjusted operating profits 8.5% behind the prior year in Rands after absorbing

R1.1 billion of COVID-19 impacts. In Pound Sterling as the chart indicates profits were down £34 million after absorbing COVID-19 impacts of £50 million. The lending franchises performed well despite the nil growth environment pre COVID-19. Now moving to the performance of the wealth businesses. The performance has been generally satisfactory with net inflows of just under £600 million. The South African business recorded profit growth of 6% in Rands in a very tough operating environment. The UK business recorded flat revenues in a difficult market. However, headwinds from the financial services compensation scheme levy and essential technology investments led to profits reducing by £8 million. Nishlan will talk later about how we have dealt with the asset management business which we deconsolidated from around the 16th March. As the charts indicate, this business increased profits by £10 million. Now moving to our strategic initiatives. In March we were pleased to complete the demerger of Ninety One. I would like to thank all my colleagues both at Ninety One and at Investec for the considerable efforts that they made to achieve this important milestone for both companies. Also I would like to wish Hendrik and his team and all the people of Ninety One the very best and they embark on the next phase of their journey. Clearly market conditions could not have been more challenging for an IPO, and as a result we decided not to sell the 10% we had originally planned to sell. We were disciplined on value, conscious that we did not need to sell at the time, and we are confident in the prospects of Ninety One as an independent company, so we retained the full 25% shareholding in Ninety One. We did however still achieve an uplift in our capital ratios, albeit this was lower than the previously guided uplift due to the larger stake that we have retained. As previously announced we closed Click & Invest, our robo advisor in the UK, and we sold our Irish wealth business as well. The costs and the gains of doing so have been previously reported. In the second half we took a further write-down on the run down of the Hong Kong direct investments business. And within the restructured

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Irish branch we have booked further losses including a provision relating to an ongoing litigation in respect to a previously disclosed legacy matter. Let me pause at this stage to say that because there is an ongoing investigation we will not be able to shed more detail on this particular topic. However, we do feel that we have provided conservatively within the numbers that we are publishing. On the cost front we have reduced total costs by 7% including a material reduction in fixed cost in the UK as well as a variable remuneration in the light of weaker revenue performance. In the group centre these costs have risen as you have seen in the published numbers. These costs would have fallen had it not been for the early termination of a long-term contract. This will lead to annual savings going forward and this year we expect to reduce central costs to below £35 million, reflecting these savings on the long-term contract as well as the previously announced £10 million of cuts. So as you can see this was a pretty busy year for us and tough calls were made. I hope you will agree that substantial progress has been made to simplify and focus the business as we pursue disciplined growth in the long term. And with that let me hand over to Nishlan to take us through the detail of the numbers. Nishlan Samujh Thanks Fani, and good morning to everyone. It really gives me great pleasure to present the results to you in more detail. I am going to focus on the continuing business. And just to be clear, it’s the business post the demerger of Investec Asset Management or the newly listed Ninety One business which presented their results

• yesterday. So the continuing business really focussed on our bank and wealth businesses including our group

investment pillar which I will refer to in a short while. From an overall performance perspective as Fani has highlighted earlier our adjusted operating profit number decreased by 24.1% to £419 million. I think noting that the impact of COVID of about £105 million against this number reflects the reduction from £552 million in the prior year. Obviously we are operating in a backdrop that was quite tough over the period, but there has been good traction across our franchise businesses, as we will get into detail. Adjusted earnings per share are 30.4% lower at 33.9p, and the net asset value per share of 414.3p is 4.6% behind the prior year. And this is notwithstanding the demerger of the Ninety One business. I think it’s worth noting that in terms of equity we had a negative £200 million movement on equity driven by the 17.8% reduction in the Rand against the Pound. The net asset value per share was positively impacted by the demerger and profits that we generated in the period and negatively impacted by currency movements. The return on equity for the continuing business is at 8.3% against 12% last year. And COVID-19 has shaved off about 2.5% off the return on equity in the period. Cost to income ratio has come in at 68.2%, so notwithstanding the drop-off in revenue in the period you will see that cost containment has reasonably matched the drop-off in revenue in the current period, with the overall credit loss ratio at 52 basis points. Let’s get into some detail. Firstly, if we look at the mix of earnings from a revenue perspective it’s worth noting that the UK segment or geography generated about 53% of the group’s revenue compared to South Africa generating around about 47% of revenue. From a divisional perspective the specialist bank is generating 78% of the revenue and the wealth businesses are generating 22% of the revenue. From a profitability perspective

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South Africa contributed 68% to the bottom line with the UK business contributing 32% to the bottom line, Wealth & Investment contributing 19% and the specialist bank 81%. If we get into these businesses and our core franchises, looking at the specialist bank in South Africa net core loans and advances were up 6.5% to R288.9 billion in the period. I think is in the context of the position at the end of March. I think it’s also worth noting that a lot of that growth has actually been driven by organic growth. The net increase or credit extension driven from COVID related relief has been less than 1% of the book at the end of March. Our private client book growth was partially offset by subdued corporate client activity over the

• period. Customer accounts and deposits grew by 9.9% to R375.5 billion.

And if we look at the operating income analysis you can see that there has been a strong contribution from net interest income and recurring fees and commissions across the businesses. The area where we did take the pain in these results is there was net reduction in investment and associate income. I think also worth noting that in the prior year we did have a significant realisation within IEP when it realised its investment in Vumatel last year. So we did not have a repeat of that level of realisation in the current period. And then lastly obviously the impact on listed and unlisted valuations in the period, and to the end of March factoring in the sharp decline in the market that actually took place in that period. From a cost to income perspective the cost to income ratio for the business increased slightly from 51.7% to 52.3% with both revenue and cost being maintained relatively flat over the period. From the specialist banking business in the UK again I think we saw significant growth in core loans and advances which were up 12.9% to £11.9 billion in the period. And a lot of that growth actually came in from our high net worth platforms and our mortgage book, and I will give you some colour on that in a few more slides. There has been a reasonable origination as well in our corporate activity and the ability to actually sell down and manage the level of risk that we take on to our balance sheet. From a deposits perspective the deposit book grew by 16.3% to £15.3 billion over the period. Again analysing operating income we see that net interest and annuity fee income has performed relatively well

• ver the period given the backdrop of the ability to grow the book and to continue with good activity levels over

the period. However, the lower equity capital markets fees from persistent market uncertainty have influenced

• ur other forms of fees and commissions. Now, one of the areas where we have been impacted is hedging

losses from our structured products – and I will give you some detail when we get into our COVID slides – and negative fair value on listed and unlisted positions. The cost to income ratio in the specialist bank in the UK actually improved from 71.6% to 71.1% with costs reducing from £554.7 million to £449.8 million over the period. Obviously revenue decreased as I had highlighted previously, but given the drastic steps taken around cost and the ability to actually manage down fixed costs by about £32 million and variable costs combined resulting in an overall reduction of £96 million on the cost base in the business. Turning to the Wealth & Investment business in South Africa, AUM did decrease by 16% to R252 billion but what we did notice is that our discretionary funds actually remained constant over the period year at about R132

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billion and there was a marked decrease in our non-discretionary portfolios following mainly market movements and clients managing their own positions. The business did effectively have net inflows in the period of around R2.2 billion, and that was in the context of a tough South African environment with R8 billion of net inflows into the discretionary portfolio offset by R5.8 billion of outflows in the non-discretionary portfolio. Adjusted operating profit for the period was up 5.7% to R501 million presenting a diverse revenue stream and in fact a higher level of foreign based fees within the base, obviously supported by higher AUM – and that’s our discretionary AUM – and stronger demand for our offshore offering. Cost did increase at an above inflation basis as the business continued to invest in a technological base. And there were certain one-off personnel costs

• incurred. During the period the operating margin decreased from 31.1% to 30.4%.

Our wealth business in the UK within a challenging backdrop AUM decreased by 9.7% to £33.1 billion, and that was largely driven by market movements particularly in the last quarter of the year. The business did have net inflows of £484 million in the period, and as I’ve highlighted closing AUM impacted by markets. Adjusted

• perating profit decreased by 10.8%, and that’s in the context of actually a slightly higher revenue base for the

period offset by higher cost as the business absorbed higher regulatory fees and levies in terms of the FSCS levies as well as higher discretionary technology costs in terms of driving the business forward for the future. Operating margin is on the low end at 19.8% and the business has put in processes and procedures to enhance the operating margin looking forward. Now, if we have to take an overall look at operating income and look at the line items that were impacted, again net interest income – and this is the combined business, so both specialist bank and wealth and the total business – net interest income was 4.5% higher in the period, annuity fees 1.7% higher, and other fees down by 5.6%. But the biggest drop is coming from a 62.2% drop or a £109 million drop in investment and associate income, again just reiterating some of the realisation impact that we had in the prior year. Trading income was lower by 42.9% to £68 million. That’s both trading income and balance sheet management as we did not see recurrence on some of the positives that we had on balance sheet management in the prior year. And we did incur certain hedging losses in our structured products, and market volatility and non-repeat of gains in the prior

• year. From an operating mix perspective very similar to the conversation that I highlighted earlier.

Bringing the picture together, third party assets under management has decreased from £55.8 billion to £45 billion, and that’s off the backdrop of net positive inflows of £599 million over the period and obviously markets influencing the overall outcome at the end of March. We also disposed of our Irish Wealth & Investment business in the period, and that would have resulted in a comparative difference over the period. Our loan book and deposit book I have spoken through the detail. Now let’s just unpack some of the growth in terms of our loan book. As I’ve highlighted, the UK business is growing net core loans and advances by 12.9% in the period, and that was primarily driven by the high net worth and other private client lending activities in the period as well as our mortgage platform offering to our high net worth clients. There has been diversified growth across multiple asset classes in corporate and other

• lending. In South Africa net core loans and advances were up by 6.5% in Rand terms. Obviously with the 17.8%

reduction in the exchange rate when you look at this in Sterling terms it appears to have moved slightly

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• backwards. Again growth was really driven by mortgages and our high net worth specialised lending in the

private bank and certain select areas of growth within our corporate book within a challenging context in South Africa. Now, if I do unpack the impact of COVID, as we had said a pre-tax impact of about £105 million in the period. And that is split between the two banking businesses largely. We haven’t isolated any significant impact in our wealth businesses. The UK business reducing profitability pre-tax by £55 million, of which £61 million is driven by investment and trading activities and £38 million by an increase in ECLs. Operating cost savings are £44 million in the period really driven by variable remuneration. Now, that business did experience hedging losses from our structured products of about £29 million due to market dislocation in March, and effectively dividend cancellations that took place following regulatory guidance across the market. The South African business was really driven by a drop-off in listed and unlisted mark to markets in the period as well as increased expected credit loss provisions that we had taken both in the UK and in South Africa, effectively adjusting our outlook to a more severe negative outlook. Now, some of those, as Fani has highlighted, in South Africa from a peak to trough perspective we built into our models a decline in GDP of 10.9% and in the UK of around about 9.4%. But further to that we’ve also effectively forecast a protracted recovery over the period, and that has been built into our modelling. Post-tax an impact of around £86 million across the group. So from a cost to income perspective the cost to income ratio is increasing from 67.3% to 68.2%. That’s off the backdrop of operating income that was down by 7.5% for the reasons that I identified and operating costs following sharply as well, down by 7% in the period. From a cost analysis perspective we did not have a repeat of some of the double rental that we incurred in the prior year in our UK business. So we saw premises costs decreasing in the period as well as personnel cost decreasing by around 9.5% in the period as we tightly managed head count across the businesses given the economic background that we are experiencing. From an overall ECL perspective if you look at this chart in the periods March 2016, 2017 and 2018 we did have a high level of ECLs passed on our legacy book. And there is a non-repeat of those moving into March 2019 and March 2020 as we incorporated the remaining book which is really at an insignificant book compared to the

• verall book. Overall ECLs increasing by some £67 million to about £133 million in the period. And as we’ve

highlighted, the overall credit ratio is increasing from 31 basis points to 52 basis points. Now, had the world been through a period where COVID had not entered and we had the same economic background that we had

• ver the last financial year just prior to the effects coming in the last quarter, we would have expected our

credit loss ratio to be at around about 28 basis points in the period. Well over 90% of our portfolio resides in the stage 1 category. Just to highlight, stage 1 is your performing book. Stage 2 is where you’ve identified a significant increase in credit risk, and stage 3 is your default book. So we’ve got a high degree of our book continuing to reside in stage 1, but we’ve increased our credit loss ratio such that the coverage of that book has increased from about 20 basis points to 40 basis points as we anticipated deterioration in the quality of the book as we flow through the passage of time. I think let’s go on to the next couple of slides where you can get some detail.

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In the UK in the first half we reported a credit loss ratio of 28 basis points, and that in the second half has significantly increased to 97 basis points. Now, we have guided previously that through the cycle we anticipate credit loss ratios of about 30 to 40 basis points for the group, so we are operating currently outside of those given the vast deterioration that we have seen over the recent while. And that 97 basis points represents about 41 basis points of normalised ECL, 15 bas is points associated with stage 3 or default clients, and 41 basis points associated with the pick-up in coverage based on the overlays that we have put into our modelling taking into account the COVID environment. And that gives you a blended credit loss ratio of 69 basis points in the period. From an SA credit loss perspective we reported an 18 basis point loss in the first half of the year and in the second half we would have anticipated around a 25 basis point level. However, taking into account COVID and the economic scenarios that we have plugged in, an increase of 30 basis points resulting in a second half charge

• f 55 basis points for the period and a blended charge for the year of 36 basis points.

I’ve highlighted before the mix of our book between stage 1, stage 2 and stage 3, and really what this next slide provides for you is a view of our balance sheet provisions where you can see a significant increase in our stage 1 provisioning in both South Africa and the UK with South Africa increasing from about R538 million to just over R1 billion and the UK increasing from £14 million to £37 million. We have seen a blend of movements in our stage 2 and stage 3 provisions, and that’s really driven by asset quality migrations in the period between the different stages. Again highlighting that our stage 2 book in the UK accounts for around 5.1% of our book, and

• ur stage 3 book about 2.3% of our book with the rest represented in stage 1. And in South Africa similarly

about 5.3% of our book is in stage 2 and 1.5% of the book is in stage 3 and the rest represented in stage 1. I think it’s also worth reflecting on the nature of our loan book. And what this next section tries to present to you is our analysis of where we believe we do have exposure to vulnerable sectors. As you can see from the

• verall book in the UK of about £12 billion we have indicated that we’ve got about 4% of the book exposed to

aviation, 1.7% of the book exposed to other transport, 1.5% of the book exposed to retail, hotel and leisure properties, 0.9% in leisure entertainment and tourism, 0.9% in retailers, and about 5% in other sectors within what we would refer to as small ticket finance. Now, at the end of the year we have closely analysed these

• exposures. I think within these exposures they are diversified types of exposures as well as diversified levels of

collateral against the book. And we will continue to closely monitor the outcome across these particular areas, but we have really closely analysed it in terms of the positioning for year-end March 2020. In South Africa similarly we have split out our book in South Africa of our total R292.2 billion portfolio. We have about 1.5% of the portfolio in aviation which amounts to R4.4 billion, 1% in automotive, 0.4% in hotel and leisure, 1.5% in leisure entertainment and tourism, and 0.8% in discretionary retail exposures, and 1.5% against trade finance. I think it’s also important to note that the businesses have remained active and very close to our clients over this period. And to the extent that we have identified that clients needed assistance we have remained extremely active over the period. Now getting on to ROE. I did report that our ROE was 8.3% and about 2.5% impact of COVID in the period, and that is split out with an ROE of 10.7% in South Africa and 6% in the UK business. In South Africa the specialist bank’s ROE was at about 12%, around 14.5% pre-COVID. And the South African group investment portfolio

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generated an ROE of 2.9%. Now, what is that South African group investment portfolio? That really represents

• ur investment in Ninety One. And in South Africa we hold about an 8.4% interest in Ninety One and we

effectively carry these positions across South Africa and the UK as associates and have therefore not taken into account the subsequent positive market movement. We switched Ninety One, our 25% holding that we have across the group, into an associate holding and effectively equity accounted income for the last two weeks of the month of March which has brought in about £4 million of income in these numbers, so fairly insignificant. So that’s the one asset. The second is our investment in IEP, and that represents just over a 47% interest in that platform. And in the period we did raise an impairment against our carrying value of IEP effectively reducing our goodwill that existed in our carrying value. And the portfolio is represented by businesses that I think have got a good representation across the South African platform particularly around chemical and industrial services clusters as well as an investment in the life business. We also include our investment in Investec Property Fund. The group holds an investment of just 24% and we consolidate our investment in the Property Fund, as well as from a group perspective an investment of just under 9% in the Investec Australia Property Fund which excludes the investment held in the Investec Property Fund. So that portfolio in this period generated an ROE of 2.9%. And I think world over any portfolio of that nature will generate an ROE at that level given the current market and valuation principles applied across the group. From a UK perspective the bank generated an ROE of 6.2%. We had highlighted to you that we were tracking the impact of the banking proposition which we had indicated to you at CMD we anticipate to have reached breakeven by about the end of 2022. And currently that has an impact of about 1.5% on the overall ROE of the UK bank, so excluding the banking proposition the ROE is at 7.7%. Now, the bank did benefit from a tax settlement in the current period of about £18 million release in provisions that were held. And if you had to isolate that out of the numbers I think we would be closer to about the 5.5% mark. The UK group investment really represent our 16.6% holding in Ninety One in the UK, and that’s really the return for the two week period weighted for the period return and an ROE of about 8.4% for the period. The wealth businesses across South Africa and the UK are generating high ROEs and I think on the next slide we provide you with details on our return on tangible equity where you can see the most material impact is in our UK wealth basis where the ROE on a tangible basis is at 60%. And the intangible is really arising from our historical sale of Carr Shepherds and repurchase of Rensburg Shepherds over the period. So overall ROE or return on tangible equity is coming in at 9.2%. One more slide that I have forgotten that I had to present. Let’s bring this picture together in terms of capital and liquidity. The leverage ratios as we said across the group are relatively strong with the UK leverage ratio at 7.8%. South Africa did see a decrease in the leverage ratio from 7.4% to 6.4%. It’s a perverse thing because that’s actually arising from prudence being applied on the balance sheet. We’ve had higher cash and near cash positions, and in particular we increased our cash placements with the central bank from R10 billion to R30 billion, and perversely that has a negative impact on leverage. Had we been a US regulated entity you would actually have seen that stripped out.

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Secondly, we had a negative impact on our HQLA, which is our high quality liquid asset portfolio, due to the widening of credit spreads that took place in March. And we carry that portfolio at fair value as well as our remaining credit investment portfolio. And with the widening of credit spreads there was about an 85 basis point impact on the capital ratio as well as the leverage ratio. Now a fair amount that has actually come back as credit spreads have normalised up to this period in time. The overall capital ratio for the Plc is coming in at 10.7% and 10.9% in South Africa. For those of you who had followed the circular you would have anticipated for that ratio to be probably between 50 and 60 basis points higher. And that’s really as a result of us holding on to the full 25% investment which we assessed and are very comfortable to hold on to given our capital ratios. So overall we are comfortable with our capital ratios. And I think one more point to note is that in South Africa when we adopted FIRB at the end of March there was an increase in the capital ratio of about 1.1%. We continue on the path to adopting ARB. We have submitted our applications to the regulators. That is subject to review and acceptance by the regulators, which does take time as there are multiple models that go into these

• calculations. But based on the models that we’ve run for the last couple of years our current quantification is

about a 2% increase in the overall CET1 ratio. So when you compare it to market we’re operating at close to 13% in South Africa on an ARB basis. Cash and near cash has remained elevated at about £12.7 billion at the end of the year. And we continue to manage liquidity on a heightened level across the group, and the depth of liquidity including Dollar funding across our South African balance sheet. Advances as a percentage of customer deposits is at about 76.3%. So thank you, and I think that’s really a summary of the numbers. Fani, I now hand back to you. Fani Titi Thank you Nishlan. That was quite comprehensive. Nishlan normally takes about 15 minutes or so for these types of presentations. Given the unusual and unprecedented economic and market conditions we’re in we thought to give you a lot of detail and also be transparent around the quality of our book. We believe that when

• ur shareholders and analysts understand the detail they will come to a conclusion that we have provided

particularly prudently. Thanks, Nishlan, for that level of detail. Nishlan also went into the detail of our franchises. I hope out of his presentation you will agree that these franchises are particularly strong, both Private Banking, Corporate Banking, Wealth & Investment businesses in the UK and SA. Nishlan also covered in some detail the impact of COVID on the numbers including a breakdown of the exact impact on trading and investment income and also on ECL. So thank you for the great work, Nishlan. And lastly, Nishlan covered capital and liquidity which in a market like this is really important. So while you took about twice the time you normally take I think it was worth doing at this time. So, if I may get into the closing stretch, let me take just a few moments to remind you of what Investec is today post the demerger of Ninety One. We are a client-centric business, relationship focussed, offering high touch service that is supported by advanced digitalised technology, what we at Investec colloquially call high touch and high tech. Our high service culture is underpinned by an approach that is refreshingly human. You will see when you get any communication from us we continue to remind you that you can relate with us at a human level and that we understand you, we get you, we are empathetic and we offer true partnering. You will have seen our campaigns around ‘Partner with Investec’ as you can see the back ground that I have.

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We thrive by being more nimble and more innovative than our competitors. We specialise. As you know we are in two specific home geographies, the one being South Africa and the other being the UK and allied territories. And we also focus on market niches where we can differentiate and add value to clients. So we are not all things to all people. We are specialised. We have a strong culture, one that is entrepreneurial and gets the best out of

• ur passionate and talented people. This culture is carefully nurtured by our experienced leadership teams.

These distinctive attributes combine powerfully to form the brand that is Investec. I’m sure as you go around the markets where we operate you can see the prancing zebra on some billboards. This iconic brand has been built and honed over four decades and really encapsulates the ethos of who we are as a business. And finally, everything we do needs to be sustainable. If we get all these things right then we will create a better, more valuable business and shareholders and stakeholders will get their due returns over time. The next slide which you are looking at at the moment shows more precisely our target lines and niche specialisations. I will not elaborate any further on that. Now let’s move to sustainability. Approach to business is framed by our belief that everything we do has to have a long-term effect. And we are minded to be long term in everything that we undertake. We believe we can leverage the power of capital and the spirit of enterprise to contribute meaningfully to building a better world. As we like to say at Investec, we live in society, not off it. We do well and better when our stakeholders benefit from what we do. So sustainability is core to what we do and it informs how we conduct our business and engage with our stakeholders. In this reporting period, as you can see

• n the slide, we have made significant progress in codifying our policies and measuring our impact, both

negative and positive, on different metrics including on the planet. Not only is sustainable business practise the right thing to do, it also creates substantial business opportunities for us. The COVID-19 crisis has shown a very sharp light on inequality in our societies. You have seen the level of suffering as a consequence of COVID-19. As I indicated earlier, we responded particularly swiftly and with great

• impact. So the need for an inclusive economic era even as we look to restart the economies post COVID could

not be greater. We will continue to walk the talk at Investec. And I will flip to the next slide to show you what we have been able to achieve as we walk the sustainability journey. Again I do not intend to cover this slide in detail. The results we have presented today are necessarily largely backward looking as you would expect of financial results for a year. I would now like to pivot slightly to addressing our approach to the future. You can see on the slide how we have tried to frame our thinking. In the short term we have to deal with the challenges that COVID- 19 presents to us. I look at it in three steps specifically. Firstly we look at our immediate focus, and that remains

• n balance sheet strength, ensuring we manage capital and liquidity rigorously and prudently, cost control,

being laser focussed on excess cost in the business, being there for our people, making sure that they have what they need to do their jobs and to support our client, and in turn society at large. This is something that my senior team and I are very focussed on. The wellbeing and health of our staff is right at the top of our agenda. Monitoring our credit exposure in this period is quite key, which means doing thorough stress testing and modelling as the economic environment changes while working very closely with our clients to manage risk. Secondly, in the near term our attention will turn to reintegrating our people into the workplace from home. As I

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said earlier, Richard is attending a meeting called by the President where these issues of reopening the economy are under discussion. So this will be a focus for us in the near term. We will continue to support our clients to deal with the effects of the crisis. We will remain vigilant to spot opportunities in this dislocated world. Some of you may have seen an announcement yesterday where we have helped a client of ours to raise capital at a pretty substantial level. So we remain vigilant to spot opportunities for ourselves and for our clients. And lastly, we will continue to invest in our people and platforms to position ourselves ready to support our clients in the long term and to capture the opportunities that the future inevitably holds. In the months to come we will hopefully get more certainty on the development of the COVID-19 crisis, in particular the health side of it and the trajectory of the economy. As of today it is simply too early to accurately judge the economic outcome for this year or the next couple of years. While our ambition remains undimmed and the strategy we are pursuing is clear and unchanged, we may well be forced to revisit the targets we set ourselves in the light of the

• utlook once things stabilise. I think most businesses talk about getting to a new normal and understanding

what that looks like. We will update you on that when we’re in a position to do so, but in the meantime we remain focussed on driving the business forward and on improving financial performance. What do we think lies ahead in the short term? We think the recovery is likely to be protracted, as Nishlan said earlier today. Client activity will likely be muted in this environment of uncertainty. Our net interest income will be impacted by lower interest rates. In fact in most countries you know there is this concept of lower for longer, and in fact in Europe you even have negative interest rates. Credit loss provisions will remain elevated as we saw in the slide that Nishlan presented comparing the first half credit loss charges versus the second half credit loss

• charges. But facing into this environment we will be very disciplined in controlling costs and rigorous in the

management of credit risk. When the revenue outlook is uncertain we have to be able to do as best as we can to control those things that we can control. At all times, by staying close to our clients and remaining focussed on what we do well, we will be positioned to see the opportunities that lie ahead. We are determined to navigate the rough seas. We will keep our periscope above the choppy waters and the waves and we will focus a clear eye on the long term. So, as we conclude, I hope that we have demonstrated to you that our client franchises have been resilient, that we are strongly capitalized and liquid, that we have provided prudently for expected credit losses given the environment, that strategic execution has been strong and substantial, and that we remain poised to capture the long-term opportunities that lie ahead. My colleague, Malcolm Fried, in London in the last day or so reminded me of the motto of our alma mater, Berkeley in California. That motto reads Fiat Lux, which means let there be light. So in a crisis there needs to be a clarity of purpose, a clarity of plans and a resolve to execute and stay the course. Thank you for your attention and support. We are happy to take questions. Again the presentation has been about 20 minutes longer than normal, but we are in unprecedented times so we will take the first questions from the conference call. Operator Thank you. Ladies and gentlemen, if anyone would like to ask a question you’re welcome to press * and then 1

• n your touchtone phone. If you however wish to withdraw the question please press * and then 2 to remove

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yourself from the question queue. If anyone would like to ask a question please press * and then 1. Our first question is from Harry Botha of Avior Capital Markets. Harry Botha Thank you. Morning, Fani and Nishlan. Thank you for the presentation. Just on the provisioning and sensitivity of those provisions to your GDP declines. If we for example had to plug in a GDP decline of -15% how sensitive do you think particularly your stage 1 provisions would be? Then you did speak to the decline in CET1, but could you potentially give us a bit more detail on the Investec Plc excluding the demerger, maybe why the lack of sale affected the CET1 level? I guess my question would be isn’t it fair valued? And then finally just around the profit impact of the Irish branch restructure, why it was so much more severe in H2. Thanks. Nishlan Samujh Harry, in fact in the UK what we did do is we developed a COVID short and a COVID long scenario. And we did take into account potential for a deeper recession in the period, but weighted that much more to the short period at about 75 basis points. What we did find in the scenarios is a deeper GDP with a sharper recovery actually didn’t have a material impact on the overall expected loss. But obviously if you had to protract it at a much deeper level then I think you will see a continuation of our second half provision levels into the new year. On your second question in terms of capital firstly I would like to reiterate that we actually measure capital on a standardised basis. And our actual risk weight density to total assets is at a much higher level than any of the

• ther ARB measured banks. So we believe that the capital measure is relatively conservative. So that’s just one
• point. The impact of the demerger did have about a 58 basis point positive impact on the UK capital ratio and

about 40 basis points in South Africa. And that was on the basis that we hold the remaining 25% in Ninety One. We remain relatively comfortable. Now, if you were to sell down the position you will probably get an additional 30 to 40 basis point improvement on the capital ratio, so not that material from an overall capital position. Fani Titi Nishlan, at the time of the listing where we had a floor price of 190, if we panicked into selling our piece of Ninety One we probably would have had to sell at close to 160. So as I said earlier in the remarks, we are value

• conscious. We didn’t panic. I held on to the stake and as you know Ninety One is trading much better. It’s a

quality business. And we’re happy that we made the decision that we did. Just talking to your question, Harry,

• n the increase in write-downs in the restructured Irish business, I did indicate in my earlier remarks that we

disclosed previously that there is a legacy matter that is under investigation. And we have provided what we believe is prudent and adequate for that potential outcome, and given that the investigation is live we wouldn’t want to disclose any more detail so that we do not prejudice the position of the business. So I hope you understand that the matter is legally privileged, ongoing. We have provided adequately and we wouldn’t really want to talk much further on it at this stage. Harry Botha Thank you. Maybe going back to the CET1 and Investec Plc, I understand that Ninety One is above the deduction threshold, so why this change in terms of the impact of the demerger versus the previous guidance in the preparation document?

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Nishlan Samujh The guidance was miscalibrated. The guidance was at about 1.2% increase in the capital ratio. We have now indicated that it has been about 58 basis points. And remember that at the time when we produced the circular we had utilised a price of about £2.05 and the reduction is really driven by a lower price that has been applied. We took on the investment at around a price of about £1.47 recording it at the 16th March in our books. Fani Titi Thanks Nish. I hope it’s clear, Harry. Harry Botha Thank you. Operator Ladies and gentlemen, just a reminder, if anyone else would like to ask a question you’re welcome to press * then 1. It seems we have no further questions on the conference call at the moment. Fani Titi Shall we go to the webcast then? Tash, we are struggling to hear you. Is the mic on? Tash de Saldanha Can you hear me now? Fani Titi Yes. Tash de Saldanha Okay, fine. This is from Banki, Bank of America. The first one is: What are your assumptions in the GDP recovery

• n 2021 and do you see the rate of provisions staying elevated in 2021?

Nishlan Samujh If I take that question, Banki, with these results we have issued a detailed analyst booklet. So I think there are about three pages dedicated with the absolute detail that you’re looking for, and I would refer you to that

• detail. But to reiterate, we did indicate that it will probably take about three years for there to be a recovery to

levels pre the crisis. And some of that also extended in the stress scenarios that we had applied. Fani Titi I think on the issue of our expectation of the economy the basic fact is that we’ve made certain assumptions. We’ve been quite explicit about what those assumptions are. But the future is so uncertain that we really do not know what will happen. In fact, two or three days ago Jay Powell of the Fed said exactly the same, that his guess is as good as anyone’s. If the Chairman of the Fed tells you that he really doesn’t know what is likely to occur because the economic malaise is linked to a health crisis, if as an example you do get a vaccine over the next six

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to 12 months the prognosis for a recovery may well be very different. Even with that I think the impact on individuals, their psychology and mental wellbeing is likely to be such that you will not get back to the old

• normal. Even if there’s a vaccine I suppose I will take a lot more time to be comfortable to go into a restaurant, a

stadium to watch a game. And every time I hop onto an aeroplane I’m sure that my family will be a bit nervous. So we don’t know how long it will take. We’ve given you assumptions and there is a lot of detail in the book. And all of us have different assumptions. Tash de Saldanha The second question is also from Banki. He wants to know can you unpack the £45 million impairment of IEP and how you see your other equity investments being unwound in this environment. Nishlan Samujh Firstly let’s deal with the impairment. That translated to about R937 million against what was a carrying value of just over R6.5 billion. And we’ve reduced the carrying value to about R5.6 billion. Now, inherent in our carrying value there was goodwill of about R680 million and we took the view that given the compressed revenue environment in the short term it was opportunistic for us to effectively rebalance the carrying value. I think what’s worth noting is that write-off has had a zero impact on capital because we effectively haircut the investment by about R2.4 billion prior to this particular haircut. And there still remains a significant capital haircut so there is capital protection around the investment. With regard to the rest of our investment portfolio at the end of the day we look to realise these assets for

• value. I think we’ve always got to be cognisant of opportunity costs around carrying investments. But we believe

that there are always opportunities at the right timing with the right partners and at no stage are we looking at any forced sale requirements. And we are quite comfortable with the carrying of these assets on our balance sheet, albeit we have a very clearly stated mandate that we want to reduce the investment portfolio in South Africa, including all the assets that we have in our franchise businesses. There is around R23 billion which includes our investment in Ninety One, our trading property portfolio as well as our investments across these assets that I have described. And our desire is to decrease that portfolio to probably closer to R15 billion to R16 billion subject to balance sheet growth over the period. So it’s really a risk appetite debate that we have internally and overall we’re quite comfortable with the capital position and the returns that we have on these assets in the shorter to medium term. Fani Titi Strategic intention around the reduction of that portfolio remains quite clear. But this is not a season to be dumping assets, as we demonstrated with Ninety One in March when the season wasn’t right. We held on to it. So we are disciplined on value. In the right season we will do what is right with respect to the investment portfolio that Nishlan spoke about. Tash de Saldanha The next one is also from Banki. He wants to know how much is left in the Hong Kong direct investments business.

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Nishlan Samujh We’ve got two conflicting disclosures. So it’s either £26 million or £34 million. I think it’s £34 million. The asset that carried risk has now been fully written off. At the end of the day the remaining portfolio if you look at the level 3 disclosures that we’ve provided we provide a range of downside of about £8 million and upside of probably around £3 million. Tash de Saldanha The next one is from Douglas Wallace, Visio Capital. He says I would like to clarify your comments on the watch

• list. You have mentioned the vulnerable sectors you are monitoring more closely. Could you also quantify your

exposure to SMEs in the UK and SA? What proportion of these clients have sought payment holidays, and what was their performing status at year end, and how has that evolved post year end? Nishlan Samujh I think again what’s relevant is firstly I wouldn’t call it a watch list. We have disclosed to you what is common market practise to indicate our exposures to vulnerable sectors. I think if you’re looking for watch list detail look at our stage 2 and stage 3 disclosures that we have provided in the booklet. In terms of relief that has been provided, I think in the UK it amounts to 0.8% of the book. And there has been quite a decent coverage across the client portfolio, but that is relatively spread. And in South Africa I think again relief of about 0.7% of the book amounting to about 20% of the overall book size in terms of clients that we have interacted with. I think that’s about 3,500 clients. And we will remain active with our client base as we go through, but we have seen a slowdown in some of that activity. Fani Titi It’s really important to understand that the disclosure is for purposes of transparency. As I said we believe we have provided prudently. We are also being very transparent so that you have a sense of those sectors like hotels, hospitality and certain retail type property that you may be worried about, so that you know exactly what our exposures are. As Nishlan says, it doesn’t mean that these are on the watch list. The relief provided at the moment is fairly low. And if you look at South Africa and the UK these markets are very different. In the UK you have substantial support from the government there in terms of support to the economy to kick-start it. In South Africa we know our fiscal space is relatively limited, so the support that you have is lower. So you have to think about these things very differently for each of these economies. I’m going to ask that we try wrap it up in the next five minutes or so. Nishlan and myself have an engagement in a few minutes. I’m sorry it has taken us a bit long to go through the detail that we have gone through. If there are questions after these five minutes we will be able to take them privately. Tash de Saldanha Are you going to take one more question? Fani Titi Yeah, let’s take one more question.

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Tash de Saldanha It’s from Graham Bell. He says please say more about your exposure to the aviation sector, e.g. with regard to the collateral and ongoing assistance, and is there any government support? Fani Titi Nishlan, the last one is for you. Nishlan Samujh Is it? I was pointing to you. I think in the presentation we’ve provided the actual quantum of exposure. I think in the UK it was £400 million. I think we do have a spread of exposure across the portfolio. A large portion of the book is actually supported by significant government entities behind those businesses. And again some of these exposures are not direct exposures. So to some extent it could be to leasing houses as well as to large airlines with government support behind it. I think that pretty much covers it. Fani Titi Ladies and gentlemen, that’s it for today. I hope you were able to get a sense of how we look at the business, the current crisis, and what work we have done to understand its impact on our business, and that we remain prepared for building the business in the long term, and that in the short term we have taken significant pain to make sure that we can take the business forward with confidence. The outlook as we said is uncertain and we will continue to monitor it. Thank you for your support. Thank you, and please stay safe. END OF TRANSCRIPT