Good day, ladies and gentlemen, and welcome to the Investec pre-close conference call. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing star then zero. Please note that this call is being recorded. I would now like to hand the conference over to Fani Titi, the Group Chief Executive. Please go ahead, sir.
Thank you, Irene, for the introduction. Good morning, ladies and gentlemen. I am joined this morning by Nishlan Samujh, the Group Finance Director, and a number of our executives are also on the call. Thank you all for taking the time to join us on this call to discuss our year-end pre-close trading update, which covers the 11 months ended on the 28th of February. Our full year results for the 12 months ending on the 31st of March will be announced on the 19th of May. It has been a positive trading period for Investec. However, we are mindful of the impact the ongoing tensions between Russia and Ukraine may have on global economies and financial markets. Our thoughts are with the people of Ukraine and the region, many of whom have been forced to flee their country and their homes.
From an exposure perspective, the group has no material direct or indirect exposure to Russia or Ukraine. We are spending a lot of time talking to all our clients about the short, medium, and long-term ramifications of this crisis. Our risk teams continue to monitor any potential impact and are working closely with regulators and industry bodies to ensure compliance in this fast-moving situation. Now turning to the results. The momentum we experienced in the first half of the year continued into the second half, and we have seen the benefits of continued strategic execution and post-pandemic economic recovery. Consequently, the group operating performance has surpassed the pre-COVID comparative period. Pre-provision adjusted operating profit increased over the period, supported by continued client acquisition across geographies, growth in funds under management, and the higher average advances.
Overall, underlying performance was driven by continued growth in revenue underpinned by increased client activity and lower funding costs, lower expected credit losses due to limited default experience, and well-contained costs. We are pleased to update our adjusted earnings per share guidance to between 51 and 55 pence, up from the 48-53 pence range that we previously guided in November 2021. Accordingly, we expect adjusted earnings per share to be between 76% and 90% ahead of the prior year. To conclude, we are clearly operating in another period of uncertainty, and the full impact from the war and sanctions remain unknown. The recovery in the group's performance underscores the resilience of our client franchises. Our strong capital and liquidity levels leave us well positioned to pursue our identified growth opportunities and to navigate the unfolding economic uncertainty.
Regarding the distribution of Ninety One shares, we refer shareholders to the circular published this morning with all the relevant details. Thank you for joining the call. I would now like to open the line for questions, but please bear in mind that this is a trading update and not a full year announcement, so there is only so much detail we can provide at this stage. Of course, in May, we can go fully into all the details of the results. Thank you.
Thank you. Ladies and gentlemen, if anyone would like to ask a question, you're welcome to press star and then one on your touchtone phone or on the keypad on your screen. If you however wish to withdraw the question, you may press star and then two to remove yourself from the question queue. If anyone would like to ask a question, you're welcome to press star and then one. We will pause a moment to see if we have any questions. We have a question from Stephan Potgieter of UBS. Please go ahead.
Good morning. Thanks very much for the update. Just a question on the cost of risk or credit loss trends. Obviously, in the first half, you had particularly low credit losses, I think in the U.K., as low as seven basis points. You indicate that it remained quite benign. Has it been quite a bit higher than that first half level in the second half, or did it stay as low as that? Just trying to figure out to what extent the performance came from pre-provision operating profit versus credit losses.
Hi, Stephan. It's Nishlan. I would say that, you know, we're dialing towards a very similar sort of level in terms of the first half. To the extent that we had reported recoveries in the first half, I think that those levels are also at similar levels to the first half, maybe slightly ahead. The underlying point is that there isn't any significant momentum in terms of new impairments coming onto the book, and at the same time, we have pretty much retained a degree of level subject to recoveries from a balance sheet perspective.
I'm very lucky in the first half we saw significant growth in pre-provision operating profit. The second benefit obviously comes out of the lower than the previous impairment numbers. Obviously, as we go forward, at the results, we will give you a sense of what we expect normalized impairments would be like for both the U.K. business and the S.A. business. That is business for me.
Thank you.
Our next question is from Chris Steward of Ninety One. Please go ahead.
Good morning, gentlemen. Thank you for what looks like a very solid update. Just two questions from my side. One, perhaps you can just give us a sense of, now that you are firmly in at least a modest rate upcycle in the U.K., what implications that is having for the margins within your U.K. banking operations. Second question, I guess, given the fact that there is potentially a higher inflation on the cards for the U.K. consumer in the immediate term, have you taken any steps, preemptive steps to moderate your risk appetite to grow assets? Or are you still pretty comfortable that the U.K. consumer can deal with whatever's coming at them?
I'm going to ask my colleague, Ruth, who runs the bank in the U.K., to answer the question. As a general response, both in South Africa and the U.K., we service clients generally at the top end of the market on the private banking side. Generally on the corporate side, we have very clear niches that we service. We've seen a high level of resilience through the COVID period, both on the South African side and on the U.K. side. We would expect that we would have a similar level of resilience as we go forward.
Clearly, higher energy costs in the U.K. and now coming through as well in South Africa, given the invasion of Ukraine by Russia and the impact on the prices of commodities, specifically oil, we would see that feed into both economies even much more sharply. The expectation in the U.K., I think from the BOE, is that inflation could go as high as 8%. That obviously will be concerning. Ruth, do you want to go into a bit more details on how you expect your clients to respond or be affected?
Thanks, Fani, and hi, Chris. I think, Fani, you covered that pretty comprehensively in terms of the impact. Just on your first question, Chris, we have seen improving margins as read in the statement. Our cost of funding has been enhanced over this last period, and we continue to see that trend. Clearly, it's early days in terms of the new uncertainty that has come and the prospects for increased inflation. We are, you know, waiting to see how that actually plays out. We haven't actually taken preemptive steps, but are obviously as cautious as always in our credit process in terms of how we approach corporate lending at this time, taking strongly into account these impacts from cost-push inflation, et cetera.
Corporates have become fairly resilient through the COVID period in terms of adaptability to shocks and changes, and have fairly strong balance sheets as a general comment. Of course, we are looking at inflation at levels we haven't seen for many, many years. We do need, you know, to keep a watch on this as we go forward. You know, we'll just watch it closely.
Thanks. I'm not sure if I'm still live. If I am, Ruth, can you maybe just add a comment on the asset side of the balance sheet in the U.K.? I mean, you talked to margin expansion through the liability side of the balance sheet. What's happening in terms of the assets now?
In terms of right now, I think that you are seeing a slight widening in spreads right now. That is very early days in terms of what's going on in terms of the Russian-Ukraine crisis. We need to see where that settles. It is a matter of, you know, wait and see, as I said before. We have seen margins slightly widen, but whether that actually sets in, I don't know. We have been able to maintain lending margins over the period up to now.
Super. Great. Thank you very much.
I think that the question was. Okay. Let's move on.
Ladies and gentlemen, just another reminder, if anyone else would like to ask a question, you're welcome to press star and then one. We will pause a moment to see if we have any further questions. We have a question from Asanda Notshe of Mazi Asset Management. Please go ahead.
Hi there. Can I just check if you can hear me?
Pleased to hear you.
Hi, Asanda. We can hear you loud and clear.
Okay, great. I wanted to check. Thank you very much, by the way, and good morning. I wanted to just ask on the costs, is it fairly assumed that the rise in cost in H2 was, you know, materially higher or closer to, let's say, operating income rise in H2? Because the costs were up, just if I look in H1, roughly, let's say 12%. To kind of get to cost that grows, you know, closer to revenue, is it fair to assume that H2 was then materially higher in terms of the cost growth? Thanks.
Well, firstly, good morning. I think we guided the fact that we are anticipating an improvement in cost-to-income ratio overall. Costs have grown at a lower pace than growth in revenue. Albeit that, variable costs will grow pretty much in line with growth in revenue. Overall costs have grown materially lower than growth in revenue.
Okay, great. Thank you.
Our next question is from Robin Geutink of RJ Risk Management. Please go ahead.
Following on from the questions regarding expected credit losses and impairment levels and risk appetite, obviously all these lead to levels of capital that has to be held by the bank. Does Investec have any plans to reduce capital levels by offsetting some of these impairment levels to the market?
I think the short answer is no. There's no intention to reduce capital levels overall. The capital ratios remain healthy. I think the point that we do make is that we run with significant surplus capital position in South Africa, particularly having transitioned to the advanced AIRB methodology. That's one of the reasons as to, you know, we point to the fact that the ROE in that geography is probably lower than where one would be if you were on a different capital basis. We have announced the distribution of our holding in Ninety One, which is a 15% holding, and to date, that's really the only announcement.
In the period, I think when we get to the year-end results, you will see, how we have managed the overall, number of shares in issue from a group perspective. As you would have seen, we have trended lower in terms of our weighted average number of shares in issue.
I noticed that your corporate book is moving to AIRB. What would the effect of moving to AIRB be on your ratios?
Again, to be specific, that's on the South African balance sheet. We do anticipate between 1.5% and 2% uplift in terms of the CET1 ratio on full migration, but that is still subject to regulatory approval, and that's still subject to finalization from that perspective.
Thank you.
Ladies and gentlemen, just a final reminder, if anyone would like to ask a question, you're welcome to press star and then one. We have a question from Michael Gresty of Anchor Capital. Please go ahead.
Good morning, everyone. Just two from my side, if I may.
Hi, Michael.
First of all, I noticed in the trading update that you said that you had maintained the provision overlays. I was just wondering, what's the logic behind that? I mean, given how conditions have improved, is that something that, you know, by the time the auditors get involved, things could change? I was just, you know, certainly it would suggest the underlying performance has been, you know, of pretty high quality in terms of the guidance you've given. I'm just curious about, given how much things have improved, how you can justify maintaining those overlays. Secondly, has there been any further progress on your thinking about, you know, just optimizing your assets? Obviously we've seen PSG make some interesting announcements recently.
I was wondering whether, you know, in the last six months since we last spoke, whether there's been any sort of major thinking changes on your side around possible optimizations that still lie ahead for Investec.
Yeah. Just starting off with the question on overlays. I mean, clearly, the operating environment appears to have improved quite significantly, and we do refer to that as a basis for some of the improvement in performance in addition to the strategic execution that we have seen. There is still a level of some uncertainty as to whether we will go into the fifth wave in South Africa, specifically. Even in a place like the U.K., where you have seen significant liberalization of the country from a COVID perspective, you still see a level of pickup in infections. Thankfully, we are not seeing a concomitant increase in serious illness and deaths. There is still some uncertainty.
We will review when we get to the final results what needs to change with respect to our attitude towards those overlays. Needless to say, as that level of uncertainty recedes, you have now the impact of the Russian invasion of Ukraine and its impact on oil prices and how that feeds into inflation and potentially how that could affect confidence and demand. It's a pretty complex set of matrices, but we feel comfortable about where we are, both in terms of activity and demand from our clients, provisioning.
We will review those and the implications of the changing economic and financial market landscape when we release our final results. With respect to strategically whether we would like to further optimize our asset base and composition, I just want to remind you that over the last two years or so, with the announcement we have made today, we would have distributed, by the timeline of May, as indicated in the circular, about 70% of Ninety One. What was then a substantial return of value to our shareholders. The one area where we had indicated in the past that we need to do we need to get more progress relates to the reduction in the investment portfolio in South Africa.
Nishlan spoke about a high level of capitalization and the need to optimize our capital in South Africa. If there is any additional work to be done, it will be there. We are already highly capitalized, and with AIRB, as Nishlan indicated, you will have another 1.5%-2% addition to the CET1 ratio. Strategically, we are well-positioned in the bank and wealth space in the U.K. as a bank and provider for the entrepreneurial market and the mid-market corporate market. We are uniquely positioned there with a breadth of services that is not available by some of the competitors.
As an example, on the equity capital market side, you would have the likes of a Numis, but they do not do other things we do. On and so forth. We're comfortable with the composition of the assets that we have, and we have very clear areas of work where we think we can either grow or we can be much more effective in terms of how we serve our clients. We wouldn't expect any substantial reorganization of the asset portfolio at all. Similarly, in South Africa, we are happy about where we play and our competitive strength in the South African market as well as the U.K. market is where we would like it to be.
Okay, great. Thank you, Fani, for those answers. Thank you.
Pleasure.
It seems we have no further questions on the line. I would like to hand back to Fani for any closing comments.
Thank you all again for your time this morning. As we said, this is a trading update. We will have far more fuller detail in May. Needless to say, we are quite encouraged by the continuing progress in our business as we continue to execute on the path we committed to two years ago. Assuming that some of the recovery that we have seen in the economies continue and that the impact of the Russian invasion can be much better understood around May as we go forward, and hopefully there is an end to the war, we will hopefully continue to see a level of continued progress from Investec side. Thank you for your interest.
To the extent you have any further questions, please be in contact with our team. Thank you.
Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.