Good day, ladies and gentlemen, and welcome to the Investec pre close trading update. All participants will be in listen only mode. There will be an opportunity to ask questions later during the conference. Please note that this call is being recorded. I would now like to turn the conference over to Sunny Titti, Chief Executive of the Investec Group.
Please go ahead.
Ladies and gentlemen, good morning and welcome. Thank you all for taking the time to join us on this call to discuss our fleetless trading update, which covers the continuing operations for the 11 months ended 28 February 2021 and guidance for our full year results. Please note that our full year results for the 12 months ending 31st March will be announced on the 21st May. We'll take a few minutes to talk through the key highlights from our trading update and we'll then take some questions. 1st, a few general comments on the operating environment and the overall performance.
Despite further lockdowns globally during the period under review, The actions taken by governments and central banks have continued to support economies and financial markets. We are encouraged by the momentum we are seeing across our business, the continued recovery of markets and the positive developments related to COVID-nineteen Vaccines. We expect the group's operating results for the year ending March 2021 To be in line with the guidance released in our interim results in November 2020, Adjusted earnings per share from continuing operations is expected to be 20% to 29% behind the prior year. A table containing full details of our earnings guidance for financial year 2021 can be found on page 2 of today's trading statement. Year on year, our performance has been negatively impacted by lower interest rates, elevated costs Related to the hedging of our U.
K. Structured products book as guided in November, reduced client activity over the period and circa 14 Depreciation of the average rent against pound sterling. This was offset by lower expected credit losses And continued cost containment. Our expected performance also demonstrates the strength of our underlying client franchises, The continued execution of our strategic objectives and the resilience of our people in what has been an unprecedented year. In terms of the momentum I mentioned, second half adjusted operating profit and earnings are expected to be ahead of comparable numbers reported in the first half of the financial year, reflecting an improving trend, particularly in the last quarter.
Now I move on to for initial performance in more detail. In terms of the underlying performance over the 11 months to 28 Feb, 3rd party funds under management increased by 26.7 percent to 57,000,000,000 £1,000,000,000 with net inflows of just under £1,000,000,000 Co loans increased 5.5 percent to 26.3 £1,000,000,000 while deposits were up 5.9 percent to £34,100,000,000 Turning to operating income. The expected revenue decline in FY 2021 reflects an environment still marked by the crisis that prevailed throughout the financial year. Risk management and risk reduction costs related to the hedging of the U. K.
Structured public book Are expected to be in line with the guidance provided at our September interim results. In the second half relative to the first half, revenue benefited from improved client activity and liability repricing. Operating costs for the full year are expected to be lower than last year by mid single digits And these costs include costs associated with the implementation of strategic initiatives taken during the period under review. On asset quality, the group expects to report a lower credit impairment charge in the second half compared to the first half, resulting in a full year focused credit loss ratio of between 37 and 44 basis points. Capital leverage and liquidity ratios remain sound and ahead of internal board approved minimum targets and regulatory requirements.
The group's cash and near cash on the 28th February was at 13.9 £1,000,000,000 representing approximately 41% of customer deposit. Turning to the geographic performance of the business in Southern Africa. Adjusted operating profit from continuing operations Is expected to be 16% to 24% behind in pound sterling. Financial year 2020, that number was GBP286,000,000 And in rent terms, Adjusted operating profit from continuing operations is expected to be 4% to 12% Behind that number in rands was €5,300,000,000 last year. In the U.
K. And other, Adjusted operating profit from continuing operations is expected to be 15% to 26% behind the prior year Number of £133,500,000 Finally, on the dividend. Investec paid an interim dividend of 5.5p at the half year and a final dividend will be considered as part of the normal board process leading up to the full year results on the 21st May 2021. In summary, the group's operating results for the year ending 31st March 2021 are expected to be in line with guidance, Including the hedging costs related to our U. K.
Structured product book, our underlying performance demonstrates the strength and resilience of our client franchises. We anticipate lower expected credit losses year on year and costs remain well contained. While the general outlook is improving, The long term impact of the pandemic is uncertain. Investec remains well capitalized, highly liquid and well provisioned for impairments. With the simplification of the group now substantially complete, We are positioned to pursue long term growth.
Thank you for joining the call. I would now like to open the line for questions.
Thank you. We will pause a moment for the queue to hold. We have a question from John Storey of JPMorgan.
Good morning, Pani. Thanks very much for the detail in your prepared remarks there.
I wonder if you could A little bit more color just around the cost performance
of the U. K. Specialist Bank. Is there anything more that you could provide than what was provided in the release this morning would be useful.
Thanks very much.
Hi, it's Nishlan. I think what is quite relevant from a UK Specialist Bank perspective is the fact that we have Obviously, been through a period of implementing some of the strategic actions. So in this period, some of the costs Associated with implementation are going to be carried in the cost base. So the benefits are really going to be reflected into our 2022 Financial, yes. Now having said that, notwithstanding those particular costs, we've indicated that overall our Cost base will be down in sort of mid single digits and that's represented across both the South African and the U.
K. Platform.
I mean obviously when we announce our results. Okay.
Thanks very much.
We will go into more detail And disclose what the associated costs to the restructure are and how they impacted the number that we're talking about.
Excellent. Thanks very much, Fani.
Thanks, Ja.
Our next is from David Talbot of Avior Capital Markets.
Good day. Just thanks for the Just a question around the stream losses in the UK. Just wanted to know, can you check more about how the proposed and So maybe improving U. K. Equity markets would help that unwind slightly quicker than previously the other 2.
Yes. Thanks, David. You're right that improving equity markets are positive For this business, just to remind you, we have the cost of ongoing Day to day hedging and we have costs related to Taking off risk from the table, specifically selling portions of the book. So the cost of managing the book on a day to day basis in terms of hedging, those costs are obviously moderating As markets improve, but we specifically are continuing to sell portions of the book. So the cost reduction element of the total cost would obviously still be there and therefore The overall costs are in line with guidance.
So whenever there is an opportunity to reduce The book, we will, please.
Thank you.
Our next question is from Chris Stewart of 91.
Good morning, gentlemen, and thanks Very much for your time this morning. Just a quick question from my side, probably one for Nish. Can you just comment on the fairly dramatic uptick in the tax rate in the second half? What's Describing that and what the indications are before the same tax rate is supposed to be?
Yes. So Hi, Chris, and thanks for the question. It's again pretty much associated with our actions in Australia where we did have some deferred That's assets that we've revised our outlook on, which has caused a pickup in the effective tax rate.
Would that imply that the effective tax rate you're showing for the full year is the sort of effective tax rate you would expect Is the sustainable rate going forward? Or will the elevated second half tax charge is more indicative of the ongoing run rate?
No, I would say that the elevation in this period was caused much more by a once off event. Obviously, noting that you do have corporate tax rates going up in 23% in the UK As was announced. And in South Africa, you have a slight decrease by 1% also coming into effect in 2023. So those will Blend in to the forward look tax rate.
Okay. So we shouldn't necessarily use the 2021 full year or H2 tax rate At relatively elevated levels, it's necessarily the pre tax dispensation change in 2 geographies rates going forward.
Yes. I think previously we guided to a sort of a normalized tax rate of about 19% to 20%.
Got you. Thanks,
Chris. The next question is from James
Stark of SBG Securities.
Good morning, gentlemen. Thank you for the opportunity. If you could just give us some color around the asset quality trend you see in your real estate In particular, on the commercial property side and then also on the mortgage book within the private bank? Thank you.
Sure. I think overall, I would say that the asset quality trends have been relatively pleasing. I think particularly when you look at some of the relief levels being provided and those are at relatively low levels in both the South African and the U. K. Book.
Overall, loan to value levels and collateral positions Have also remained relatively strong over the period and repayment rates. We have seen Maybe 1 or 2 migrations into Stage 2 or Stage 3, but nothing symptomatic from an asset quality perspective. If I look at our private our mortgage lending book, I think over history, we've tended to have a fairly low Loss rate and in particular the book in the U. K. I think over history has been around about 4 to 5 basis points.
And we haven't seen any change to those long term trends.
Thank you.
Our next question is from Michael Christie of Anker Capital.
Good morning, Fani and Michelin. Can you hear me okay?
Yes, loud and clear. Please go ahead.
Thanks for the opportunity guys. Just a couple from me. I just wanted to clarify The way you guys are seeing these losses relating to that structured lending book in the UK, My previous recollection was you were looking at a similar loss in the second half, which was about GBP 100,000,000 and then potentially Slightly smaller, but not much in the next year. Fani, your comments would suggest that maybe that's looking Less sizable than it used to. So if
you could just be a little
bit clearer on A, is my recollection correct? And B, How are you seeing it now? Next question is, have you made any progress in these more supportive markets in the second half and getting rid of any of that private equities Non core assets that you had. And then the last question, just the big outflows In discretionary AUM in South Africa versus inflows in nondiscretionary, that was quite interesting.
No, no, it's actually the opposite. Sorry. Could you sorry, got it through. Could you
just check a bit about that?
Okay. Let me take
the first question just to give you clarity.
We had guided To approximately £106,000,000 of losses relating to the hedging of that book For the full year being 53 in the first half and a similar number in the second half, we had also said But we will expect a similar number for the full year March 20 22. So that was the guidance we gave. And what we are saying now is while we have Benefited from improving markets on the ongoing cost of management of the book. We have had the opportunity to Take off risk as we go forward. So while the overall Guidance for the financial year 2021 is the same.
The proportion of where that money has been spent is different. Lower ongoing management costs Versus slightly higher risk reduction costs. Clearly, as markets improve, Our position in that book should improve, but I don't want to speculate at this stage. We will give you more color of our expectations when we report our results. But your general understanding of how the book Should behave broadly in line.
The second question related to flows. Nish, do you want to deal with flows?
Yes. I think, Michael, again, it's very important to note that we actually saw very strong flows into our discretionary portfolios In both South Africa and the U. K. I think in South Africa it's just under ZAR7 1,000,000,000 offloads into the discretionary portfolio. Now the non discretionary is it is effectively directly managed by clients as they Effectively react to various aspects.
We're not concerned about The level of change that was seen on that and are holistically focused on the discretionary element. And then your question around progress on the investment portfolio. I would say that over the period, Again, we have seen improving sort of trends of late in this sort of last quarter of this financial year. Our intention is not to offload any of these assets. Our intention is to work through the portfolio with an Folio with an intention to effectively realize value because these are and remain high quality asset portfolios.
We have had Some success in terms of realizations and we'll report those levels in the results and also remain quite encouraged With where markets are headed to.
Great. Thanks very much guys.
We have a question from Neil Young of Coronation.
Hi. Thanks very much for the update. Just a definite question. Hi, guys. Forniston, just to confirm, the adjusted operating profit should stay down 16% to 24%.
That would exclude the 25% holding in 'ninety one, is that correct, in both periods?
No, Neil. I think It excludes the full results of Asset Management in the prior year. We would have equity accounted at least at €91,000,000 from the 16th March To the end of last year, I think that number was about £1,400,000 last year. And this period will include Equity accounted income of €91,000,000 on the 25%. For the full year?
Correct. For the full year, correct.
And that is included in both the adjusted operating profit number as well as the adjusted earnings per share from continuing operations
Yes. That's correct. Yes. Okay. All right.
Okay. Understood. Thanks.
And since we have no further questions on the line, sir, would you like to make any closing comments?
Again, just to thank everyone for their interest in the business and for attending this briefing. As usual, If there are follow-up questions, please contact our team and we will deal with the questions raised. Equally, if you want to talk to any of our other executives on any part of the business, please let us know and we can facilitate that. Thank you again and good day to you.
Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.