Welcome everybody. Dave or someone in London, are you guys connected? Yes, you're connected. Right. Then we'll get going.
Okay. Welcome to our end of September 2017 results presentation. I'll just introduce briefly and I'm going to hand out it to our CFO, Nishlan, to talk through the numbers and then I'll come back and talk about the strategy with different divisions. I think we were really in a panic kind of environment over the past 6 months, very difficult macro background, but strong global equity markets and a stronger global economy against a very weak environment in South Africa and a mixed environment in the U. K.
Or Robert regarded as similarly weak. I think overall, if you look at our business, I think we still managed to get quite good funding flows about £3,600,000,000 and both our wealth and asset wealth Management Business and Asset Management Business has benefited? And client activity, Notwithstanding the uncertainty in our 2 core geographies. We have continued as a group to invest for growth And our increasing costs reflect largely planned investment spend and growing our client franchise businesses. We've made further progress on our digital and online innovation enhancements across our group, Which coupled with our high touch client centric service model has further entrenched the strength of our franchises, particularly in our private banking businesses and our wealth management businesses.
Again, geographic and operational diversity continues to support our sustainable recurring income base and earnings through bearing markets. I'm now going to hand you over to Nishlan, who's going to take you through the numbers. And then When he's finished, I'll come back and talk about what's going on in the various businesses. Is this one? Yes.
All right. Good morning, everyone. Just getting rid of the notes very quickly. So in this period, if We look at the summary of our statutory performance. Operating profit has increased to £314,600,000 an increase of 11.8%.
Obviously, the positive rand on the income statement has influenced that number. On a neutral currency basis, it's up 1.1% and we'll unpack the various drivers of that. Just raise the share up to 26.6p in the period and that's the 17.2% growth in the period. The rand is sorry, the dividend has grown by 5% in the period to 10.5p, which translates to about a 12.4% growth in the overall rand dividend that we've declared. If we have to look at splitting this out by effectively our geographical contribution and by our businesses.
From a geographic perspective, the U. K. And European businesses generated effectively 41 percent of the operating profit level, down 5% in the period and that's really driven by lower trading income And investment income offset by some pretty good fundamental growth in the interest margin and fee lines, with Stephen or unpack as he goes through the divisional results. South Africa from a RAN perspective is up 7.9% And that number is significantly higher as you bring in the impact of the rand over the period. From a business perspective, I think you'll see that the Specialist Bank has contributed 62% And the Wealth and the Asset Management business is contributing 38% of contribution, sort of in line with what you would have seen in September 2016.
And again, we'll go through some detail around that. Now let's look at some of the earnings drivers. From a funds under management perspective, as you've seen earlier, there was net inflows of £3.6 £1,000,000,000 in the period, taking those funds under management to £154,300,000,000 in the period. Now that increase has been offset because of the weakness in the rand. So again, just to position it, the rand weakened by about 8% since the last trading update that we delivered to you and that has an impact on some of these fundamental drivers.
Customer accounts on neutral currency up 0.7% in the period to $28,000,000,000 We continue to actively manage Our net liquidity position and the net cash position across the group and core loans increasing by 5.6% on a currency neutral basis in the period to £22,400,000,000 with good growth experienced across our specialist banking businesses. If we look at the key drivers in terms of operating income that is coming at 1.19 £1,000,000,000 in the period. Total operating income increasing by 13.2%. Net interest income 16%, up to £364,400,000 in the period. And again, as we go through the contribution from the you'll see the driving force coming from the good growth in the underlying book.
Net fees and commissions up 9.4 percent to 6 €166,000,000 Investment and associate income, which makes up about 7% of the underlying operating income line, has increased to £85,600,000 That also includes about £23,000,000 of income from the associate line, which is decently up on prior period and is mainly driven by the underlying operating income from the IEP business in platform. Claiming income and customer flows is down 12.7% in the period to £64,200,000 And that's really driven by the fact that at this time last year, you did have a higher level of activity driven off the Brexit sort of base really in the prior year. Now bringing the picture together, I think what you do see is a healthy mix between Capital Life and Capital Intensive Businesses. With Capital Life Revenue coming in at 56% of the total revenue base. And if you look at the net annuity fees at £546,000,000 that contributed 45.8% to the net operating income line.
And 3rd party assets and advisory contributing £672,000,000 versus our sort of capital intensive drivers in net interest investment and associated and trading income contributing £519,000,000 or 44% of the overall base. Okay. In terms of the relationship between operating income and operating expenses, we did see positive jaws in the period with operating income growing by 13 point percent as we've just earlier discussed. And operating costs in the period did grow by 12.9% to £792,500,000 There are some very specific reasons for that. Bidding is higher than what you would see in a normalized environment and And Stephen will unpack that as he gets through the divisional analysis.
In terms of headcount, the Wealth Businesses and the Specialist Banking Businesses continued to grow headcounts in the period, really driven by growth initiatives across the platform. The asset management business actually decreased the account slightly in the period from efficiencies achieved through some automation in the administrative functions. Impairments in the period is up from £18,000,000 to £31,100,000 I think as we've mentioned, we are coming off a relatively low base in the prior period with the credit loss ratio at 19 basis points, Now at around about 28 basis points, which is still more or less at the lower end of our longer range or long term average. Impairments in the legacy book have been more or less in line with the prior year at £28,000,000 And that's driven by an increase in an acceleration of very specific portfolios in that particular portfolio in the current period. So if we had to summarize it from an ongoing perspective, Operating profit at £347,500,000 up 10.5 percent in the period with adjusted earnings per share up at 29.5p or 14.9% in the period.
Think one point to note is that that's a combination of the operating profit as we've discussed and the average tax rate in the period that's coming at about 14.5 Which is usually due to our mix of earnings, but in the period we've also had some tax provision for lease that we no longer require. Total shareholders' equity, down slightly to 4,760,000,000 pounds and that's really driven by the impact of the rand on the closing balance sheet on a currency neutral basis growing by 3.7% And customer accounts and net core loans and advances again mentioning growing by 5.6% on a currency neutral basis to £22,400,000,000 Now if we look at our various financial targets, the ROE is within the 12% to 16% sort of target at 12.5 that's in line with what we saw at March and a bit better than what we see at 716. Adjusted earnings per share growing by 17.2% or 14.8% on an ongoing basis. Our cost to income ratio at 66.9% is outside of our target at 65%. But as we've highlighted, those are that's driven by very, very key initiatives that are on the go currently.
The dividend coming in at 10.5p is at a 2.5 times cover over the current period. From an ROE perspective, if you look at the ongoing ROE coming in at 14.1% and as we phase out the legacy book, you will see those two lines sort of converge in terms of statutory and ongoing. And that's reasonably within our target range. Now ROE is driven by strong client franchise businesses and followed annuity earnings as we've discussed. And if we really look at it from an ongoing perspective, The key levers that we challenge to continuously invest in and drive our Activity levels across the board, growing our client base and core drivers and managing our liquidity and optimizing our capital structure.
And if you have to look at the various business leaders in terms of their strategies and what's being driven from a business perspective, these are holistically embedded within those strategies at this point in time? Steven, I think it's time to one more. From an overall balance sheet perspective, the overall capital ratios, I think, have remained relatively healthy over the period. I think I must remind you that we measure all of these capital ratios on a standardized basis. From a South African perspective, we are aiming to move to ARB.
The key differential for us between Standardized and ARB is a better measurement of collateral in a highly collateralized lending base, as well as a low loss sort of history If we look at that relationship across our book. So we are expecting between probably 1.5% to 2% benefit in terms of the overall capital ratio, but we're obviously subject to a regulatory process before we can start reporting on that particular basis. Liquidity has remained strong over the period. We have, as we mentioned earlier on, we are managing that liquidity level quite actively in terms of cost of funds. And leverage ratios have remained fairly healthy across both balance sheets.
In the PLC, we have issued 250,000,000 pounds of additional Tier 1 instruments in October and those coming to the capital base as we move into the next half. But we've given you a pro form a feel for it in terms of the total capital adequacy ratio, including the GBP 250,000,000 that would be reported at 16.3% And the leverage at about 9.3%, which does give you a fair amount of room in terms of further growth trajectory. So I'm going to go into the divisions and I'll start up with Asset Management. I think Asset Management at growth of 1.2% in operating profit. And I think that really was very good growth in our global business with as the South African business went backwards on the on performance fees, which really A feature of history because remember we reminded you last year and the year before that South African performance had been weakened.
It's now come back into line. But certainly, we were unable to earn performance fees at the same level that previously earned. But the international business grew quite strongly. So that earnings overall was still up 1.2%. I think operating margin was also down more, again, for the identical reason that I gave you before, mainly as a consequence of Performance fees, if you looked at the operating margin from the rest of the business, it had improved.
Funds under management increased 3.1% to 98.2 1,000,000,000 remember at the end of August, we were just over 100,000,000 in the rand went a bit AWOL. And so that pulled the numbers back. And markets also were softer towards the back end of September. However, what we're very happy with is very solid net inflows of £2,100,000,000 which I'll give you some color In a moment. And that gives an annualized talk ratio of 4.4%.
So overall, if you look at our business, 57% of our income is managing emerging market funds and 43% developed market. We've talked about gaining traction in America. We had just under £1,300,000,000 of net inflows in the Americas during this half. We had £628,000,000 of net inflows in the African business, which would include South Africa. Asia £927,000,000 in Europe, including UK, was down.
£731,000,000 that was a big loss of an emerging market fixed income portfolio, which should have had that effect in the European business. So we think that we have built a Strong platform, we still think that active asset management is very relevant. And I know there's been a lot of talk about passive eating up active. But I think we just have to go and look in history and say that every now and again, there's something that goes wrong and then people switch. So we believe we've got very positive momentum And are confident about where we are in this business as an active asset manager.
If we look at our Wealth business, good overall performance again On the South African front, we were impacted by lower brokerage volumes across the private clients. And I think people are in South Africa in a bit of a bad mood, worried about the politics. Whereas in the UK business, we're Up 21%, benefiting from again good inflows and higher average funds under management. I think operating margin overall Improved to 25.5 percent, operating income up 12.5 percent and operating costs up 11.7%. And again, we saw net inflows of £1,500,000,000 and tonnes under management up from £54,800,000,000 to £55,500,000,000 again affected by the rand at the end of the year.
So I think for us, we keep on investing for long term sustainability. Our core platforms, both in the U. K. And in South Africa are very well established. We have distribution in the U.
K, Switzerland, Ireland, Guernsey and Hong Kong. And we recognize as one of the leading client investment managers. I think in South Africa, we are the largest player. We just again won the Financial Times award for the 1st year running. And I think we have a very good brand and very good positioning.
So obviously, looking forward, market conditions are very unknown to us. I think you have uncertain investor sentiment and all we can do is focus on the ball, not on the environment. And I think that's important for us is to continue to play the ball and remain focused. So we believe we're very well placed and we continue to focus on building our franchise and our strategic initiatives. If we look at the Specialist Bank overall, we're up, this is ongoing numbers, up 12.5% to 279.4%.
UK was down 22%. That was really due to the points that Michelin made that last year we had very strong investment banking in the period and good time flow from post Brexit volatility, which wasn't repeated in this particular period. But I think what was important In the U. K, net interest income was actually up 18% and that's a key driver of earnings going forward. I mean, so that's where we're up 21% in rand.
That was strong investment, strong performance from our investment portfolios. And I think we still continue to see quite good activity levels from our clients, not to standing The environment that we're in. So we're still able to continue backing. I think the cost to income ratio overall 61%, down from 61.8%. This is a number that we need to focus on.
I think we have a lot of IT expenditure, regulatory expenditure, and we have the double U. K. Premises costs and we are Busy rolling out and the private bank, which we'll come to in a moment. So overall, loans are 5.6% in neutral currency. The graphs on neutral currency because they reflect the trend?
And the customer counts sort of flattish, up 0.7% In neutral currency, I think we have been trying to get our cost of funds down in the UK. And I think that's really part comes through in strong improvement in net interest income. So I've already covered this. You can see income overall down by £7,000,000 in the UK or £6.5. And that really was fees Down and trading down.
And net interest income, as I mentioned before, strongly up. If we look at the cost in the UK Bank, They were up £13,000,000 during the period. £5,100,000 came from incremental investment in building up a private bank and £6,000,000 double premises costs. I think in the private bank this expenditure will continue for March 2018 and then it starts flattening out? And we won't see much rising costs in that business as because all the investments in gets replaced by people going forward.
And so it flattens out. The remainder of the cost in the U. K. Special Bank were up £1,500,000 which was reasonably moderate. So I think we're getting things under control, but we still have to build out our business.
And I'll remind someone when we walked in here, If I went back 5 or 6 years to where the private bank in South Africa was, it hardly made a contribution off the back of a bad season. It now contributes almost as much as our corporate bank. So these are franchise businesses. You've got to spend money to build them. And they do cost you while you're building them.
But then one day you wake up and the money is spent and then the income starts coming through. So obviously that's reflected our ROE in that business, Which is down to 8.8% post tax. I think if I unwrap What we do in the corporate bank, that's still performing very well. And as I said, the private banking, particularly the banking side of the private banking is still loss making as you're spending more than the income, but we know that given time that will turn around. So we do have what we believe are resilient business.
We're mindful that there's a lot of uncertainty out there and that affects client's decision making. But we just have to navigate The storms. I think on the legacy, and Michelin spoke a little bit about the legacy. What we're trying to do is Get rid of this legacy because we know it's a thorn in everyone's side. It affects returns, it affects performance.
And at that point, we need to kill it. So, Oskar will shoot me for saying this because it's not down here in writing, but we hope that From 1st April, we don't have this legacy thing anymore. And the residual piece that we have just gets normalized. But and that we then report only ongoing. So that's not a guarantee, but that's what we hope.
But you can see our expectation is it will be down to £330,000,000 even maybe a bit better depending on 1 or 2 things and then down to £200,000,000 by the end of March 2019? So it is something it's taken a long time to deal with. But at least I read yesterday that RBS are reporting losses for the 20 in a row, post the financial crisis. So, Hendrik Petore said it takes 10 years to get over a financial process, well, it's sort of taken us to deal with all this stuff that came from the pre crisis period. I think if you look at South Africa, you can see that quite strong growth in total income from R5.9 R1000000000 to R6.8 billion.
That was very good performance from the investment portfolios, That's still underlying very strong performance from the rest of the business. Net interest slightly down and that's mainly because of Accounting noise. But overall, we have that book growth and we're growing, I think, annualized at over 12%. So not to standing people saying corporates aren't investing, Investec is still active in its space. ROE, I'll give you two numbers.
13.5% including the investment portfolio, 15.9%, just under 16% excluding the investment portfolio. Why you need to exclude the investment portfolio It's because the investment portfolio you have to look at over a long period of time. The bulk of it, we recognize only income coming through from an equity accounting point of view. And I think you get very confused if you bring that into our ROE number. The other thing is we have quite a big balance sheet in Mauritius, which is a dollar balance sheet that And there is a lot of free funds.
That would add another 1% already, if we actually had to strip that out. So I think a resilient performance. I think we are in a difficult period in South Africa. I think Political events can continue to impact on the perception of our clients and the activity level that they conduct. At the moment, we have been reasonably active.
So if you look at going forward, asset management, I think Key priorities, investment performance, both scaling the multi asset and quality capabilities, growing the adviser business, I think that's something that they've been talking about for a long time? And then focus on large markets. And I'm not just standing everyone talking about the emerging markets, Asia, Mainly China, India and the growth in those markets, 50% of savings in the world still live in North America. And that's why it's very important for us to grow and develop in North America. And you saw quite big inflows into North America, which tells you that we've got good traction there.
And then I think we are a responsible investment investor. We have to make sure that we do things that are sustainable over the long term And that we continue to invest, motivate and lead our people. So I think as a strong franchise, a strong business And that has very good long term growth opportunities. I think on the Wealth business, again, we're investing for the long term. The Wealth business is delivering.
And if you remember, we spoke a long time about click and invest. You got very bored of that. But we launched it in June And it was ranked as the number one robo advisor in an independent survey of digital portfolio management in the UK. We'll continue to enhance it and develop the rest of our digital channel. I think one place, which is What brings investment and banking together is a very important platform for us and we continue to improve that And add to that and make sure that we're properly integrated.
And we still got quite a bit of work to do on efficiency. So we're not there yet. We have Very good recognition from around the world in terms of what we're doing as a firm and how we're progressing. I think if we look at the Specialist Bank in the U. K, I think we've mentioned to you A lot of times how we're going to build a domestically relevant private bank.
We are getting very good traction in this business. It will take Quite a while for the income to really start coming through. But it's not a one day game. It is a couple of 2 series And we will ultimately get there and we are very confident that we are getting there. And we see good client traction, good activity.
Think we're still trying to broaden our client base and building our franchise. I think we have very good corporate franchise. We do very well in the corporate bank. And we also need to continue to deepen the relationships with our clients, both between the private bank and the corporate bank. Improved coordination across all our geographies.
I think I don't think it's ever been better, where people from different parts of the world work together as a team. And you start seeing very good cross border flow as a consequence of that. And then we have to deal with costs. I know you shout about costs. We can't have a cost Income ratio at the level it's at.
If you normalize it, it's just over 72%. We still need it down in the UK into the low 60s. But we just need a bit of time for that. So again, we get a lot of independent recognition for some of the stuff that we do. Coming to South Africa, I think clearly we're trying to still grow our client base.
And I think we're having we Continue to make good progress in that. I mean, South Africa is not without competition. But we prefer a place where there's a lot of competition because it makes you better. We continue to evolve our digital offering and trying to leverage our international capabilities, as I mentioned on the previous slide. And I think we've also created Invest Express Investments that offers certain types of investment strategies, Two clients delivered, sometimes manufactured by our wealth business, sometimes manufactured by our specialist individuals.
And then we've also launched Investec Life and it is working exceptionally well. We're starting to just being launched to the general to our clients in the last week or so? So it started off by being launched to us as individuals and staff. I've got a life policy at the age of 6 in 2 and a half minutes, fully underwritten with my letter from the underwriter. I think it's sort of 8.
No people involved, Just all online. But there are people if you need people, if you need to go for medicals and things like that. But we are quite confident that it's a great value add to our client base? And again, as I mentioned, under the Wealth business, we again got recognition from the financial times for the 5th year running. We got recognition from Euromoney.
Again, we were up Then My Private Banking Research as the 2nd best app for Private Bank and Wealth Management globally. We were 2nd just behind UBS and Credit Suisse. So I think we are making decent progress. I think on our digitization strategy, the high touch client centric model, I'm probably boring you now. So We try and bring everything together, bank, borrow, invest, save and protect and manage my life.
And I think that's Something that if you as an invested client can do things right across your financial needs. We also have made sure that we're trying to integrate our corporate clients with a private bank because we deal with the executives of the corporate and make sure that the private bank and wealth management businesses work together to offer the strong product to our client base. So in closing, I think whilst we see just coming back from IMF, what What I noticed is that when we sit here miserable in South Africa and the U. K. Are panicking about Brexit, the rest of the world has moved on.
And the rest of the world is quite happy with where they are actually, they're actually growing. So we still have to deal with the board that we dealt with. And we have to navigate the bumps in the road in the 2 geographies as they work out how they're going to go forward from a political point of view. Would start to have a knock on impact on economics. Thank God it's not impacting the global world.
They just carry on with life. I think notwithstanding this, We have continued to improve in shape and capability. We've made further progress in dealing with our legacy book and the development of the UK Private Bank and that we have made great progress in our various digital initiatives. I think we continue to invest in infrastructure and our people across the group and that's indicative of the cons we had in our franchise And that we are trying to position our business appropriately for future growth and development. So We think credible set of results in a difficult environment.
We believe that we are on song in terms of our strategic delivery. And we know there are bumps in the road, but we happily navigate those bumps. We've navigated them many times in our history. So again, thank you. And we now can take questions.
We can start, Dave, in the UK. I don't know if anyone wants to ask Any questions? James has got one. James has a question. James, how did you work out your forecast impact?
You didn't read our trading update? Badly, I think, is a sure sell, sir. Badly, it's
a sure sell. Badly, it's a sure sell. Thank you, Thank you. If you just hand the management account over, it would certainly ease the process. I've got one question, and it's about the Clearly, clearly, clearly, 8 basis points is still quite a low number.
And during your presentation, you referenced both In U. K. Concerns, can you sort of comment on where you see the impairment charge of settling out for the next period or 2?
Can you repeat that? Because it's very good. What's wrong with it? Okay. You're talking about yes, look, we did increase time payments in South Africa.
UK, our ongoing impairments can't stay as low as they are forever. But we will see Not for the second half, but a drop off in legacy. If you look at our defaults, right, at quite a low level, right across the group and have continued to decline. But last time we had some defaults in the mining area, We have very little mining exposure on the South African balance sheet where the risk was. I think we're on top of our game, but yes, You don't know what the economic environment is going to bring.
So it's very hard to give you a forecast. If life is as it is now and there's no big calamities, I think the impairments remain moderate. But we can't predict what's going to happen in South Africa in December. And the continued uncertainty from the Brexit negotiations, because those are the key issues. But we're not feeling the stress.
You just look at our default levels, if you don't believe me, and ask us to give them to That it joined? Okay. Are there any other questions? No other questions, J. D.
I'll come back to Efrain. Questions in South Africa? Harry, come. You need a mic. You were smiling before you came in.
Now you're going to bother bouncing. Thanks, Stephen. No, not quite. So I think very impressive results on the net interest income in the UK. Can you give us a sense of what your normalized Net interest margin targeted for that business.
And how does that change as the private bank gains scale? Your man in the UK? The margin in the UK will be slightly lower. Our normalized margins are about 2%. But yes, we probably think we'll hold those.
We're seeing an improvement in cost of funds. But obviously, there's more As the world gets a bit better and more banks are entering the fray as the world gets better sizing, your balance on that of 2%.