Welcome everybody. Dave or someone in London, are you guys connected?
Yes, Ian, connected.
Right, 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 over to our CFO, Nishlan, to talk through the numbers, and then I'll come back and talk about the strategy with the different divisions. I think we were really in a funny kind of environment over the past six 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., regarded as similarly weak. I think overall, if we look at our business, I think we still managed to get quite good funding flows, about GBP 3.6 billion. Both our wealth and asset management business have benefited. Client activity, notwithstanding the uncertainty in our two core geographies.
We have continued as a group to invest for growth, and our increase in 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, it's further entrenched the strength of our franchises, particularly in our private banking businesses and our wealth management businesses. Again, geographic and operational diversity continue to support our sustainable recurring income base and earnings through varying markets. I'm now going to hand you over to Nishlan, who's going to take you through the numbers. When he's finished, I'll come back and talk about what's going on in the various businesses.
Is this on?
Yes.
All right. Good morning, everyone. Just get rid of the notes very quickly. In this period, if we look at a summary of our statutory performance, operating profit has increased to GBP 314.6 million, an increase of 11.8%. Obviously, the positive ZAR on the income statement has influenced that number. On a neutral currency basis, it is up 1.1%, and we will unpack the various drivers of that. Just the earnings per share up to GBP 0.266 in the period, and that is a 17.2% growth in the period. Sorry. The dividend has grown by 5% in the period to GBP 0.105, which translates to about a 12.4% growth in the overall ZAR dividend that we have 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% of the operating profit level. Down 5% in the period, and that is really driven by lower trading income, and investment income offset by some pretty good fundamental growth in the interest margin and fee lines, which Stephen will unpack as he goes through the divisional results. South Africa, from a ZAR perspective, is up 7.9%, and that number is significantly higher as you bring in the impact of the ZAR over the period. From a business perspective, I think you will see that the Specialist Bank has contributed 62%, and the wealth and the asset management business is contributing 38%. Contribution sort of in line with what you would have seen in September 2016. Again, we will go through some detail around that. Let us look at some of the earnings drivers.
From a funds under management perspective, as you have seen earlier, there was net inflows of GBP 3.6 billion in the period, taking those funds under management to GBP 154.3 billion in the period. That increase has been offset because of the weakness in the ZAR. Again, just to position it, the ZAR 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 billion. We continue to actively manage our net liquidity position and the net cash position across the group. Core loans increasing by 5.6% on a currency-neutral basis in the period to GBP 22.4 billion, with good growth experienced across our specialist banking businesses.
If we look at the key drivers in terms of operating income, that has come in at GBP 1.191 billion in the period. Total operating income increasing by 13.2%. Net interest income 16%, up to GBP 364.4 million in the period. As we go through the contribution from the specialist bank, you'll see the driving force coming from the good growth in the underlying book. Net fees and commissions up 9.4% to GBP 666 million. Investment in associate income, which makes up about 7% of the underlying operating income line, has increased to GBP 85.6 million. That also includes about GBP 23 million of income from the associate line, which is decently up on the prior period and is mainly driven by the underlying operating income from the IEP business and platform. Trading income and customer flows is down 12.7% in the period to GBP 64.2 million.
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 base, really in the prior year. Bringing the picture together, I think what you do see is a healthy mix between capital light and capital intensive businesses with capital light revenue coming in at 56% of the total revenue base. If you look at the net annuity fees at GBP 546 million, that contributed 45.8% to the net operating income line. Third-party assets and advisory contributing GBP 672 million versus our capital intensive drivers being net interest investments and associate and trading income contributing GBP 519 million or 44% of the overall base. Okay. In terms of the relationship between operating income and operating expenses, we did see positive draws in the period, with operating income growing by 13.2%, as we've just earlier discussed.
Operating costs in the period did grow by 12.9% to GBP 792.5 million. There are some very specific reasons for that being a bit higher than what you would see in a normalized environment 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 headcount in the period, really driven by growth initiatives across the platform. The asset management business actually decreased headcount slightly in the period from efficiencies achieved through some automation in the administrative functions. Impairments in the period is up from GBP 18 million to GBP 31.1 million.
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 GBP 28 million. That's driven by an increase in an acceleration of very specific portfolios in that particular portfolio in the current period. If we had to summarize it from an ongoing perspective, operating profit at GBP 347.5 million, up 10.5% in the period, with adjusted earnings per share up at GBP 0.295 or 14.9% in the period.
I think one point to note is that that's a combination of the operating profit as we've discussed, the average tax rate in the period is coming at about 14.5%, which is usually due to our mix of earnings. In the period, we've also had some tax provision release that we no longer require. Total shareholders' equity down slightly to GBP 4.76 billion, that's really driven by the impact of the rand on the closing balance sheet. On a currency neutral basis, growing by 3.7%. Customer accounts and net core loans and advances, again, mentioning growing by 5.6% on a currency neutral basis to GBP 22.4 billion. If we look at our various financial targets, the ROE is within the 12%-16% target at 12.5%. That's in line with what we saw at March and a bit better than what we see at Sem 16.
Adjusted earnings per share growing by 13.2% or 14.8% on an ongoing basis. Our cost to income ratio of 66.9% is outside of our target of 65%, as we've highlighted, that's driven by very key initiatives that are on the go currently. The dividend coming in at GBP 0.105 is at a two and a half times cover over the current period. From an ROE perspective, if you look at the ongoing ROE coming in at 14.1%, as we phase out the legacy book, you will see those two lines converge in terms of statutory and ongoing. That's reasonably within our target range. ROE is driven by strong client franchise businesses and solid annuity earnings, as we've discussed.
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, managing our liquidity and optimizing our capital structure. If you had 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. Stephen, I think it's time to One more. All right. 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 AIRB.
The key differential for us between standardized and AIRB 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. We are expecting between probably 1.5%-2% benefit in terms of the overall capital ratio, we're obviously subject to a regulatory process before we can start reporting on that particular basis. Liquidity has remained strong over the period. As we mentioned earlier on, we are managing that liquidity level quite actively in terms of cost of funds. Leverage ratios have remained fairly healthy across both balance sheets. In the PLC, we have issued GBP 250 million of Additional Tier 1 instruments in October, those come into the capital base as we move into the next half.
We've given you a pro forma feel for it in terms of the total capital adequacy ratio, including the GBP 250 million 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. Okay.
Thanks, Stephen.
Thanks, Nish.
I'm going to go into the divisions. I'll start off with asset management. I think asset management had growth of 1.2% in operating profit. I think that really was very good growth in our global business. Whereas the South African business went backwards 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 weakened. It's now come back into line, certainly we were unable to earn performance fees at the same level previously earned. The international business grew quite strongly, so that earnings overall were 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 we looked at the operating margin from the rest of the business, it had improved.
Funds under management were increased 3.1% to GBP 98.2 billion. Remember, at the end of August, we were just over GBP 100 billion, the ZAR went a bit AWOL, it pulled the numbers back. Markets also were softer towards the back end of September. However, what we are very happy with is very solid net inflows of GBP 2.1 billion, which I will give you some color on in a moment. That gives an annualized stock ratio of 4.4%. Overall, if you look at our business, 57% of our income is managing emerging market funds and 43% developed market. We have talked about gaining traction in America. We had just under GBP 1.3 billion of net inflows in the Americas during this half. We had GBP 628 million in net inflows in the African business, which would include South Africa. Asia Pac, GBP 927 million. In Europe, including U.K., was down GBP 731 million.
That was a big loss of emerging market fixed income portfolio, which would have had that effect in the European business. We think that we have built a strong platform. We still think that active asset management is very relevant. I know there has been a lot of talk about passives eating up actives, but I think we just have to go and look in history and say that every now and again, there is something that goes wrong, and then people switch. We believe we have 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.
I think people are in South Africa in a bit of a bad mood, worried about the politics. Whereas in the U.K. business, we were up 21%, benefiting from, again, good inflows and higher average funds under management. I think operating margin overall improved to 25.5%, with operating income up 12.5% and operating costs up 11.7%. Again, we saw net inflows of GBP 1.5 billion, and funds under management up from GBP 54.8 billion to GBP 55.5 billion, again affected by the ZAR at the end of the year. 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. We are recognized 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 fifth year running, I think we have a very good brand and very good positioning. Obviously, looking forward, market conditions are very unknown to us. I think you have uncertain investor sentiment, all we can do is focus on the ball, not on the environment. I think that is important for us, is to continue to play the ball and remain focused. We believe we are very well-placed, we continue to focus on building our franchise and our strategic initiatives. If we look at the specialist bank, overall we are up. This is ongoing numbers, up 12.5% to GBP 239.4 million. U.K. was down 22%.
That was really due to the points that Nishlan made, that last year we had very strong investment banking in the period and good client flow from post-Brexit volatility, which wasn't repeated in this particular period. I think what was important in the U.K. is net interest income was actually up 18%, and that's a key driver of earnings going forward. I think South Africa were up 21% in ZAR. That was strong performance from our investment portfolios, and I think we still continue to see quite good activity levels from our clients, notwithstanding the environment that we're in. We're still able to continue betting. 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 the private bank, which we'll come to in a moment. Overall, loans are 5.6% in neutral currency. The graphs are neutral currency because they reflect the trend. The customer accounts sort of flattish, up 0.7% in neutral currency. I think we have been trying to get our cost of funds down in the U.K., and I think that's really part comes through in the strong improvement in net interest income. I've already covered this. You can see income overall down by GBP 7 million in the U.K., or GBP 6.5 million. That really was fees down and trading down. Net interest income, as I mentioned before, strongly up.
If we look at the costs in the U.K. bank, they were up GBP 13 million during the period. GBP 5.1 million came from incremental investment in building up our private bank and GBP 6 million double premises costs. I think in the private bank, this expenditure will continue for March 2018, then it starts flattening out. We won't see much rise in costs in that business because all the investment spend gets replaced by people going forward, it flattens out. The remainder of the costs in the U.K. specialist bank were up GBP 1.5 million, which was reasonably moderate. I think we're getting things under control, but we still have to build out our business.
I reminded someone when we walked in here, if I went back five or six 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. These are franchise businesses. You've got to spend money to build them, and they do cost you while you're building them. One day you wake up and the money's spent, the income starts coming through. 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.
As I said, the private bank, in particular the banking side of the private bank is still loss-making as we're spending more than the income, we know that given time, that will turn around. We do have what we believe a resilient business. We're mindful that there's a lot of uncertainty out there and that affects clients' decision-making. We just have to navigate the storms. I think on the legacy, Nishlan spoke a little bit about the legacy. 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. At a point we need to kill it.
Ursula will shoot me for saying this because it's not down here in writing, we hope that from 1st of April, we don't have this legacy thing anymore, and the residual piece that we have just gets normalized. That we then report only ongoing. That's not a guarantee, but that's what we hope. You can see our expectation is it will be down to GBP 330 million, even maybe a bit better depending on one or two things, and then down to GBP 200 million by the end of March 2019. It is something that's taken a long time to deal with. I read yesterday that RBS are reporting losses for the 10th year in a row post the financial crisis. Hendrik du Toit said it takes 10 years to get over a financial crisis.
That sort of taken us to deal with all this stuff that came from the pre-crisis period. If we look at South Africa, you can see they've quite strong growth in total income from ZAR 5.9 billion to ZAR 6.8 billion. That was very good performance from the investment portfolios. Still underlying very strong performance from the rest of the businesses. Net interest slightly down, that's mainly because of accounting noise. Overall, we have had book growth and we're growing, I think, annualized at over 12%. Notwithstanding people saying corporates aren't investing, Investec is still active in that 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 is because the investment portfolio, 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. I think you'll 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 earns very little on your free funds. That would add another 1% to ROE, if we actually had to strip that out. I think a resilient performance. We are in a difficult period in South Africa. 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.
If you look at going forward, asset management, I think key priorities, investment performance, build scale in the multi-asset and quality capabilities, growing the advisor business. I think that's something that they've been talking about for a long time. Focus on large markets. Notwithstanding 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. That's why it's very important for us to grow and develop in North America. You saw quite big inflows into North America, which tells you that we've got good traction there. I think we are a responsible 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.
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 growth business is delivering. If you remember, we spoke a long time about Click & Invest. You got very bored with us. 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 U.K. 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 are properly integrated. We've still got quite a bit of work to do on efficiency. 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. It's not a one-day game. It is a couple of test series, and we will ultimately get there, and we are very confident that we are getting there. We're seeing good client traction, good activity. I think we're still trying to broaden our client base and building our franchise. I think we have very good corporate franchise. We're doing very well in the corporate bank.
We also need to continue to deepen the relationships with our clients, both between the private bank and the corporate bank. Improve coordination across all our geographies. I don't think it's ever been better, where people from different parts of the world work together as a team. We've started seeing very good cross-border flow as a consequence of that. We have to deal with costs. I know you shout about cost. We can't have a cost to income ratio at the level it's at. If you normalize it's just over 72%. We still need it down in the U.K. into the low 60s, but we just need a bit of time for that. 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.
We continue to make good progress in that. South Africa is not without competition. We prefer a place where there's a lot of competition because it makes you better. We continue to evolve our digital offering. We try and leverage our international capabilities, as I mentioned on the previous slide. We've also created Investec Specialist Investments that offers certain types of investment strategies to clients delivered, sometimes manufactured by our wealth business, sometimes manufactured by our specialist individuals. We've also launched Investec Life, and it is working exceptionally well. It's just been launched to our clients in the last week or so. It started off by being launched to us as individuals and staff. I got a life policy at the age of 66 in two and a half minutes, fully underwritten with my letter from the underwriter.
I think it's no people involved, just all online. There are people if you need people, if you need to go for medicals and things like that. We are quite confident that it's a great value add to our client base. Again, as I mentioned under the wealth business, we again got recognition from the Financial Times for the fifth year running. We got recognition from Euromoney. Again, we were up there in MyPrivateBanking Research as the second best app for private bank and wealth management globally. We were second just behind UBS and Credit Suisse. I think we are making decent progress. I think on our digitalization strategy, it's a high-touch, client-centric model. I'm probably boring you now. We try and bring everything together, bank, borrow, invest, save, and protect, and manage my life.
I think that's something that if you as an Investec client can do things right across your financial needs. We also have made sure that we try to integrate our corporate clients with the private bank because we deal with the executives of the corporates, and make sure that the private bank and wealth management businesses work together to offer the strong product to our client base. In closing, I think whilst we see, just coming back from IMF, what I noticed is that 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. We still have to deal with the ball that we dealt with.
We have to navigate the bumps in the road in the two geographies as they work out how they're going to go forward from a political point of view, which does have a knock-on impact on economics. Thank God it's not impacting the global world. They just carry on as 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 U.K. Private Bank. We have made great progress in our various digital initiatives. We continue to invest in infrastructure and our people across the group. That's indicative of the cons we have in our franchise. We are trying to position our business appropriately for future growth and development. We think credible set of results in a difficult environment.
We believe that we are on song in terms of our strategic delivery. We know there are bumps in the road, but we happily navigate those bumps. We've navigated them many times in our history. Again, thank you. We now can take questions. We can start Dave in the U.K. I don't know if anyone wants to ask questions. Any questions? James has got one. James has a question. James. How did you work out your forecast income? You didn't read our trading update.
Badly, I think is the short answer.
You what?
Badly is the short answer.
How did you miss that?
Thank you. If you could just hand the management accounts over, it would certainly ease the process. I've got one question, it's about the provision. Clearly, 28 basis points is still quite a low number. During your presentation, you've referenced both South Africa and U.K. concerns. Can you comment on where you see the impairment charge settling out for the next period or two?
Dave, can you repeat that? Because it's very blurred. What's wrong with it? Okay. You talk about, look, we did increase our impairments in South Africa. U.K., our ongoing impairments can't stay as low as they are forever. We will see, not for the second half, but a drop-off in legacy. If you look at our defaults, they at quite a low level right across the group and have continued to decline. Last time we had some defaults in the mining area. We had very little mining exposure on the South African balance sheet where the risk was. I think we're on top of our game. Yeah, you don't know what the economic environment is going to bring. It's very hard to give you a forecast. If life is as it is now, and there's no big calamities, I think that the impairments remain moderate.
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. We're not feeling the stress. You just have to look at our default levels if you don't believe me. Ask us, we should give them to you. Is that it, James? Yeah. Are there any other questions? No. No other questions, Steve. Okay, I'll come back to SA. Questions in South Africa? Harry, come. You need a mic. You were smiling before you came in. Now you're going to bother Bouncer.
Thanks, Stephen. No, not quite. I think very impressed with the results on the net interest income in the U.K. Can you give us a sense of what your normalized net interest margin target is for that business? How does that change as the private bank gains scale?
You mean in the U.K.?
Yeah.
The margin in the U.K. will be slightly lower. Our normalized margins are about 2%. Yeah, we probably think we'll hold those. We're seeing an improvement in cost of funds. Obviously, there's more competition as the world gets a bit better, and more banks are entering the fray as the world gets better. I think we are balancing out at 2%.