Investec Plc - Unaudited Consolidated Uk Gaap Financial Results In Pounds
Release Date: 20/11/2002 09:25:00 Code(s): INP
Investec plc - Unaudited consolidated UK GAAP financial results in Pounds
Sterling
Investec plc (incorporating the results of Investec Limited)
(Registration number 3633621)
JSE Code: INP
ISIN: GB0031773103
Unaudited consolidated UK GAAP financial results in Pounds Sterling for the six
months ended 30 September 2002
- Headline Earnings Per Share 1.5%
- Headline Earnings 2.3%
Salient Features
Year to
30 Sept. % 30 Sept. 31 March
UK GAAP 2002 Change 2001 2002
Headline earnings 43 867 2.3 42 898 115 777
attributable to ordinary
shareholders (GBP`000)
Operating profit before 48 543 (34.7) 74 343 158 567
goodwill amortisation and
taxation (GBP`000)
Headline earnings per share 47.6 1.5 46.9 126.8
(pence)
Dividends per share (pence) 26.0 0.4 25.9 53.8
Cost to income ratio (%) 78.1 71.5 72.0
Headline return on average 11.9 12.0 17.6
shareholders` funds (%)
Annuity income as a 76.0 72.7 70.7
percentage of operating
income (%)
Total capital resources 924 (15.5) 1 093 958
(GBP millions)
Total assets under 41 463 (5.2) 43 746 45 184
administration (GBP
millions)
Weighted number of ordinary 92.2 91.4 91.3
shares in issue (million)
Consolidated profit and loss accounts
6 months to 6 months to Year to
30 Sept. 30 Sept. 31 March
2002 2001* 2002*
UK GAAP GBP`000 Unaudited Unaudited **
Interest receivable - 114 423 124 651 226 950
interest income arising from
debt securities
Interest receivable - other 326 427 409 070 713 293
interest income
Interest payable on (3 411) (8 530) (12 177)
convertible debt
Interest payable on (11 055) (12 427) (23 408)
subordinated liabilities
Other interest payable (351 037) (436 786) (745 541)
Net interest income 75 347 75 978 159 117
Dividend income 3 031 1 724 2 008
Fees and commissions 137 832 172 149 350 218
receivable
- Annuity 119 544 136 286 278 317
- Deal 18 288 35 863 71 901
Dealing profits 23 307 8 110 45 300
Income from long-term 18 830 13 605 31 079
assurance business
Other operating income (1 917) 20 548 30 949
Operating income 256 430 292 114 618 671
Administrative expenses (193 726) (201 669) (428 510)
Depreciation and amortisation (37 965) (29 832) (115 361)
- Tangible fixed assets (6 556) (7 158) (16 926)
- Goodwill (31 409) (22 674) (98 435)
Provision for bad and (7 605) (8 944) (14 668)
doubtful debts
Operating profit 17 134 51 669 60 132
Share of income of associated 3 671 133 3 083
companies
Provision for losses on (5 159) - (7 056)
termination and disposal of
Group operations
Reorganisation and - (11 836) (11 836)
restructuring costs
Profit on disposals of - - 1 363
subsidiary undertakings
Profit on ordinary activities 15 646 39 966 45 686
before taxation
Tax on profit on ordinary (11 727) (17 651) (28 540)
activities^
Profit on ordinary activities 3 919 22 315 17 146
after taxation
Minority interests - equity (492) (758) (1 586)
Profit attributable to 3 427 21 557 15 560
shareholders
Dividends - including non- (27 349) (31 412) (57 874)
equity
Retained loss for the period (23 922) (9 855) (42 314)
Headline earnings 43 867 42 898 115 777
attributable to ordinary
shareholders
Earnings per share (pence) 3.2 22.1 14.8
Headline earnings per share 47.6 46.9 126.8
(pence)
Diluted earnings per share 3.2 21.3 14.8
(pence)
Dividends per share (pence) 26.0 25.9 53.8
Consolidated statements of recognised gains and losses
6 months to 6 months to Year to
30 Sept. 30 Sept. 31 March
2002 2001* 2002*
UK GAAP GBP`000 Unaudited Unaudited **
Profit for the period 3 427 21 557 15 560
attributable to shareholders
Currency translation (12 724) (16 050) (69 737)
differences on foreign
currency net investments
Unrealised surplus on 3 212 5 799 10 254
revaluation of investment
properties
Total recognised gains and (6 085) 11 306 (43 923)
losses for the period
Calculation of headline earnings
6 months to 6 months to Year to
30 Sept. 30 Sept. 31 March
2002 2001* 2002*
UK GAAP GBP`000 Unaudited Unaudited **
Profit attributable to 3 427 21 557 15 560
shareholders
Dividends - non-equity (431) (1 333) (2 015)
Profit attributable to 2 996 20 224 13 545
ordinary shareholders
Amortisation of goodwill 31 409 22 674 98 435
Profit on disposal of - - (1 363)
subsidiary undertakings
Provision for losses on 8 682 - 4 339
termination and disposal of
Group operations (net of tax)
Amortisation of goodwill of 780 - 821
associates
Headline earnings attributable 43 867 42 898 115 777
to ordinary shareholders
Consolidated cash flow statements
6 months to 6 months to Year to
30 Sept. 30 Sept. 31 March
2002 2001* 2002*
UK GAAP GBP`000 Unaudited Unaudited **
Net cash inflow from 523 338 1 238 937 595 588
operating activities
Net cash outflow from return (16 912) (24 005) (39 314)
on investments and servicing
of finance
Taxation (25 341) (20 019) (19 380)
Net cash outflow from capital (594 473) (599 147) (461 662)
expenditure and financial
investment
Net cash inflow/(outflow) 5 324 (47 858) (95 656)
from acquisitions and
disposals
Ordinary share dividends paid (26 433) (38 913) (58 606)
Net cash inflow/(outflow) 6 025 (28 316) (22 510)
from financing
(Decrease)/increase in cash (128 472) 480 679 (101 540)
Cash and demand bank balances 2 062 888 2 164 428 2 164 428
at beginning of period
Cash and demand bank balances 1 934 416 2 645 107 2 062 888
at end of period
Consolidated balance sheets
30 Sept. 30 Sept. 31 March
2002 2001* 2002*
UK GAAP GBP`000 Unaudited Unaudited **
Assets
Cash and balances at central 221 487 424 186 457 222
banks
Treasury bills and other 487 019 328 424 340 525
eligible bills
Loans and advances to banks 2 755 770 3 082 699 2 583 205
Loans and advances to 5 079 600 3 948 111 4 780 480
customers
Debt securities 3 797 015 4 875 945 4 235 119
Equity shares 145 745 99 322 204 352
Interests in associated 43 051 17 135 45 026
undertakings
Intangible fixed assets 338 198 484 263 384 900
Tangible fixed assets 178 383 148 459 186 761
Own shares 70 004 51 086 42 130
Other assets 887 816 969 984 1 275 695
Long-term assurance business 97 972 183 713 67 116
attributable to the
shareholder
14 102 060 14 613 327 14 602 531
Long-term assurance assets 2 022 945 3 032 530 2 354 401
attributable to policyholders
16 125 005 17 645 857 16 956 932
Liabilities
Deposits by banks 3 697 701 4 678 773 3 735 349
Customer accounts 7 549 341 6 996 580 7 584 425
Other liabilities 1 733 119 1 657 158 2 106 191
Accruals and deferred income 197 541 187 573 218 132
13 177 702 13 520 084 13 644 097
Long-term assurance 2 022 945 3 032 530 2 354 401
liabilities attributable to
policyholders
15 200 647 16 552 614 15 998 498
Capital Resources
Subordinated liabilities 153 803 219 672 190 659
(including convertible debt)
Minority interests - equity 32 580 26 071 33 473
Called up share capital 123 7 510 7 530
Share premium account 924 945 845 616 814 089
Shares to be issued 41 148 41 148 41 148
Revaluation reserves 14 148 6 631 11 202
Other reserves (187 415) (125 903) (176 833)
Profit and loss account (54 974) 72 498 37 166
Shareholders` funds 737 975 847 500 734 302
- equity 737 975 804 399 691 201
- non-equity - 43 101 43 101
924 358 1 093 243 958 434
16 125 005 17 645 857 16 956 932
* Restated for changes in accounting policies and disclosures
** The audited figures as reported at 31 March 2002, restated for changes to
accounting policies and disclosures
^ Includes tax on exceptional items as follows:
GBP000
30 September 2002 3 523
31 March 2002 (2 717)
30 September 2001 -
Segmental analysis - geographical and business analysis of operating profit
before taxation and goodwill amortisation - for the six months ended 30
September 2002
Private Treasury &
Investment Client Specialised
UK GAAP Banking Activities Finance
GBP`000
Southern 1 980 6 151 21 000
Africa & Other
UK, Europe & (1 391) 12 619 (2 495)
Australia
Israel 1 374 1 124 94
USA (4 589) - -
Total Group (2 626) 19 894 18 599
Group
Services
Asset & Other Total
UK GAAP GBP`000 Management Activities Group
Southern Africa & Other 27 578 (21 169) 35 540
UK, Europe & Australia 1 445 6 610 16 788
Israel 94 (42) 2 644
USA - (1 840) (6 429)
Total Group 29 117 (16 441) 48 543
* Restated for changes to accounting policies and disclosures
Segmental analysis - geographical and business analysis of operating profit
before taxation and goodwill amortisation - for the six months ended 30
September 2001
Private Treasury &
Investment Client Specialised
UK GAAP GBP`000 Banking Activities Finance
Southern Africa & Other 10 069 6 730 22 047
UK, Europe & Australia 17 714 9 213 4 488
Israel 2 405 1 868 182
USA (576) - -
Total Group 29 612 17 811 26 717
Group
Services
Asset & Other Total
UK GAAP GBP`000 Management Activities Group
Southern Africa & Other 24 904 (29 623) 34 127
UK, Europe & Australia 789 2 473 34 677
Israel 182 (593) 4 044
USA - 2 071 1 495
Total Group 25 875 (25 672) 74 343
Consolidated statements of reconciliations of shareholders` funds and movements
on reserves
6 months to 6 months to Year to
30 Sept. 30 Sept. 31 March
UK GAAP GBP`000 2002 2001 2002
Balance at the beginning of 734 302 578 885 578 885
the period
- as previously reported 579 170 579 170
- prior year adjustment (285) (285)
Foreign currency adjustments (12 724) (16 050) (69 737)
Retained profit for the year (23 922) (9 855) (42 314)
Share issues/to be issued 69 769 339 029 391 526
Cancellation of shares (5 190) (50 579) (134 655)
Conversions from debentures - 271 343
Issue expenses (27 472) - -
Revaluation of investment 3 212 5 799 10 254
properties
Balance at end of the period 737 975 847 500 734 302
Presentation of financial information
Investec Limited and Investec plc
In July 2002 Investec Group Limited (since renamed Investec Limited) implemented
a Dual Listed Companies (DLC) structure, and listed its offshore businesses on
the London Stock Exchange. For further information please refer to Investec`s
web site: www.investec.com/investorrelations
Under the contractual arrangements implementing the DLC structure, Investec
Limited and Investec plc effectively form a single economic entity, in which the
economic and voting rights of shareholders are equalised. In accordance with
this structure, the directors of the two companies consider that for financial
reporting purposes, the fairest presentation is achieved by consolidating the
results and financial position of both companies using merger accounting
principles.
Accordingly, the interim report for Investec plc presents the results and
financial position of the combined DLC group under UK GAAP, denominated in
Pounds Sterling. The interim financial report for Investec Limited is also
prepared on a DLC basis under SA GAAP, denominated in South African Rand. All
references in the commentary below referring to Investec or the Group relate to
the combined DLC Group comprising Investec Limited and Investec plc.
SA GAAP differs in certain respects from UK GAAP. A high-level reconciliation of
the principal differences between SA GAAP and UK GAAP is provided.
The financial information contained in the "commentary" section has been
prepared in accordance with UK GAAP. Rand values included in the "commentary"
section of this announcement have been translated into Pounds Sterling, in the
case of the profit and loss accounts, at the weighted average rate for the
relevant period and, in the case of the balance sheets, at the relevant period
end rate. Reuters quote the average Rand/pound sterling exchange rate at 15.67
and 11.48 for the periods ended 30 September 2002 and 30 September 2001,
respectively. This represents depreciation of the Rand of some 36% during the
period under review.
This depreciation of the Rand has a significant negative effect on the results
expressed in sterling of those Investec businesses that generate the majority of
their revenues and profits in Rand. Where the impact of Rand depreciation is key
to understanding the performance of one of the group`s businesses, this has been
noted in the "commentary" section.
Dividend declaration
The dividends per share declared by Investec Limited and Investec plc are
determined with reference to the combined group`s headline EPS, denominated in
Pounds Sterling and prepared in accordance with UK GAAP.
Commentary
Operating environment
The protracted economic slowdown and increasing corporate governance concerns
presented a deeply challenging environment for capital markets. Financial
markets continued to be characterised by price volatility, low volumes and
diminishing deal flow which further entrenched negative investor sentiment.
These adverse factors have had a negative impact on Investec`s equity related
activities. However, strong performances from the group`s Private Banking,
Treasury and Specialised Finance and Assurance Activities served to partially
offset the weaker performance of the group`s Investment Banking and Stockbroking
activities.
Furthermore, the depreciation of the average Rand/pound sterling exchange rate
by 36% during the period has had a direct negative impact on the results of the
group expressed in Pounds Sterling.
Overall performance
Against this backdrop, Investec is satisfied to announce that headline earnings
per share for the six months ended 30 September 2002 increased by 1.5% to 47.6
pence, with headline earnings increasing by 2.3% to GBP43 867 million. Investec
has continued to benefit from the portfolio effect of its well-diversified
operating base and has concentrated on balancing profitability and risk.
Highlights of the past six months include:
- Established Investec`s DLC structure in July 2002. This long sought after
achievement represented a significant milestone in the history of Investec and
is a major stepping-stone in providing the group the opportunity to fulfill its
mission of becoming one of the world`s leading specialist banking groups.
- Issued 4 million Investec plc shares, for a consideration of GBP33.2
million, in July, at a time when markets were exceptionally difficult.
- Annualised headline return on average shareholders` funds remained stable
at 11.9%, notwithstanding the weaker performance of the group`s United Kingdom
("UK") and United States ("US") operations and the severe depreciation of the
Rand.
- Annuity income as a percentage of total operating income increased from
72.7% to 76.0%.
- An improvement in the quality of the group`s advances, as evidenced by the
continuing declining trend in the percentage of gross non-performing loans to
core loans and advances to customers from 1.71% in the previous year to 0.93%.
This facilitated a drop in provisions for bad and doubtful debts charged to the
profit and loss account of 14.9% to GBP7.6 million.
- Operating profit before goodwill amortisation declined from GBP74.3 million
to GBP48.5 million, impacted by the weaker performances of the group`s UK and US
operations as well as the significant depreciation in the Rand.
- Dividends of 26 pence per share, equating to a dividend cover of 1.83,
which is in line with the group`s stated policy of maintaining a dividend cover
under this basis of between 1.75 and 2.3
Business unit review
- Investment Banking
The prolonged weakness in financial markets and subdued trading volumes has
substantially impacted the performance of the Investment Banking division which
posted an operating loss of GBP2.6 million.
In South Africa ("SA"), Investment Banking reported results significantly down
on the previous period, largely as a result of a lack of appetite for direct and
private equity investments as well as declining trading portfolio values.
Investec Corporate Finance continued to maintain a strong deal flow off the back
of the division`s distinctive ability to provide innovative and creative deal
structures and advice. Accordingly, the division`s prime focus during the period
under review was on group and corporate restructuring activities, shareholder
activism mandates and black economic empowerment initiatives. Investec Corporate
Finance retained its first place rankings in the 2002 Dealmakers survey for M&A
volume, corporate finance value and volume, and was further awarded the
"Dealmaker of the Year" award. During the period under review, Investec
Securities focused on augmenting the depth and breadth of its research offering
while the structured equity desk performed well despite the difficult SA
stockbroking environment.
In the UK, Investec Investment Banking and Securities posted an operating loss
during the period under review. The division was severely impacted by the lack
of corporate advisory and capital market activity, with the number of deals
concluded declining substantially over the period. Trading income declined
significantly reflecting the poor performance of the house stocks in which the
division makes markets. This initiated a shift in focus to non-house stocks
where the division was successful in gaining market share in large-cap broking.
The UK Private Equity division`s performance was negatively affected by
declining equity portfolio values and a lack of viable exit opportunities.
Investec Inc in the US, was affected by the severe decline in equity markets,
recording operating losses of GBP4.6 million. The strategic review undertaken in
the US (see below) resulted in Investec Inc repositioning itself as an
institutional research-driven investment bank in the chosen niches of
technology, media, telecommunications, healthcare, retail and consumer goods.
In Australia, Investec Wentworth demonstrated growth in a challenging investment
banking environment enjoying a strong pipeline of mandates and prospective
deals.
- Private Client Activities
The Private Client Activities division, which comprises Private Banking and
Private Client Portfolio Management and Stockbroking divisions, recorded a
period of strong growth in operating profit before goodwill amortisation of
11.7% to GBP19.9 million. The strong performance of the Private Banking division
was somewhat offset by the weaker performance of Private Client Portfolio
Management and Stockbroking which suffered as a result of the lower market
prices and reduced demand for equity and other investment products.
- Private Banking
The Private Banking division reported operating profit before goodwill
amortisation of GBP16.6 million, an increase of 18.8% on the previous period.
This performance was driven by solid growth in total advances, non-interest
income and assets under administration, both in SA and the UK. Since the year-
end, the group`s total private client lending book in SA grew by 10.1% in Rand
terms to R15.2 billion (GBP922 million), and the private client lending book in
the UK grew by 6.2% in sterling terms to GBP846 million.
In SA, Investec Private Bank retained its number one ranking in the 2002
PriceWaterhouseCoopers SA Banking survey demonstrating its ability to
continually develop innovative alternatives to investment planning that provide
real returns regardless of market conditions.
The Private Banking division in the UK developed a private client investment
banking service which focuses on clients whose wealth is inextricably linked to
their businesses. Furthermore, in line with the group`s increased cost
consciousness, an initiative was undertaken during the period to relocate the UK
retail call centre to SA.
In Australia, a more focused strategy within the Private Client Group has
improved profitability with a steady increase in the number and quality of
clients and notable growth in total funds under advice.
- Private Client Portfolio Management and Stockbroking
The Private Client Portfolio Management and Stockbroking division reported
operating profit before goodwill amortisation of GBP3.3 million, a decrease of
13.9% on the previous period.
Despite the decline in market volumes which had a negative impact on overall
commissions, Investec Securities in SA, managed to increase funds under
management marginally from R27.3 billion to R28.3 billion (GBP1.7 billion) since
the last year-end. The business posted a creditable result, which is largely
attributable to the Merrill Lynch acquisition in the previous period and the
vigilant reduction of costs as a result of natural attrition and the
introduction of STRATE (share transactions totally electronic). Furthermore, the
business supplemented its revenue stream with a number of new investment
initiatives including a Money Market fund launched in conjunction with Investec
Asset Management.
In the UK, Carr Sheppards Crosthwaite`s performance was adversely impacted by
the testing operating environment, with funds under management falling by 20% in
relation to a 30% decline in the UK market since the group`s year-end. Funds
under management at September 2002 were GBP4.8 billion, of which GBP2.9 billion
were managed under discretionary mandates. The business continued to experience
a healthy flow of net new funds under management with the addition of GBP225
million funds over the past six months, further confirming the viability of the
division`s business model, notwithstanding the difficult environment.
- Treasury and Specialised Finance
The Treasury and Specialised Finance division posted operating profit before
goodwill amortisation and taxation of GBP18.6 million, a decline of 30%. The UK
operations reported an operating loss of GBP2.5 million, while the South African
operation`s contribution increased by 7.7% in Rand terms. This percentage would
amount to 19.8% if the results of Securities Investment Bank, which posted a
loss, are excluded.
The solid performance of the SA Treasury and Specialised Finance division`s core
operations is largely attributable to its overall diversity of income. The
Financial Market Activities performed particularly well with meaningful
contributions from all desks. The Banking Activities continued to maintain their
strong positioning in the local market, with flows of deals and mandates
concluded by the Structured and Project Finance division`s during the period.
In the UK, the Treasury and Specialised Finance businesses are in a development
phase and hence the group continued to focus on enhancing and expanding its
capabilities, particularly in its Banking Activities. In July, a structured
finance team was acquired to focus on cross-border structured finance, with
particular emphasis on leasing structures. Sound performances, off a very low
base, were recorded from the project and resource finance division as it
continued to position itself as a leader in the public private partnership
market. The division was selected as preferred bidder on the 2nd largest UK
hospital private financing deal, with a deal value of GBP330 million. The
division`s Financial Market Activities posted a loss, with the interest rate
desk suffering from market volatility while the commodities division struggled
in the face of the downturn in certain base metals prices.
- Asset Management
The Asset Management division delivered operating profit growth before goodwill
amortisation of 11.9% in Rand terms and a 15.3% fall in sterling terms. Although
assets under management of GBP15.8 billion (R260.8 billion) declined by 0.9% in
Rand terms and 2.9% in sterling terms since March 2002, the impact of the weak
equity markets was offset by the achievement of net new business flows of GBP545
million (R8.7 billion). The key achievement in the reporting period was the
impressive investment performance achieved across the board by the division`s
London based investment team, complemented by the strong retail funds and
specialist performance of its South African business.
Investec Asset Management recorded strong growth in its market share of UK
retail funds. In spite of weakening industry conditions and declining equity
markets, the Investec Asset Management UK retail business grew assets under
management by 19%, positioning it as one of the UK`s fastest growing retail fund
businesses. Net inflows of GBP81 million represents a market share of 3% of net
sales. Investec Asset Management has made significant progress in terms of
market positioning, with the authoritative SWAY industry survey ranking Investec
as the third best supported supplier of retail funds to the UK discretionary
independent financial advisor market. Offshore funds, listed in Guernsey and
Dublin, achieved positive net inflows during the six months under review at a
time when the industry as a whole is experiencing significant redemptions. This
was achieved by all the division`s retail businesses.
In the broad based CAPS survey for UK balanced pension funds, Investec Asset
Management was placed in the top decile out of a field of 85 competitors for the
twelve-month period to 30 September 2002. Investec Asset Management continues to
win fixed income mandates in the UK local authority market on the back of a
strong track record and proven investment process. Investec Asset Management,
after a relatively short period in the UK, is now on the list for recommendation
by some of the major investment consultants.
The South African Personal Investments division was successful in attracting
domestic net new business flows, attracting R2.3 billion. The division`s unit
trusts also excelled over the reporting period, with half of the in-house
managed funds in the top quartile over a one-year period, and achieving an
average ranking well above the median. Investec also achieved fourth place
overall in the most recent Plexus survey, which assesses three-year investment
performance.
In summary, the core South African businesses continue to show resilience, while
the international expansion prospects are developing in line with management
expectations.
- Assurance Activities
The results of the group`s SA life assurance activities, conducted by Investec
Employee Benefits Limited ("IEB"), were positively influenced by further
restructuring of the business and its investment portfolios over the course of
the past six months. The overall effect of which was to increase earnings from
GBP13.6 million to GBP18.8 million.
- Group Services and Other Activities
Group Services and Other Activities posted an operating loss of GBP16.4 million,
reflecting a 36% improvement on the previous year. This was largely attributable
to the performance of the group`s Central Funding division, which benefited from
effective capital management facilitated through the group`s restructure, as
well as increased returns on shareholder`s funds within IEB, whose earnings were
included for a full six months in the current period as opposed to four months
in the prior period. Some of these gains were offset by the weaker performances
of the group`s Traded Endowment and Clearing and Execution Activities.
The Traded Endowments activities were affected by poor trading conditions as
well as general market uncertainty surrounding the frequency, timing and
magnitude of bonus rate cuts.
The group`s Property Activities performed reasonably well. The SA business
benefited from an increase in assets under administration as a consequence of
the Growthpoint restructure, the Melrose Arch mandate and the Fedsure
acquisition. Furthermore, the demand for investment properties in the UK
remained buoyant.
Geographic performance
The group`s Southern African businesses accounted for 73.2% (2001:45.9%) of
Investec`s operating profit before goodwill amortisation. Notwithstanding the
above, the concentration of assets is weighted towards the group`s Non-Southern
African operations with 63.4% located in these countries. Highlights of the
developments and performance of the regions in which the group operates follow.
Southern Africa
The group`s SA operating profit before goodwill amortisation in SA increased
significantly by 32.7% in Rand terms and 4.1% in pound sterling terms. Most of
the group`s SA businesses performed strongly, and the group continues to
maintain a sound positioning in most of its SA businesses.
UK
In the UK, the group posted an operating profit before goodwill amortisation of
GBP13.5 million, a decrease of 61.0%. These results reflected the adverse market
conditions which had a negative impact on the UK Investment Banking and Treasury
Trading Activities. The consequent negative impact on investment appetite and
asset values also impeded the performance of the Private Client Stockbroking
activities. The UK Private Banking operations grew advances by 19% over the year
and generated pleasing growth in non-interest related income. Furthermore, the
group`s Asset Management division in the UK made significant progress,
particularly on investment performance.
US
As part of Investec`s continued strategic focus on building niched businesses in
its core areas of competence and in select markets where it can compete
effectively, a strategic review of the US business was undertaken over the past
year which resulted in the following:
- The decision to sell the private client stockbroking business to management
in May 2002 ("the PCG management buy-out").
- The sale of the Clearing Division to Fiserv Securities in August 2002 for
US$44 million ("the Fiserv transaction").
- The streamlining of support services and infrastructure.
The remaining US businesses will be combined into one broker-dealer and operate
under the Investment Banking pillar enabling Investec to align its US operations
with its other global businesses. The overall headcount will be reduced to
around 165 staff from some 688 at the year-end. For further financial
information regarding the sale of these businesses refer to the "financial
statements analysis" section of this report.
Israel
The Israeli operations posted satisfactory results against the backdrop of a
fragile geopolitical situation, poor domestic capital markets and severe
depreciation of the Shekel. Noteworthy accomplishments were achieved in the
mutual fund custodial and administration activities with total assets under
custody increasing 134% to NIS9.6 billion during the period under review.
Australia
A strong performance was posted by the Australian subsidiary which increased its
contribution to the group from GBP0.07 million to GBP3.2 million. In August,
Investec Australia received a full banking licence which has opened up many
growth opportunities for the business. Investec Wentworth has had a strong
impact on the region`s activities with increased investment banking earnings. A
more focused strategy for private banking drove a breakthrough to profitability.
Australia now has a solid platform to build a strong reputation, quality client
list and effective corporate network.
Financial statements analysis
Operating income
Operating income of GBP256.4 million decreased by 12.2% over the period largely
as a result of significant declines in fees and commissions and other operating
income (investment income). These declines were partially offset by solid growth
in dealing profits (trading income). The movements in operating income are
further analysed as follows:
The group`s net interest income remained relatively stable at GBP75.3 million,
largely as a result of the significantly lower Rand/pound sterling exchange rate
during the period. The group was able to achieve sound growth in its lending
portfolios.
Fees and commissions, both annuity and deal, were impacted by the weaker
economic and equity environment and the weakness of the Rand, resulting in a
decline of 19.9% to GBP137.8 million. The Investment Banking division in the UK,
Investec Asset Management and the Private Client Portfolio Management and
Stockbroking divisions were the primary contributors to this negative variance.
Dealing profits increased significantly by 187.4% to GBP23.3 million. The
group`s Financial Market Activities performed exceptionally well in the period
under review. The equity derivatives division posted a profit after generating
losses in the prior period in the aftermath of the 11 September 2001 attacks.
Furthermore, the group`s interest rate and currency activities were well placed
to exploit movements in the market.
The performance of the group`s long-term assurance activities is discussed
earlier in this report.
Other operating income reflected a loss of GBP1.9 million, largely as a result
of the weaker performance of the group`s Investment Banking division. In the
prior period the group benefited from the disposal of certain direct and private
equity investments. The income from these activities is affected by macro-and
micro-economic market conditions, as well as the unavailability of profitable
exit routes. Furthermore, difficult market conditions had an adverse impact on
the values of the trading portfolios.
Administrative expenses
Total expenses decreased by 3.9% from GBP201.7 million to GBP193.7 million
principally due to rationalization of the group`s activities in North America,
ongoing focus on cost control and the depreciation of the Rand.
Notwithstanding this nominal value decrease, the ratio of operating expenses to
total operating income increased from 71.5% to 78.1%. The increase in the ratio
is attributable to the reduced revenues in the group`s Investment Banking
activities as well as investments made in systems enhancement in the UK Treasury
and Specialised Finance units, the latter also explaining the increase in group
equipment expenditure of 3.4% from GBP11.9 million to GBP12.3 million.
These factors resulted in the cost to income ratio declining in SA (from 62.1%
to 59.4%) while the same ratio for the non-SA businesses increased from 77.1% to
90.4%.
Goodwill amortisation
Goodwill amortisation over the period increased by 38.5% due to the inclusion of
a full six month amortisation in relation to those acquisitions which were made
towards the end of the previous reporting period of which Fedsure and PMG
Capital were the most material.
Taxation
The operational effective tax rate of the group (extracting the tax effect on
the profit on disposal of subsidiaries of GBP3.5m) has decreased from 23.7% in
2001 to 16.9% in 2002, mainly as a consequence of taxable credits in the US
arising out of the losses incurred within the investment banking business and
the lower taxable earnings in Israel and South Africa. The latter was
particularly influenced by the increase in the income from long-term assurance
business which bears a lower effective tax rate due to losses brought forward.
Share of income of associated companies
The marked increase in associate income is attributable to the fact that the
group`s interest in its main associate, Capital Alliance Holdings Limited
("CAL"), was acquired in October 2001. An amount of R73 million (GBP3.5 million)
has been accrued, representing Investec`s share in CAL`s operating earnings for
the six month period ended 31 March 2002.
Provision for losses on termination of business
A pre-tax loss of GBP5.2 million was incurred during the period under review in
connection with the sale of certain of the group`s US activities. Specifically,
the Fiserv transaction realised net proceeds (after provisions for severance
payments, professional fees, lease penalties and other related expenditure) of
GBP9.7 million, against which unamortised goodwill of GBP8.6 million was
deducted, resulting in a net gain of GBP1.1 million. Offsetting this gain were
losses suffered as a result of the delayed completion of the Private Client
Group management buy-out. This transaction was finally concluded in October 2002
resulting in additional disposal costs linked to the ongoing management of this
and other inter-related activities of GBP6.3 million. This amount included a
write-off of unamortised goodwill of GBP1.8 million which represented the future
income to Investec in respect of the anticipated clearing on behalf of the
private client group business which fell away as a consequence of the Fiserv
transaction.
Due to the non-deductibility of goodwill amortisation for tax purposes, a net
tax provision of GBP3.5 million was raised on the combined transactions,
resulting in an overall post tax loss of GBP8.7 million which constitutes a
headline adjustment in this period`s results.
Capital resources
The DLC structure has two capital bases which contribute to a consolidated pool
of capital. The implementation of the structure resulted in a transfer of
reserves from Investec Limited to the share capital and premium of Investec plc
by means of an unbundling dividend of GBP356.9 million. Furthermore, the
conversion of certain instruments into shares in both Investec Limited and
Investec plc switched these resources into equity. While altering the split of
shareholders` funds, the net effect on the combined group was neutral.
Apart from this, net capital of GBP37.1 million (after share issue expenses of
GBP27.5 million) was raised by Investec plc through its offer undertaken in July
2002 and through the issue of 5 251 616 ordinary shares to the Investec plc
share scheme which is included under "Own Shares" in the balance sheet. After
taking into account the interim dividend and the net movements on the foreign
currency and revaluation reserves, shareholders` funds increased marginally from
GBP734 million to GBP738 million since the last year-end.
Given that the South African Reserve Bank ("SARB") exercises the role of lead
supervisor to the group, capital adequacy returns for Investec plc and Investec
Limited are submitted under the requisite DI401 consolidated capital
regulations. As at 30 September 2002, capital adequacy ratios of 16.0% and 14.3%
applied to Investec Limited and Investec plc respectively.
Total assets under administration decreased by 8.1% from GBP45.2 billion at 31
March 2002 to GBP41.5 billion at 30 September 2002. This was mainly attributable
to a decline in assets under management of GBP2.8 billion across all ranges of
third party funds due to depressed equity values and the effect of the
devaluation of the Rand.
Accounting policies and disclosures
Share options
During the period, Investec issued 4 million options to staff at a strike price
of R165 per share and 875 000 options at a strike price of R170 per share. These
options have vesting periods varying between 6 months and 5 years.
Future accounting standards are likely to require that options are valued at the
date of issue and expensed over the period that employees become entitled to
them. Had Investec applied this treatment to the options issued during the
current period, reported earnings would have decreased by GBP1.9 million (R30.5
million) resulting in a decrease in headline earnings per share of 2. pence
(31.6 cents per share) for the six months ended 30 September 2002.
These changes have been calculated using a Black-Scholes model with an implied
volatility for the Investec Limited share price of 37%, independently projected
dividends, and a risk free rate appropriate to the period of the option.
Goodwill
During the current year, the group changed its policy for the translation of
intangible assets in respect of foreign entities. These intangible assets are
now translated at the closing exchange rate instead of the exchange rate at the
date of acquisition. This change is permitted under both UK GAAP and SA GAAP.
Since a recent exposure draft issued by the International Accounting Standards
Board also proposes to make this treatment mandatory, the group considers it
appropriate to change the policy in the current period. The effect in SA GAAP of
this change is an increase in goodwill as at 31 March 2002 by R1.5 billion. The
effect in UK GAAP of this change in policy is a decrease in goodwill as at 31
March 2002 by GBP66.3 million. The difference in each case has been taken
directly to foreign currency translation reserves, resulting in an increase (in
SA GAAP) / decrease (UK GAAP) in ordinary shareholders funds as at 31 March
2002. There is no effect on the tangible net asset value of the group.
Prospects
Investec has a strong financial services platform with breadth and regional
diversity. With measures taken to address the under performing elements of our
business, and vigilant cost and risk management, we continue to position the
group to cope with difficult market conditions. We remain focused on growing our
businesses within our core areas of activity and further enhancing operating
discipline.
The operational health of the group`s activities are sound, but external market
and economic conditions remain volatile and could have an impact on the
performance of the group for the 2003 financial year.
On behalf of the boards of Investec Limited and Investec plc
Hugh Herman Stephen Koseff Bernard Kantor
Chairman Chief Executive Managing Director
19 November 2002
Dividend announcement
Investec plc
A maiden interim dividend (No. 1) of 26 pence (equivalent to 395 cents at the
date of declaration) per ordinary share has been declared in respect of the six
months ended 30 September 2002. The last day to trade cum dividend will be
Friday 6 December 2002.The shares will commence trading ex dividend on Monday 9
December 2002.The record date will be Friday 13 December 2002 and payment will
be made on Tuesday 24 December 2002. Share certificates may not be
dematerialised or rematerialised between Monday 9 December 2002 and Friday 13
December 2002, both dates inclusive.
By order of the board
R Vardy
Secretary 19 November 2002
Investec Limited
An interim dividend (No. 95) of 395 cents (2001 : 375 cents) per ordinary share
has been declared in respect of the six months ended 30 September 2002. The
exchange rate used to convert the Pounds Sterling dividend into Rands is 15.20,
which represents the average spot rate at 11h00 (SA time) on 19 November 2002.
The last day to trade cum dividend will be Friday 6 December 2002.The shares
will commence trading ex dividend on Monday 9 December 2002.The record date will
be Friday 13 December 2002 and payment will be made on Tuesday 24 December 2002.
Share certificates may not be dematerialised or rematerialised between Monday 9
December 2002 and Friday 13 December 2002, both dates inclusive.
By order of the board
S Noik
Secretary 19 November 2002
Date: 20/11/2002 09:24:19 AM Produced by the JSE SENS Department
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