Investec Group (OTCPK:IVTJF) Q2 2023 Earnings Conference Call November 17, 2022 4:00 AM ET
Company Participants
Fani Titi – Group Chief Executive
Nishlan Samujh – Group Finance Director
Ruth Leas – Chief Executive Officer, Investec Bank plc
Conference Call Participants
James Starke – RMB Morgan Stanley
Fani Titi
Okay. Good morning ladies and gentlemen. It really is a privilege for Nishlan and I to present the results for the 6 months ending September 30, 2022. The results are written by 8,500 of our colleagues across the world. We just have the pleasure to present them to you. And I really am glad that over the last 4 years or so, since the pandemic, we have seen continued execution on the strategy that we outlined over that period of time. The environment has been particularly difficult, a level of volatility in markets, a recovery from COVID, which has been interrupted obviously by where we are today.
So as we start our results, we obviously do recognize that we have a level of volatility that continues to characterize the environment ahead, and goes into the outlook, the macroeconomic outlook that we use in looking at our results. As Nouriel Roubini says, in the history of modern capitalism, crises are the norm and not the exception. And that is the mindset that we take as we move forward. And we look obviously to continue to execute with discipline, but also to take advantage of opportunities that do come out of these environments that are disrupted.
Just looking at the key takeouts of the results, as I said, over the last 4 years or so or 4 reporting periods, we have seen COVID. And now we are in a macroeconomic environment that is highly disrupted. Over those 4 years, we now see that our earnings per share, adjusted earnings per share up 47%. That, we believe, is a fantastic achievement for the business over a disruptive period of time. We see also that the quality of our result continues to improve as we see recurring income increasing as our client franchises continue to generate results that are pleasing as we support our clients the way we do.
We also see a strong generation of capital. As you see on the graph that our net asset value has continued to increase and that generation of capital allows us first and foremost to continue to invest in growth, but importantly, in this period, to also return a significant amount of capital to our shareholders. So the ability to support growth and to return capital to our shareholders, are the twin tracks that we are running on. As I said, we’ve made significant progress. And we are now at a point where we are returning to our shareholders. We are achieving returns to our shareholders that are within the targets that we said. Also our cost-to-income ratio is where we said we would like to be by 2024 financial year end, so pleasing results indeed.
If we have a snap look at the results, a 25.1% increase in adjusted earnings per share, a 24% increase in adjusted operating profit, driven largely by significant revenue growth of 19% that is supported by the diversified client franchises that we have, but also the focused approach that we have towards client service and client support, particularly in an environment that is uncertain and that has a lot of risk attached to it. Our cost-to-income ratio came in at 60.5%, which is much lower than our FY ‘24 target of less than 63%. In this reporting period, our costs were up about 11.5% and Nishlan will unpack that.
But if you look at our cost relative to 2019, you will realize that cost has been up only about 3.9%. Those who follow Investec will know that there has been a step change in our costs in the UK bank. Hence the cost discipline that we have exercised over the last 4 years or so, continue to support us. And as we go forward, we will continue to exercise that level of discipline.
Our asset quality continues to be very good and our exposures are supported by very good collateral. In this reporting period, our credit loss ratio came in at 15 basis points compared to the prior period of 7 basis points. And this is driven largely by the outlook in the macro economy, particularly in the UK, where there is a significant level of deterioration. In fact I’m glad I am not Jeremy Hunt who at about the same time has to deliver in the UK at the autumn statement because the fiscal numbers there are much more constrained. So that increase to 15 basis points is still lower than our medium-term range of 25 to 35 basis points in terms of credit loss ratios.
But going into this environment, we obviously expect that you will see some creeping towards our medium-term targets. Our return on equity, as I’ve said, is at 13%, inside of our medium-term targets. And we really are pleased that we’ve been able to execute as we have. The net asset value at 507 seems to be fairly stable. But what it hides is the fact that in the prior period we distributed 15% of Ninety One. So we see strong capital generation, as I’ve indicated. That allows us to have a proposed dividend of 13.5p, which equates to a payout ratio of 41%.
And importantly, for this set of results, the Board has approved a share purchase program that totals £7 billion, if we take into account the prior announcement that we have made. We had said to our shareholders that we will set to deal with the excess capital that we have on the South African balance sheet. And we are now at a point where we can do so.
If we move forward and look at our two core geographies, being South Africa and the UK, we see a loan book growth in South Africa of 10.3%, your book say 10.2%; the number is 10.3%. I see that my team has updated that number on our screen. So, strong growth within an environment that is constrained because we need a certain fiscal and economic structural reforms within the South African environment. So an annualized rate of 10.3% is particularly pleasing for us. We have seen very strong demand, in particular, on the corporate client side of our business. Clearly, in this environment, where there is a lot of market volatility and economic uncertainty, we have seen funds under management down 3.7% to ZAR20.1 billion within the South African Wealth and Investment business. Despite that, we still saw net inflows of ZAR2.1 billion in discretionary funds under management, a number that we obviously do monitor quite carefully.
Overall, if you look at the two businesses, our adjusted operating profit increased 21.1% to £230.6 million. So we are pleased with that level of increase in profitability. But it also underlines the fact that we have a business model that has diversified revenues. This is a season where asset managers and wealth managers have a lot of headwinds, but also a season at the same time where our banking businesses have a level of support from the rising global interest rates. Our ROE for our South African business printed at 14.8%. And this is before we implement the share purchase program that we talked about, the ZAR7 billion, the total ZAR7 billion share purchase program. As we continue to implement the program, we would obviously hope to see a significant improvement in the return on equity of the South African business.
Now turning to our UK business in Investec PLC, again, a very robust growth in the loan book of 12.8% annualized, driven as in the case of South Africa, by good corporate client lending, but also by a good traction in our private clients’ business with a lot of growth in our mortgage book there. Remember, we serve very high net worth clients within that business; so a good level of growth in the loan book. As in the case of the South African business, funds under management significantly down, in this case, by 9.4% to £38.8 billion. Even in that environment, we saw over £440 million of net inflows and a top ratio of around 2% in this instance. Again, the diversification or the diversity of our income streams comes through. And we saw adjusted operating profit up 28.8% to £174.4 million. Of note is that the banking business in the UK increased profitability by 52.3%. So the traction that we have gained within the UK market continues. And our niche segments that we serve, we will continue to serve even as we go into a much tougher environment. Again, our ROE in the UK business printed at 11.1%, above our minimum target. And in that market, we generally focus on return on tangible equity and that came in at 12.6%, overall a very pleasing set of results for both Investec Limited and Investec PLC.
Just before I ask Nish to go into these numbers in greater detail, we always look at our business, not only as a business that serves shareholders, although shareholders are one of our most important stakeholders, we also want to make sure that we run our business in a sustainable manner. And specifically with respect to the chosen sustainable development goals, one being around climate change and the second being around reduction of inequality, we have made significant progress.
On the former, we have now a baseline in terms of our Scope 3 reporting in terms of climate change. And we have made much more significant progress also with respect to signing up to a number of international conventions and treaties where we will be reporting the progress we are making with respect to climate change. On inequality, we have made significant progress as detailed on the slides. We also measure our progress with respect to a reduction in HAM. And this – in this case, we measure our exposure to coal as an indicator of our commitment to reduce HAM. But on the positive side, we also measure our progress with respect to positive investment, making a positive contribution. So we’ve seen significant progress with respect to our support for social infrastructure. On the African continent, we also have made significant progress with respect to responsible investing on our wealth side.
As you can see there, there has been some inflows into our Investec global sustainable equity fund. So as we go forward, we will always measure our progress in terms of profitability for our shareholders. We will measure our support for our colleagues inside of Investec in this current period. Given the crisis in terms of cost of living in the UK, we were able to support our colleagues that and up to £50,000. In the prior period, we supported our colleagues within the South African environment given the performance that we reported in the prior year. So we will continue to look after our colleagues. And we will continue to look out to create an environment where our colleagues can be the best that they are capable of being.
So we look out for issues relating to diversity. We look out to a culture of entrepreneurialism as we continue to support our clients. On a per capita basis, we continue to spend higher than our competitors because we believe that living in society and not of it is a principal tenant of who we are as Investec. So, pleased with the result overall in terms of financial outcomes and non-financial outcomes.
I’m going to ask Nishlan to go into the detail of the result in terms of financial accounting and all the complexity that we will be able to unpack as we go. Nish, over to you.
Nishlan Samujh
Our colleagues and shareholders and to all the parties out there, good morning to all of you. Thanks for sharing this time with us. I think these are really pleasing results to deliver to you. And I’ll start off by setting the context in terms of which we’ve operated in and then really get into the results.
So really looking at the macro environment, I think both in South Africa and the UK, we have seen a good recovery or somewhat recovery post-COVID. And then the realities of the environment has shifted in with the geopolitical tension, with the Ukraine-Russia conflict that continues to go on and constraints around global commodities and supply chain constraints around the world as well as localized political issues that continue to play out.
So while we are expecting there to be sort of a positive economic growth in South Africa of around about 1.9% over the next couple of years, that still remains relatively constrained. And from a UK perspective, I think it will be quite brave to try and preempt some of the news that will break in the market today and that might influence that. But really I think these are times that we’ve got to be prepared for the level of uncertainty that exists. From a financial markets perspective, we’ve seen volatility and weakness, particularly with the events that played out at the end of September within the political and economic, fiscal policy profile in the UK. And from a South African perspective, we continue to see some volatility in the exchange rate and somewhat weak set of exchange rates, particularly as we closed the half year.
Global interest rates obviously sharply decreased as we went into the COVID environment. And we’ve seen a stepped increase and of late, a much sharper level of increase in interest rates as the various regulators have really instituted policies to try and deal with this concept of inflation that continues to drag into the influential layers. I think from a UK perspective, this slide really identifies some very key points, which is that with the key – with the sharp rise in interest rates, you can see that those interest rates when seen before were last seen before the financial crisis. So these increases in interest rates are really real and really sharp within that economy.
We have seen that recently, inflation printed at about 11.1% in the last quarter. So there is still work to be done to curtail inflation. So we do see the interest rates continuing to increase. But at the same time, we’re very conscious of the fact that there is economic weakness that has to be dealt with once inflation is dealt with. So to that extent, we will anticipate seeing interest rates moderate as we move forward in time. In the South African context, I think it’s very important to note that these interest rates were pretty much seen just before us entering into the COVID period back in March ‘20. So the levels at which we are at now, these markets have actually operated at just prior to the COVID period.
Now having contextualized those results, I think what’s very pleasing is when we stood here back in March; we spoke about the post recovery from COVID. We spoke about the momentum of that recovery. And what you see in today’s results is really a continuation of that momentum really building on the strength of the underlying business franchises. And for example, looking at the base growth that we’ve seen in the UK bank and the influence that that has had on our net interest margin as well as the positioning of the balance sheets in both South Africa and the UK. So it’s very pleasing to report and to present the sort of momentum that you see on this graph now to September 2022.
Splitting it out a little bit, from a South African perspective, overall contribution to the £405 million of operating profit that we’ve generated, which is a 24% increase. In South Africa, we saw an increase of 21% or 20% in rand terms, a really positive contribution across the businesses with the South African bank reporting an increase of 16% in rand terms and generating an ROE in this period of 15.1%. The wealth business in South Africa, again, within the context of the environment reporting, a 7% increase in ZAR, the South African element of that business reporting around about a 2% growth in operating profit for the period.
Group investments and I think both in South Africa and the UK, you’ve got to note that one of the key assets in that particular portfolio of business is our investment in Ninety One. And we’ve reduced that investment at the end of May from 25% to 10%. So there’s a net decrease in the contribution to these results and that will continue to phase out. And really what we will see going forward is the dividend-yield from our remaining 10% that investment in Ninety One that’s held in – on the UK balance sheet. In South Africa, we saw a significant improvement in profitability from our other investments, particularly the IEP investments, which I’ll give you some color on a little later.
From a UK perspective, underlying growth in profitability of 29% with the Specialist Bank up 52% and we’ll go through detail around that as we unpack it. The wealth business, as we’ve seen in that particular market, profitability dropping by 8%, really driven by lower and softer markets. The group investments portfolio is just the Ninety One investments, so that’s a natural reduction that we anticipated. I think as Fani has highlighted, the ROE for the group at 13% in this period is pretty much pre most of the capital actions that we’ve noted.
Now if we look at some of the highlights from a divisional perspective. Let’s start off on the UK Fund for the wealth business in wealth business in the UK decreased to £38.8 billion from pretty much record levels, of £42.9 billion last year. That’s in the context of net growth of about 2.1% annualized in terms of net inflows of £443 million. And we’ve seen a natural consequence of these reductions leading to a reduction in operating profit of 7.9% to £40.3 million.
The wealth business in South Africa, here, we have seen the business continued to expand its global investment offering, providing access to a range of investment opportunities. And what that really means is a continued diversification, I think, around about 60% to 65% of the underlying funds under management now managed on an international basis for the South African client base. Discretionary annuity inflows of ZAR2.1 billion, well offset by outflows as clients managed their portfolios and some of the share schemes that we managed also saw vesting during the period and thus a net outflow of about ZAR6 odd billion on the nondiscretionary portfolio; adjusted operating profit, up 7.6% in this context.
The Specialist Bank in the UK, here again, adjusted operating profit up by 52.3% and lending at about £128.6 million, contribution to the overall group operating profit. And that’s really underpinned by continued strong acquisition of clients, both in the private client and the corporate business. We did see good fee generation, particularly in our private equity platforms as well as our project and infrastructure platforms. But to some degree, we also saw lighter revenues from our listed equities as some of the market activity slowed in this particular environment.
The loan book grew by 12.8% on an annualized basis to £15.3 billion. So we continue to see good momentum. Through to September, we will anticipate some of that momentum to land, to lighten up as interest rates take effect, particularly on the mortgage lending book. But we’re still quite an active business that has got access to quite a large market. So client acquisition will counter some of that pressure coming from a market perspective. The South African bank, growing operating profit by 16.4% to – ahead of prior period and printing a number of just over ZAR4 billion of contribution to underlying profitability. Here, we did see increase in corporate credit demand and to some extent, subdued growth on the mortgage book in this particular period as well as other corporate property lending activity. The loan book, however, was up around about 10.2% annualized in the current period to £313.7 billion.
I think quite pleasing as we have reflected on the return on equity in both geographies now within the set targeted ranges. I think it’s very important to just note this particular slide that we look through, which is really to show the diversity of our revenue streams to spread across the businesses. Years back, we did have the contribution from Ninety One, but the wealth businesses contribute around about 20% of the revenue and 13% of the profitability for the group. We have overall net annuity income of about 78% for the group. So whilst the Specialist Bank contributes about 79% of the profitability. That’s not all capital intensive. So there are elements of advisory fees and so forth within that platform. But strategically, we’ll always look to try and balance that particular area, particularly focused on continuing to enhance capital-light revenue streams. If we look at geographically, the UK generated 55% of the overall revenue for the group and South Africa generated about 57% of the overall profitability for the group.
Now, getting into the divisions. From a wealth and investment perspective, I think a very, very respectable set of results in this period, notwithstanding the choppiness of market and the fact that you have seen lower brokerage generated from the fact that we’ve seen lower trading activity from our clients’ adjusted operating profit at ZAR300.7 million, around about 2% up in relation to the South African business. The operating margin for the South African business at 31.4% in this period, so we continue to see – operating income and operating cost growth in these results. Net organic growth of about 2.2% and we see that FUM was broadly flat at about ZAR362.7 billion. You do see when you unpack the funds under management that we continue to see good growth in our underlying discretionary fund, increasing by ZAR2.2 billion. But as I’ve noted, we’ve seen some decrease in the non-discretionary portfolio as clients managed their specific portfolios.
From a Wealth and Investment UK perspective, here, we did see FUM decreased by 9.4%, and that’s driven by markets. We continue to see net inflows of £443 million. And to some extent, I think with growth of 2.1% in the market that we are facing still a fairly good performance from the underlying business. Here, we’ve seen the operating margin decreased from 26% to 23.6%. And that’s largely as a function of lower revenue in the business in this particular period. Commission income was negatively impacted by market conditions. But we did also see an offset to the extent that there were net higher interest and given higher interest rates.
Now turning to the banks. The Specialist Bank in South Africa, as I’ve highlighted, 10.3% growth in core loans and advances, albeit that when we unpack it, you’ll see that’s largely in our corporate lending activities, whereas we’ve seen subdued growth in our private client lending extension. We’ve seen good growth in our deposit base and a continued focus on growing the retail deposit base in South Africa that will benefit net interest margin over time. The level of income, you continue to see good diversified levels of income, but strong growth in net interest income in the period of around about 14.3%, supported by higher interest rates. We’ve seen good growth in our underlying fee income in the period, obviously subdued in certain areas because of activity levels. And trading activity remained client trading activity and therefore, client flow income positive in these sets of results.
So notwithstanding the fact that operating costs increased by 14.6%, in line with income in the period. The cost-to-income ratio remained at about 49.7%. I think it’s important to note that this business has maintained a compounded annual growth rate of costs since September ‘19 of about 5.4%. The increase in costs that we’ve seen in the current period is driven by a post-recovery of some of the costs that were muted during the COVID period. But it’s also driven by increases in headcount as we’re focused on bolstering certain areas on very, very targeted growth initiatives within the business itself. From a UK banking perspective and this obviously represents our activity both in UK and within the European environment with some activity outside of those geographies as well, including our project and infrastructure capability in the U.S. and some of our Indian operations.
So the net core loans grew by 12.8%, with mortgage loans growing by just under 16% annualized in this period. And as I’ve indicated, higher interest rates, we do anticipate moderation within the mortgage lending book, offset by very much the continued drive to grow clients and to expand our base in that particular market. Deposits grew by 6.4% to £18.9 billion. Again, looking from a revenue perspective, here, we saw net interest income growing by 40.8% and that’s not just the higher interest rates. But it’s really driven by the momentum that we saw in terms of growth of the book over the last few years in that platform and therefore, the business benefiting from the net higher book that we have developed. And I think that non-interest revenue; we did see higher fee income come in from certain areas. But as I’ve indicated, there have also been negatives in terms of some of the areas, for example, advisory fees within the listed space decreasing in this period.
Trading activity and client flow income remained quite solid. And as you would have noted, I have not quoted anything to do with the financial products losses that we had prior because notwithstanding the choppiness of this market, that book is now well hedged and significantly lower than the levels that we had previously. The cost-to-income ratio in this business improving from 72.8% to 64.1%, you would note that we targeted a cost-to-income ratio of less than 65%. With a strong growth in revenue, you’ve seen that cost-to-income ratio really come into targets. Again, we note that we’ve seen significant increases in costs in this period. A lot of that is intentional. A lot of that is driven by market conditions and inflationary pressures that exist. But again, if you look at over time, I think the compounded annual growth rate over time has been below 2% for this business, particularly with the actions taken back in March ‘20 to really challenge and right-size the cost base.
Now looking at group investments. Here, you would see that our overall portfolio and balance sheet has reduced to about £656 million. We’ve distributed a large portion of Ninety One. So that’s the majority of the delta year-on-year and the remaining £169 million carrying value is really represented by the 10% that we hold of the UK balance sheet. We have a holding of 24% in Investec Property Fund. I think you saw resilient results reported from that platform yesterday. And it continues – to some extent, there remains some discount to market, which we are sensitive to from a carrying value. But the underlying business is still a strong contributor and represents the group strongly.
IEP, we’ve seen a strong improvement in its profitability contribution to ZAR282 million. To some extent, the carrying value of IEP at just under ZAR6 billion, we have announced that we’ve now entered into an agreement and in fact, IEP and its major subsidiary, that have announced that they will effectively facilitate an exit strategy for both Investec and other shareholders over a period of time, which we expect to take place over the next 24 months. Together with that, we’ve announced that IEP has actually realized one of its significant assets within the chemical cluster that represents about 26% of our book value. So to some extent, that level of execution, which is unpacked in the results, you will continue to see an overall realization of that asset. So this area, we will continue to see a reduction in capital allocated to our group investments and with the growth in our franchise platforms, both in South Africa and the UK, a continued increase in capital allocated to those businesses.
So summarizing it, operating income. If we look at it by drivers, net interest income, significant contribution to these results of a 32% increase, fee income with positives and negatives playing around in different areas, increasing by 2% in the period. Investment in trading income, really sharp increases from the prior period and other operating income is really a function of the movement on fair value of some of the positions supporting our share scheme position. So that’s really offsetting costs.
The operating income, mix again, remaining relatively healthy with annuity income at about 78.2% of the overall income base. The cost base, I think the most material line is personnel, and that’s personnel, both in the front and the back office. It’s also personnel, that, includes our IT platforms and that services the businesses and services the depth of the organization. So we’ve seen strong increase in personnel costs in both South Africa and the UK, both running above inflation in this period and some of the pressures that have come through from an overall market perspective. And then the rest of the costs, again, reflecting the fact that we continue to invest in the business and to some extent, levels of normalization that have come through.
Funds under management, the key drivers, I am not going to dwell on these numbers. We’ve been through quite a lot of detail and really summarizing the fact that we’re seeing core loans grow by 7.1% and customer deposits grow by 2.1% on an annualized basis. I think if you look at our ratio of customer deposits to core loans at 75.8% that continues to remain quite healthy.
Looking at our core loans in South Africa and just unpacking the 10.3% annualized growth that we’ve seen. You will see that that has been significantly are led within the corporate and other lending areas, spread across the various activities within that particular area. Lending collateralized by property and mortgages growing by 4% and 2% in this period. So relatively lower levels of growth than we would normally see in those areas. UK, we – last year, we saw significant growth in the mortgage book and that’s now quite relevant. It’s just under, well, £4.5 billion. And again, here, we’ve seen growth across the portfolio, including mortgages and corporate and other lending. And I think we’re quite pleased with the momentum that we’ve continued to see in the business.
Now turning to expected credit loss. I think at 15 basis points, you’ll see that that is – if you look at history, still below where we would have normally operated at. I think we’re quite clear in terms of our guidance to the market, which is in South Africa; we have sort of through the cycle credit loss ratio guidance of 20 to 30 basis points. And you’ll see that South Africa is pretty much at zero at this point in time. And from a UK perspective, credit loss ratio guidance of 30 to 40 basis points and we had about 32 basis points. Although the credit loss number, income statement charge is very similar to what we had back in 2019, the books are much larger. So we’ve seen a lower overall credit loss ratio as a ratio.
Now if we unpack that by geography. From a South African perspective, we did release some of our model impairment that we raised during the COVID period. We remained very vigilant around the economic outlook in South Africa. So we retained provisions on the balance sheet with that outlook. We’ve released some of our model overlays, but a really small component, ZAR30 million of ZAR210 million was released. And we retained about ZAR190 million of the provisions, particularly around areas where we believe that there might be emerging risk arising.
The overall loss ratio in this period at pretty flattish, there is experienced loss within that number. But there were also recoveries offsetting it and some of the release of impairments. From a UK perspective, I think, here, again, we did see a deterioration in the economic environment, a rising uncertainty in that market. And as that continues to unfold, we will remain defensive from a balance sheet perspective. So in this period, around about half of the provisions that have been raised have really been raised around increasing model impairments of these deteriorations in economic results. And we’ve seen one or two other specific impairments incurred in the current period, none of which points to any specific trend to highlight.
Our balance sheet provisions and the level of coverage against the various stages and just Stage 1 really represents the performing book Stage 2 where we have some concern and Stage 3 is the default book. And our coverage ratio across all of those remains relatively strong given the level of collateral that exists on the book.
Return on equity, and we really get into the home stretch. Return on equity and return on tangible equity printing at 13% and 13.9%, again, quite strong levels within our businesses. Quite an equal split of the level of capital allocated against the two businesses. There is a higher return on tangible equity as we have a higher goodwill element allocated to our wealth business in the UK and a 12.6% ROTE for the PLC business.
I think over this period, capital has remained robust. And the CET1 ratio at PLC level at 11.1%, again, as measured on a standardized basis. The CET1 ratio in South Africa at 14.1% is measured on a partial ARB basis. We are – we believe we are in the final stages. We’ve completed a parallel run process with the regulator. And we anticipate over the next while to be able to complete that migration to ARB. And on an equivalent basis, that ratio is around about 16% relative to the rest of the South African market. We’ve continued to maintain strong levels of cash and near cash. To some extent, we will continue to manage that down as the environment improves, that will end book growth.
As the groups indicated, we remained committed to our medium-term targets. You can see where we are. I think, obviously, over time, cost of equity and cost of capital will probably re-price in a higher interest rate environment. So we will continue to look at these targets as we move forward in time. But I think there is a lot of uncertainty as we sit in the system right now, the dividend payout ratio at 41%. Again, we will operate at that higher end of our payout ratio.
So I think as we look forward from a financial outlook perspective, I think there is no denying that we are in an environment that has been very similar to what we’ve seen over the last while, where we are influenced by the level of uncertainty in the markets. We are very conscious of particular weaknesses that exist. We’re conscious of the environment that we are operating in the UK. But taking all of this into account, I think we remained fairly positively poised to both support our clients and to engage in very specific growth initiatives across the platforms that we operate in.
I think there is a level of discipline in the way we manage the business and that discipline will continue to apply. And we continue to expect to see a high level of asset quality even though we are guiding towards a higher level of expected impairments as we look forward, the level of capital that we are deploying in terms of a buyback program and that’s really underpinned by the fact that we continue to see value in the stock itself. To the extent that is largely driven by capital generation. And we will continue to see a level of capital generation, which will support this interaction with shareholders and really expecting our cost-to-income ratio to remain in that targeted range.
Now I’m going to hand over to Fani to wrap it up for us.
Fani Titi
Thank you, Nish. There was a lot of unpacking. I hope what you saw is a business that is simpler to understand, no surprises in what we presented, a set of outcomes that we had talked about 4 years ago. As one of our shareholders says, the story is a bit easy to understand somehow a bit boring. But in these types of times, boring is good, so thank you, Nishlan. There was a lot of unpacking as it were.
So over the last few years, the idea was to simplify the business. And we have executed largely on that promise of simplifying the business. As you know, we distributed 70% of Ninety One, equivalent to about ZAR32 billion in South African terms, larger than a peak and pay by the way, if you think about the return of capital to our shareholders and we have announced in these results that we will be returning a total of ZAR7 billion to our shareholders over the next 18 months or so. So the process of simplification has borne fruit. And we continue, as I say, to return capital to our shareholders.
The next stage of what we would do over the last 4 years is really focused, particularly sharply on a set of clients that we choose to serve and make sure that we serve those clients exceptionally. And we are very competitive in terms of both the service and the offering that we provided. As you know, we went – we exited a number of businesses and geographies. And we are competitive where we choose to play. As we go forward, I know the environment is very difficult. But we have a number of identified opportunities for growth that we will be executing on.
So our story as simple as it is; is also quite interesting, by the way. So just looking at the last 4 years or so, and I don’t want to go through what Nishlan went through the detail was quite a lot. You can see that the growth in profitability has been particularly impressive. As I said, 47% between September ‘19 and now in terms of adjusted earnings per share. You can also see that there has been an impressive generation of capital, which allows us to return capital back to our shareholders. You also can see that we have been reducing the weighted number of outstanding shares. And this program that we have announced will obviously accelerate that reduction in our wages.
We talked about costs. And there over the last four reporting periods, our costs in general are up only 3.9%. That discipline around cost will continue as we go forward. And it is no surprise that our ROE and our cost-to-income ratios are now within the targets that we had set for ourselves, so a 4-year period of good delivery. But as Nishlan said, the discipline in execution has to continue. If we look slightly ahead, starting on the right-hand side of that pictorial, we talk about continued optimization of returns as a mantra. That continuous optimization of returns is underpinned by 3 specific considerations.
The one is allocation of capital. We will put our capital to use only in those areas where we think we can make a competitive return by serving clients in an exceptional and unique way. Where we cannot compete, we will exit and redeploy the capital in our people elsewhere. So discipline around allocation of capital continues. The second area is discipline around costs and making sure that we are as efficient as we can be. As you saw, our cost-to-income ratio is now at 60.5%. The third area, which we don’t talk as much about is, that we have discipline around risk.
If you look at the last 4 years or so, risk events have been few and they have been proportionate to the size of our balance sheet and the size of our business. So continued risk discipline. Those three propositions I’ve mentioned will underpin a continued optimization of returns. And if I go to the left, of this pictorial, as we move forward, we are going to deepen the level of service that we give to our clients. And we are now building ecosystems between bank and wealth in the South and in the North and also between North and South as we serve our clients much more holistically and we are seeing some fantastic outcomes out of these.
As an example, our high net worth private client’s proposition is extremely competitive as we go forward. We are seeking opportunities, for instance, in building up a global wealth proposition on the back of the successes that we have made. We are also deepening our experience in terms of how we serve the mid-market corporate client base in South Africa and in the UK. So there are vectors of growth where if we serve our clients by bringing the best of Investec irrespective of bank or wealth North or South, we can deliver a much enriched experience, much better outcomes. And in fact, as we do so, we can also operate much more efficiently.
So operating platforms that are across our businesses and optimized would be the consequence of our focus on connected client ecosystems across business and geographies. There are a number of growth opportunities and initiatives we have identified. And we’re going to accelerate our ability to scale and bring these to market. As an example, we have, for some time, been offering some investment products to the lower end of our private clients market. There is a lot more focus to scale that opportunity for growth. We have, as an example, Investec Life, that we’ve had for the last few years; we are now accelerating our execution around a number of these. As I said, we are also concentrating on the mid-market. We have, as an example, in South Africa, what we call Investec for your business and the level of interaction with our clients is increasing. And as a consequence also the profitability that we think we can get out of it.
So optimizing returns as we go forward, building connected ecosystems that offer propositions that are much more relevant and delivering those in an excellent manner, but at a cost that makes sense for our business. And internally, we will improve the cultural identity and DNA of Investec, entrepreneurial, high client service, high levels of ownership and really being exceptional in how we deliver in supporting our clients. We will continue digitization and our spending as we go forward will be directed towards the future as opposed to simply business as usual. And we will – more than we ever have done at Investec, we are now looking to use data to empower decision-making. We will always be entrepreneurial. But we will support a lot more of what we do through the strategic use of data. So the future, as we see it, despite a challenging macro environment is really exciting for the people of Investec and we look forward to engaging with that challenge.
So as we close – in the areas we choose to operate, we have a very rich heritage, private banking, wealth and investment management; corporate banking, investment banking and so on and so forth. We have deep specializations. And we are bringing these specializations together through connected ecosystems. And as I said earlier on, we will deliver the best returns we can for our shareholders. But we will also be a corporate citizen where we play that is responsible. We will support our colleagues. We will support the communities in which we play and in which we operate. And we will also make sure we do so responsibly with respect to leaving a planet for the next generations that is not destroyed.
Our client franchises have scale. They have relevance in our chosen market and they are resilient. As we go into this new environment of uncertainty, resilience of client bases is really particularly important. We went into COVID and went out fairly quickly because our clients are very resilient. So, going forward into this market, we do believe that the resilience of our clients will stand us in good stead. We will continue to deal with the strong level of capital generation. It is a particular feature of our business. And we will use that capital to support growth, but also to return the excess to our shareholders. And as Nishlan said, we have a set of mid-term targets that we are firmly committed to. We are excited about the challenge that lies ahead.
On that note, I am going to open the stage for questions. Thank you, Nishlan, for going through the big detail. Now we can go into questions.
We shall start in London, I think. Ruth, are you there?
Question-and-Answer Session
A – Ruth Leas
Hi, Fani. Good morning.
Fani Titi
Good morning.
Ruth Leas
Any questions from the room?
Unidentified Analyst
Hi Fani. Hi Nishlan. Just three questions for me. So, firstly, on credit quality, can you just talk a little bit more as to what you are seeing in the UK and South Africa and sort of talk about why you are kind of keeping that 25% to 35%, sorry, basis point guidance? Sort of secondly, on the buyback, could you just talk about why you selected the size of buyback you did this time? And how much more excess capital there might be in the business to release going forward? And then sort of thirdly, can I just ask if any change to guidance on sensitivity of net interest income to base rates? Thanks.
Fani Titi
Sorry, what was the last question? I didn’t get that.
Unidentified Analyst
Sorry, whether there is any change in guidance on net interest income sensitivity to base rates?
Fani Titi
Okay. Great. Let me take the question on buybacks, and then I will ask Nishlan to deal with sensitivity. On buybacks, we have indicated that we have a level of excess capital in South Africa. If you look at where we are marking ourselves, around 16% on an ARB perspective once we have approval and if you look in this market, competitors would be between 12% and 13% and so. So, if you mark your steady-state level of capital at about between 12% and 13%, you very quickly can quantify the level of excess capital that we have indicated we would be returning to our shareholders. So, that’s how we think about it. But also there is a strong level of capital generation as we continue forward. I mean, we have indicated, as an example, 32.9p of adjusted operating earnings. We have indicated a dividend declaration of 13.5%. So, we do generate capital. And obviously, some of that capital we put into growth. Nish?
Nishlan Samujh
Yes. I think if I deal with the question around credit impairments, again, getting back to the guidance. I think what’s very important to note is that we did have higher peaks, particularly of the global financial crisis. We saw a higher peak during COVID. We therefore don’t anticipate to see the same sort of environment as we look forward. But what’s very important for us is that we have reshaped the books over a long period of time in both South Africa and the UK. And as Fani has spoken about this concept of effectively managing risk to a tolerable level, that has been embedded into the books. So, we are a business that focuses on a high level of collateralized lending. We don’t have any significant uncollateralized positions within our private client space. So, there isn’t a significant credit card book. We continue to see high levels of prepayments in our mortgage books and that really informs our view. I think if you look at the interest rate outlook, the guidance that we have provided is £10 million to £15 million for every 25 basis point increase in the UK. We probably guide to the higher level initially. And from a South African perspective, between ZAR80 million and ZAR100 million for every 25 basis points. So, that guidance is relatively consistent with what was provided before.
Fani Titi
Ruth, any more questions? Ruth, you are on mute at the moment.
Ruth Leas
Now, we will take the questions from London.
Fani Titi
Thank you, London. We will now go to Chorus Call, I think. Let’s start over here, sorry. Any questions from the room here in Johannesburg? I hope, you liked the dividend.
Unidentified Analyst
Thank you. Mr. Titi, it states on Page 37, financial outlook that it is expected that the CLR will normalize in the range of 25 basis points to 35 basis points. Now, I am having difficulty with the use of the word normalized, because I will now look at Page 30, which incidentally is not numbered in the booklet, but it’s Page 30, where the credit loss ratio for the last 3 years is given. And I cannot see anything approaching 25 basis points to 35 basis points as normal.
Fani Titi
Look, we manage through cycles. We talk through the cycle. Sorry, Nish, you wanted to take that?
Nishlan Samujh
No, I actually take the challenge on the use of the word normal, because that probably doesn’t exist anymore. So, I think we have to be conscious of the environment we are in. But I go back to the point, which is having analyzed our books, having understood the position and having understood the level of risk in our books. This is the best guidance we can provide. If there are consequences that we can’t foresee that drives up impairments because of some sudden event in the market, you will see the levels of impairments that you saw through the COVID period. And that’s some of the history that you are looking at on that particular page. So, I think when you look through time, this is the best guidance that we can give to the market.
Unidentified Analyst
If I may take that question further, please. The current year, the client loss ratio for the first half was 7 basis points. In the second half, it was 1 basis point. Now, there is nothing wrong with being conservative about the future. But to go from 1 basis point, which you experienced actually in the second half of 2022 to go as much as high as 25 basis points seems that you are being overly conservative.
Nishlan Samujh
Well, that’s an interpretation. And again, I will take the interpretation. But we are going to have to move forward in time to fully answer that question. I think the point in South Africa is there is two factors. So, if I split it by geography, and remember the 25 basis points to 35 basis points is a combined guidance for the two geographies. So, South Africa was pretty much at zero loss if you have three components, there is actually experienced loss in that book. There is a release of some of the historical model impairments that we have raised. And there is also recoveries that are still higher than the normal rate that we experienced. So, we are a business of risk. And we will anticipate to see impairments come through, particularly as you see sharper and higher interest rate supply. From a UK perspective, we reported a 32 basis point credit loss and that’s pretty much in the range of the guidance of 30 basis points to 40 basis points. There, we have got a different book, a different mix. So, for example, we have got a higher level of asset finance activity in the UK. And therefore, we will guide to a higher credit loss ratio. But what it would be, I think it will take a brave man – person to point to that over the next while because there is a lot to unpack with regards to the uncertainty that sits in front of us.
Fani Titi
Thank you. Any further questions? What’s you are going to talk about the dividend really, but disappointed.
Unidentified Analyst
Good morning Fani. Thank you for the presentation. Just two questions from me.
Fani Titi
Could you mind just speaking up a little bit, if you want the mics to pick up on the other side as well.
Unidentified Analyst
Can you hear me now?
Fani Titi
Yes, we can hear now. Thank you.
Unidentified Analyst
Two questions from my side. I am sure you are saying no good deed goes on finished. But now that your ROE was within the target range, how do you think about that, or where should we think about it over the medium-term plus to the bottom or the top end, given you have capital allocation decisions and given that you are still have your growth initiatives where would you like us to think about that over the medium-term? I think that’s the first question. And then the second question is on your structured products book that hasn’t had significant negative impacts this year. Is it that you have hedged the book and therefore, on this particular book, you don’t expect anything further, but you still carry on doing that kind of business, or has that kind of business being significantly scaled on from where you were in 2019?
Fani Titi
Okay. Let me start. With respect to returns, we had indicated that through the cycle return range of 12% to 16% for the group. We have now gone into that range. And obviously, from a management perspective, you will hope that through the cycle, you will be middle or upper end of that range on a through-the-cycle basis. What we do – remember that we said we want to generate returns that are in excess of our cost of equity. That is the overriding principle. So, as this environment develops, there will be levels of revision of what the cost of equity will be. But until that time that we revise our thinking around that, we continue to strive for the 12% to 16%. And hopefully, we can go to the middle of that range. And when you look at the cycle, we would hope that we can be middle to upper end of that cycle. But given movements in cost of equity, as we go forward, we will look at that. So, that’s on the first question. On the structured deposit book, remember that we were very specific that we were looking at capital at risk, the capital at risk book. At the moment, that the size of the remaining book is less than 20% of this original size. So, we continue to run that down. And it has been totally insignificant with respect to our results this time around as a consequence of two specific things – three. First, the book size is much lower. Second, we had taken certain hedging decisions around that. And third, the management of ongoing risk has been very good. So, we do not expect that to be a big factor as we go forward. Any further questions? Okay. I think we will go to the Chorus Call. [Indiscernible] get closer here. You have to bet together.
Operator
[Operator Instructions] The first question comes from Harry Botha from Anchor Stockbrokers. Please proceed with your question, Harry. Harry, you may proceed with your question if your line is muted, please un-mute you phone so that we can hear your question. Unfortunately, we can’t hear anything from Harry’s line. The next question comes from James Starke from RMB Morgan Stanley. Please proceed with your question, James.
James Starke
Hi. Good morning Fani and Nishlan. Thanks for the opportunity. Two-part question from my side. Regarding the Private Bank in South Africa, I mean it’s really on competitive intensity and how you are finding the landscape at the moment? I mean which aspects of the business are you seeing that intensity manifested. I mean if you could touch on things like asset pricing, liability pricing and even risk appetite? And then secondly, you recently refreshed your rewards program. If you can give some color on how your clients are responding to these changes and how engagement levels and costs are trending relative to your expectations from these changes? Thank you.
Fani Titi
Hear the second question?
Nishlan Samujh
Yes, the rewards program.
Fani Titi
The rewards program. Okay. You go. By the way and so I could miss that of the Private Bank…
Nishlan Samujh
Exactly, I was looking for the bank.
Fani Titi
You want to get around to hear this question.
Nishlan Samujh
I think we have got a business that’s obviously operating in South Africa for a long period of time. I think competition in South Africa is strong. And I think that often the boundaries in terms of the competitive landscape will continue to change. I think the consistency from an Investec perspective is the depth of service that we offer the client. The fact that we are a very, very high touch business, really supported by high-tech. So, we will continue to keep those elements moving in deep parallel status and continue to expand our business. Now, what we have particularly done, I think which has laid the challenge to the business to actually double its client base over the next 3 years, 4 years, 5 years. And that challenge is on the basis is that we have been highly conservative in the manner in which we have acquired clients. We believe that the world out there has moved on. We believe that we don’t have to really shift the risk curve too much and that we can further penetrate into this market really underpinned by what Investec represents in the market. When it comes to our rewards program, our approach is simplicity. There is no ifs and buts and when and how and timing. And the rest of it, it’s really about if you interact with the business and we have expanded the platforms around where we measure that interaction and we will continue to expand around that. But at the end of the day, as a client, you know what you are receiving and you have optionality in terms of how to deploy that reward. So, that the crux of the program has continuous simplification and enhancement to the underlying program. Now I think you used the key word, which was recently introduced. So, it’s very hard to answer your second component with a short period of time that those changes are in play.
Fani Titi
Thanks Nishlan. Yes, I like your answer on this rewards simple to understand and simple to cash out and benefit from because there are rewards programs that are around up that are very complex, and they don’t offer the same value. In fact, I said to AD, our Global Head of Marketing. We will be able to communicate our proposition in simpler terms so that people can understand the value that resides in our propositions, so good done Nish. Another question from Chorus?
Operator
At this time, there are no further questions from the phone line, sir.
Fani Titi
Thank you. The last area to go to will be the ones that have been e-mailed. Nish [ph]?
Nishlan Samujh
Fani, before we go there, I think one other question is just the distinction of the offering in the South African market from a private client perspective. If you look at the fact that this bank has the ability to offer you an international service in a manner that is fully integrated and the integration between managing your need for capital and managing the capital that you have created through our wealth platforms as well and that level of integration that sits around the client, apologies sir…
Fani Titi
Yes. One of the questions that didn’t come up would have been on gray listing. The fact that we have an integrated offering of both South Africa and the UK private banking and wealth means that if God forbid, we do get gray listed clients here in South Africa will be negatively impacted, but given the fact that we are an integrated and a lot more joined-up proposition, we will be able to help our clients much easier than anyone else would be able to purely because we know the clients here. We have been doing a lot of work to make sure that the enhanced due diligence that would be required if we gray listed for clients to be served elsewhere, that process would be simplified. And that’s why when you look at our private banking and our wealth proposition. Firstly, we are at the top end. The best there is, we are moving to address at the lower end of it much more aggressively as we spoke on my investment, Investec Life proposition around mortgages. So, we are going to be extremely competitive. And we offer this international linkage that becomes even more important if you have gray listing. Sorry, Nishlan, now, you have got me to talk about something else.
Nishlan Samujh
Let’s take the next question.
Fani Titi
Let’s go to questions.
Ruth Leas
And Fani, we have got quite a few questions. So, I know that it’s like 12:13 at the moment. And I know you have some meeting.
Fani Titi
Okay. I will leave them to Nishlan then. I can go a bit long.
Nishlan Samujh
How many questions would you like to take?
Fani Titi
I think there will be themes. Are you able to give us one or two themes and then we can take the questions based on themes?
Ruth Leas
Alright. We are going to go to [indiscernible]. What can you say would be the optimum level of interest rates for the net interest income? Meaning the highest rate beyond which the loan growth may start to reverse backwards, both SA and the UK?
Nishlan Samujh
Again, it’s not necessarily an easy question to answer. I think what we can say is the following is given that the area of the market that we operate in, we anticipate that our clients remain relatively resilient to higher interest rates. And again, I will reiterate that from a South African context perspective, those higher interest rates weren’t too far back. So, we see that South Africa is probably reaching a point of normalized, well, I wouldn’t use the word normalized, but rates that the market is used to operating in some of that benefit of lower rates through the COVID environment is now pretty much out the system. We are still about 25 basis points below where we were back in March ‘20. And maybe that increases by 1% or 2% over time. But I would still see it consolidating given the weakness in the general market. From a UK perspective, we have seen rates increased to around about 3%-odd over this period. There is probably more momentum. We see that growing to around about 4.75% or 5%. We will listen to the news over the next few days to understand if that outlook changes. But again, we see that the main impact right now is inflation and that’s the objective. And immediately after that is to get back on to the economic outlook and forward. We think our clients will remain resilient in those sorts of rate ranges in both South Africa and the UK. But at the same time, we are very cautious that – and that’s the reason for us providing a higher impairment outlook.
Ruth Leas
We will take one more question. That’s from [indiscernible]. Excellent improvement in the cost-to-income ratio from 64% to 60%, what ratio is Investec targeting in the short to medium-term and why is the current cost-to-income ratio materially higher in the PLC than Limited?
Fani Titi
Yes. To answer that question, we have indicated that medium-term target with respect to cost-to-income for the group is below 63%. So, we have printed 60.5%. And we will continue to work, as I have said, to improve our cost discipline. With respect to the two geographies, firstly, the UK geography is a higher cost geography. Second, the composition between bank and wealth is different. We have a much larger composition relatively speaking, with respect to the UK from wealth and as I said, there is a higher cost jurisdiction. So generally, your cost-to-income ratio will be dependent on mix and on geography in terms of the level of costs. So, we would expect, as you go forward, that you have a differential in terms of cost-to-income ratios. Internally, we obviously do manage our expectations around cost-to-income ratios per business, per geography. But for purposes of reporting to the market, we now really just focus on three. The group one, the PLC and the Limited because we think that’s easier from a market perspective. I think that takes us to the end of the day or something burning, okay. Sorry, Nishlan.
Ruth Leas
One more question from Chris Steward, Ninety One. It appears your announced buyback is based on existing capital surplus plus advanced ARB, given improved organic capital generation to support risk-weighted assets growth. What are your plans for the capital generated by the disposal of the IEP assets?
Fani Titi
I knew that’s coming, Nishlan. So, that’s the last question, that came in rather late, you go.
Nishlan Samujh
I thought you were taking. I think at the end of the day, we have announced the number. That number takes into consideration what we are comfortable with at – given our outlook over the next short while. We have indicated the fact that the business remains highly capital generative. And any considerations as we move forward in time, we will consider. I think it’s important to separate the cash value of a release of an asset to its capital requirement. So, I wouldn’t overemphasize the capital released on the realization of some of those investments.
Fani Titi
Yes. Just in closing then, I would like to thank my colleagues for delivering this excellent set of results. It’s been a long journey over the last 4 years or so. I also would like to just thank our shareholders. When we came with this strategy for simplifying the business, focusing and growing it, there was a level of risk around it and there was a level of lack of conviction, but a number of our large shareholders supported us. And as we go forward, the environment is quite choppy. And as I have said, we are comforted by the fact that we have a resilient client base, well capitalized, both in terms of, well – a strong balance sheet in terms of capital and liquidity. And we have a culture that allows us to continue to support clients during this period.
Thank you very much for your attendance. We will see you in another six months or so. Thank you.
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