Investec’s five-year gambit

Investec’s share price has spent the past year in the doldrums. In contrast to the JSE banks index – which has gained almost 15% over the same period – Investec stock over one year is about 7% lower. But its shares bounced almost 4% on Thursday after it posted a 7.8% rise in operating profit to top £1bn, and a higher-than-expected dividend.

Investec’s five-year plan is big: to triple its corporate banking book in South Africa by 2030 and more than double its UK private clients business. Currency spoke to Investec South Africa CEO Cumesh Moodliar.  

Why do you think the market’s basically ignored you for a year?  

If I take a step back, you’ve seen the share over the past four years, prior to this last year, show quite a significant rebound. But the honest answer: it’s been as puzzling to us because post our capital markets day in 2019 we have consistently delivered what we had communicated to the market. We then look at core drivers in both geographies and [we’re] acquiring clients in both geographies, growing our loan books, growing our deposit base and we’re continuing to expand our operations.

Hopefully sooner rather than later the market will realise the value that’s in the share. The market’s often rewarding businesses that are nascent, but have not yet delivered profit or shown how they can weather a storm, so at times we’ve just got to put our heads down, and we believe this year’s results reflect that.  

Is it maybe that Investec lost its mojo and became a lot more conservative, having been burnt by deals that went south, without sounding too esoteric?

There’s actually a fact-based answer to it. Was there a period of time in the past five years, where we had to realign and refocus? Absolutely. We had to look at what I call one or two idiosyncratic client events that we had to manage, and also post the global financial crisis we had to rebuild a bit.

Just in our corporate lending book in South Africa we had double-digit lending growth in the past year, which was tail-ended into the last four or five months because the first six months were really flat. We’ve grown by 11.5% in the corporate space. And in private banking we’ve grown by just under 6%. So that tells me we’re in the game. We want to maintain a balanced risk approach, but we will always partner and back the clients that we have longstanding relationships with. 

It’s not as if you haven’t got ambitious targets, either. How strong really is the mid-size corporate market in South Africa, and what makes you confident that you’ll hit the targets that you’ve set yourself by 2030?  

The corporate mid-market we define as businesses with turnovers of between R30m and R1.5bn, so that effectively excludes a lot of the SMEs, and our sweet spot will probably be above that R30m mark.

We now have, and have been building for the past few years, a transactional banking offering, which is getting to scale. About two years ago we had very little operating deposits on that transactional banking base, but [now] we are on R3bn. We’ve got close to 2,800 clients right now and what we are really trying to style this as is bringing private banking to the mid-market corporate where many of the larger commercial operations have closed branch networks and focused on very specific areas.

The feedback that we often get is a lack of personal engagement and personal service and that’s where Investec is distinctive. And add to that what we know we have in terms of specialist lending skills: anything to do with structured finance, structured property finance, acquisition finance as well as corporate advisory capability for smaller companies. 

In the UK you talk about getting to a market share of 2%, which seems small. Is it just because it’s a much tougher and bigger market? 

In terms of the UK, the size of the market is completely different. The structure of the market and the depth of the capital are very different to the South African market. So, as much as that 2% may sound almost unambitious, given the size of the UK market and the fact that it’s a global competition market, for us 2% [means] there’s stretch in that target, and secondly, there’s real opportunity in it.  

Has Discovery Bank taken a big chunk out of you? 

They definitely have not taken a big chunk out of our business. In some areas it may appear that our businesses are similar, but in many areas we’re not. We have a comprehensive full banking business; our mortgage book has been growing at single high digits for the past five years and the mortgage book now is well over R100bn.

On the transactional banking side you’ve got Discovery, but you’ve also got all the incumbent banks that have also really upped the ante. And there’s the Capitec effect with 24-million customers, and it’s coming at all the major banks. So I wouldn’t single Discovery out on its own.  

Lastly, how worried are you that South Africa won’t get it together to unleash any sort of tangible economic growth out of our government of national unity?  

I would say we’ve seen a lot of the right moves, but speed of execution has to accelerate. It’s just too slow. One of the positive outcomes when we look at this year’s budget, as much as it’s been a bit of a debacle, [is that] there’s R1-trillion of infrastructure spend over three years; those are the core fundamentals you’ve got to focus on. 

What I’m excited about in that space is that when we travel to our offices in Dubai and the UK and US [there] is investor interest in participating in these public-private sector partnerships. Like many other corporates we get frustrated at the pace. Transnet is a burning platform and you’d love to see some rapid action coming through there.

Look at India and how they’ve continued to focus; they’ve continued to build infrastructure in the face of adversity. I’d last been there 15 years ago, and arriving in Mumbai, I almost didn’t recognise parts of the city again, and there you’ve got GDP growth of 6% to 8%.

If we do the basics, we will attract that investment. First, you don’t want to alienate the US, and I think that’s a different discussion, but there are pools of capital that exist in the East, in the Middle East and in Europe that are willing to partner with South Africa.