Stephen Koseff is chief executive of Investec.
SUMMIT TV: The asset management and wealth management divisions are trucking along, but it’s not going so easily for Investec’s specialist banking operations — in their regular pre-closed period briefing Investec said first half operating profit is likely to be flatter than last year. You’re saying it’s difficult to grow in the current environment – which areas are finding it a bit of a slog?
STEPHEN KOSEFF: I think some of our trading and deal-making areas would be battling because life is uncertain and corporates aren’t doing much. We’ve done very well in M&A in all three geographies because we’ve been in the right deals – but in corporate banking we are not seeing that much happening as they sit on the sidelines not investing because the world is a funny place.
STV: Is that a feature particular to any one geography?
SK: No, it’s common. In South Africa consumers are spending but corporates are not investing. In the UK consumers are saving and corporates are not doing anything. Australia is similar to the UK with corporates not doing much but private equity firms are buying distressed debt and trying to do corporate deals because they are sitting on a bit of cash. Generally speaking people are sitting on their hands because of the uncertainty…
STV: If you say there is a bit more activity in mergers and acquisitions…
SK: Yes, we did quite a large capital raising in the UK jointly with JP Morgan for a company called Melrose PLC that’s just gone into the FTSE 100 as a consequence of the acquisition they needed to raise the capital for – so there is some of that kind of activity, but it’s not consistent being more sporadic…
STV: Does this herald the start of an upturn for corporate banking?
SK: I think private equity firms buying distressed debt – we can see the equity markets stable and trying to go up, so if we have European resolution China coming out with a big stimulus package – if that starts getting traction then we could see things improving. It depends on how one sees the world – are we Japan or are we still the rest of the world? That’s what one doesn’t really know yet. Japan has lived in this space for 20 years where there’s a little bit of a rally – Japan’s index is around 8,900 points after having peaked around 39,000 about 23 years ago. That’s really the question – what kind of environment are we in? There is a lot of liquidity for good risk – but there is zero liquidity for poor risk.
STV: A lot of banks have been burnt in the past so are they still reluctant to lend?
SK: I think they are very happy to lend to good risk – maybe they lend a bit less not giving 100% home loans – so some of the pre-crisis practices have been eliminated and people that historically might have got a 100% home loan won’t buy now until they have the 20% deposit or borrow from family members and that kind of thing. That slows activity down so if we take the UK demand for rental properties has gone up even in a country like Ireland where there’s been a 55% house price collapse but rents only came down 25% because people still need to live somewhere but they can’t afford the deposit to buy a home.
STV: You must be quite pleased about the drop in impairments – particularly in Australia – you said the last time we spoke that we would start to see that and it does seem to be happening…
SK: We knew that because one can manage it over time or take the hit – we took the hit in Ireland in 2010 and South Africa in 2011 – so impairments have stabilised and are now lower. In Australia impairments dropped off a cliff because we took a lot of pain last year.
STV: You expect your credit loss ratio to be between 0.8% and 0.85%...
SK: Yes, that’s still not normal – in South Africa things are still quite tricky with a lot of banks reporting a rise in impairments as conditions appear weaker, and in the UK that economy is still not in great shape and in a mild recession – so it’s still tough on the ground but we are seeing an improvement.
STV: What is a normal credit loss ratio?
SK: In the UK and Australia we went 10 years without impairments – in the UK even 15 years without impairments – but a normal credit loss ratio for us would be getting that down to around 0.5% we would be happy globally…
STV: You must rue the effects of the currency – if we look at core loans and advances that’s going to drop in sterling terms, but it’s actually higher over the period – is the weaker rand making your life difficult?
SK: No, it just makes our earnings look worse than they are. If we were reporting in rands there would be a nice increase in earnings so it’s like swimming upstream. We’ve had a few headwinds over the past few years so a few more is not the end of the world. If you look at the underlying we manage each balance sheet separately and we manage each business separately and in South Africa we did see growth in revenue and costs were fairly well contained growing less than inflation at around 3.5% so we are not happy with that result. When we translate that into pounds we are down 5% or 6% even though we are up in reality.
STV: Asset management – are you happy with the inflow there of £1.1bn sterling over the period?
SK: That’s also affected by the rand – but we have seen some good inflows. It’s not at the levels of before – that’s more the state of the world. There was a lot of interest in developing markets but that’s tapering off with people seeing China coming off and India looking like there’s a bit of admin. Maybe the developing markets need to take a breather because we are not going to be seeing the growth but there is still a lot of interest in Africa. With what’s going on in the SA mining industry and the strikes international players are going to back off for a while but they are still looking at Africa. We are seeing an unwind of the commodities bull market and that is going to have an impact.
STV: Are you worried about this because Investec has shifted focus towards the wealth and asset management divisions and that’s going to be an increasingly important driver of income for the business?
SK: We are quite happy with where those two businesses are – our wealth businesses in stable currency funds under management grew by 10% where if I were to convert that to rands it probably grew 30% to 40%. This is life – we know that the world is volatile, and there are times where one gets the inflows. The one thing that may help those businesses is in the developed world seeing stock markets go up. If we look at the FTSE 100 it’s quite a lot below where it was 12 years ago and in fact below where it was in 1998. That is 14 years with the index still below where it was. The Dow Jones is above where it was in 1998 but it’s not above where it was in 2001. These markets are looking like if they get a bit of good news they are going to go up and there is a lot of liquidity building up in the world that needs a home. If you have a good institutional-type property with a long lease in the UK someone will buy it at 4%. We have not seen that even with the bull markets. If it’s a bad property they won’t even buy it with a 10% yield.