| Wed 21 May 2003, 10:20 | | Investec Plc - Consolidated Uk Gaap Financial Resu |
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Investec plc - Consolidated UK GAAP financial results in Pounds Sterling for the
year ended 31 March 2003
Investec plc
(Registration number 3633621)
JSE Code: INP
ISIN: GB0031773103
Investec plc (incorporating the results of Investec Limited) Consolidated UK
GAAP financial results in Pounds Sterling for the year ended 31 March 2003
Salient Features
31 March % 31 March
UK GAAP 2003 Change 2002
Earnings before goodwill amortisation 88,684 (30.5) 127 613
and exceptional items (GBP"000)
Operating profit before goodwill 84,758 (46.5) 158 567
amortisation and taxation (GBP"000)
Earnings per share (before goodwill 97.6 (30.2) 139.8
amortisation and exceptional items)
(pence)
Dividend cover (times) 1.8 2.6
Dividends per share (pence) 54.0 0.4 53.8
Headline earnings per share (pence) 90.9 (28.3) 126.8
Cost to income ratio (%) 79.8 72.0
Annuity income as a percentage of 71.3 68.7
operating income (%)
Total capital resources (GBP millions) 1,013 5.7 958
Total assets under administration (GBP 40,604 (8.2) 44,219
millions)
Return on average shareholders" funds 12.4 19.4
(%)
Return on average tangible shareholders" 23.8 37.2
funds (%)
Weighted number of ordinary shares in 90.9 91.3
issue (million)
Consolidated profit and loss accounts for the year ended 31 March
2003
Before
goodwill Goodwill
and and
exceptional exceptional
GBP"000 items items Total
Interest receivable - interest 171,066 - 171,066
income arising from debt
securities
Interest receivable - other 697,805 - 697,805
interest income
Interest payable (737,405) - (737,405)
Net interest income 131,466 - 131,466
Dividend income 3,597 - 3,597
Fees and commissions receivable 331,375 - 331,375
Annuity 286,782 - 286,782
Deal 44,593 - 44,593
Fees and commission payable (54,768) - (54,768)
Dealing profits 45,231 - 45,231
Income from long-term assurance 27,779 - 27,779
business
Other operating income 25,269 - 25,269
Other income 378,483 - 378,483
Total operating income 509,949 - 509,949
Administrative expenses (392,466) - (392,466)
Depreciation and amortisation (14,417) (122,302) (136,719)
- tangible fixed assets (14,417) - (14,417)
- amortisation and impairment - (122,302) (122,302)
of goodwill
Provision for bad and doubtful (18,308) - (18,308)
debts
Operating profit/(loss) before 84,758 (122,302) (37,544)
exceptional items
Operating profit/(loss) from 101,427 (116,599) (15,172)
continuing operations
Operating loss from (16,669) (5,703) (22,372)
discontinued operations
Total operating profit/(loss) 84,758 (122,302) (37,544)
before exceptional items
Share of income of associated 11,350 (1,644) 9,706
companies
Exceptional items - (28,757) (28,757)
Provision for losses on
termination and disposal of
Group operations - discontinued - (9,437) (9,437)
Impairment of goodwill on - (19,047) (19,047)
discontinued operations
Profits on termination and - 5,800 5,800
disposal of Group operations -
continuing
Fundamental reorganisation and - (6,073) (6,073)
restructuring costs -
continuing
Profit/(loss) on ordinary 96,108 (152,703) (56,595)
activities before taxation
Tax on profit on ordinary (5,357) - (5,357)
activities
Tax on profit on continuing 858 - 858
activities
Tax on loss on discontinued (6,215) - (6,215)
activities
Tax on provision for losses on
termination and disposal of - - -
group operations - discontinued
Profit/(loss) on ordinary 90,751 (152,703) (61,952)
activities after taxation
Minority interests - equity (1,646) - (1,646)
Profit/(loss) attributable to 89,105 (152,703) (63,598)
shareholders
Dividends - including non- (53,428) - (53,428)
equity
Retained profit/(loss) for the 35,677 (152,703) (117,026)
year
Profit/(loss) attributable to (63,598)
shareholders
Goodwill and exceptional items 152,703
Preference dividends (421)
Earnings before goodwill 88,684
amortisation and exceptional
items attributable to ordinary
shareholders
2003
Earnings per share (pence)
- Basic (70.4)
- Diluted (70.4)
Earnings per share before
goodwill amortisation and
exceptional items (pence)
- Basic 97.6
- Diluted 96.9
Dividends per share (pence) 54.0
Calculation of headline
earnings (GBP"000)
Profit attributable to 89,105
shareholders
Fundamental reorganisation and (6,073)
restructuring costs- continuing
Preference dividends (421)
Headline earnings attributable 82,611
to ordinary shareholders
Headline earnings per share 90.9
(pence) - basic
Consolidated profit and loss accounts for the year ended 31 March
2002
Before
goodwill Goodwill
and and
exceptional exceptional
GBP"000 items items Total
Interest receivable - interest 205,398 - 205,398
income arising from debt
securities
Interest receivable - other 666,802 - 666,802
interest income
Interest payable (708,370) - (708,370)
Net interest income 163,830 - 163,830
Dividend income 2,081 - 2,081
Fees and commissions receivable 415,918 - 415,918
Annuity 335,845 - 335,845
Deal 80,073 - 80,073
Fees and commission payable (74,671) - (74,671)
Dealing profits 49,485 - 49,485
Income from long-term assurance 31,079 - 31,079
business
Other operating income 30,949 - 30,949
Other income 454,841 - 454,841
Total operating income 618,671 - 618,671
Administrative expenses (428,510) - (428,510)
Depreciation and amortisation (16,926) (98,435) (115,361)
- tangible fixed assets (16,926) - (16,926)
- amortisation and impairment - (98,435) (98,435)
of goodwill
Provision for bad and doubtful (14,668) - (14,668)
debts
Operating profit/(loss) before 158,567 (98,435) 60,132
exceptional items
Operating profit/(loss) from 158,862 (92,654) 66 208
continuing operations
Operating loss from (295) (5,781) (6,076)
discontinued operations
Total operating profit/(loss) 158,567 (98,435) 60,132
before exceptional items
Share of income of associated 3,904 (821) 3,083
companies
Exceptional items - (17,529) (17,529)
Provision for losses on
termination and disposal of
Group operations - discontinued - (7,056) (7,056)
Impairment of goodwill on - - -
discontinued operations
Profits on termination and - 1,363 1,363
disposal of Group operations -
continuing
Reorganisation and - (11,836) (11,836)
restructuring costs -
continuing
Profit/(loss) on ordinary 162,471 (116,785) 45,686
activities before taxation
Tax on profit on ordinary (31,257) 2,717 (28,540)
activities
Tax on profit on continuing (32,200) - (32,200)
activities
Tax on loss on discontinued 943 - 943
activities
Tax on provision for losses on
termination and disposal of - 2,717 2,717
group operations - discontinued
Profit/(loss) on ordinary 131,214 (114,068) 17,146
activities after taxation
Minority interests - equity (1,586) - (1,586)
Profit/(loss) attributable to 129,628 (114,068) 15,560
shareholders
Dividends - including non- (57,874) - (57,874)
equity
Retained profit/(loss) for the 71,754 (114,068) (42,314)
year
Profit/(loss) attributable to 15,560
shareholders
Goodwill and exceptional items 114,068
Preference dividends (2,015)
Earnings before goodwill 127,613
amortisation and exceptional
items attributable to ordinary
shareholders
2002
Earnings per share (pence)
- Basic 14.8
- Diluted 13.9
Earnings per share before
goodwill amortisation and
exceptional items (pence)
- Basic 139.8
- Diluted 129.7
Dividends per share (pence) 53.8
Calculation of headline
earnings (GBP"000)
Profit attributable to 129,628
shareholders
Fundamental reorganisation and (11,836)
restructuring costs- continuing
Preference dividends (2,015)
Headline earnings attributable 115,777
to ordinary shareholders
Headline earnings per share 126.8
(pence) - basic
The results below are based on the consolidated profit and loss account above
but show operating profit before goodwill and exceptional items, including
income from associated companies, split between continuing and discontinued
operations.
Abridged consolidated profit and loss accounts for the year ended 31 March
Continuing operations
GBP"000 2003 2002 % change
Net interest income 127,407 151,029 (15.6)
Dividend income 3,597 2,081 72.8
Net fees and commissions receivable 250,124 288,821 (13.4)
Annuity 207,968 213,308 (2.5)
Deal 42,156 75,513 (44.2)
Dealing profits 46,192 56,666 (18.5)
Income from long-term assurance 27,779 31,079 (10.6)
business
Other operating income 26,263 31,089 (15.5)
Other income 353,955 409,736 (13.6)
Total operating income 481,362 560,765 (14.2)
Administrative expenses (348,154) (370,885) 6.1
Depreciation (13,473) (16,350) 17.6
Provision for bad and doubtful (18,308) (14,668) (24.8)
debts
Operating profit/(loss) before 101,427 158,862 (36.2)
goodwill, exceptional items and
taxation
Share of income of associated 11,350 3,904 >100
companies before goodwill
Profit/(loss) on ordinary
activities before goodwill,
exceptional items and taxation 112,777 162,766 (30.7)
Abridged consolidated profit and loss accounts for the year ended 31 March
Discontinued operations
GBP"000 2003 2002 % change
Net interest income 4,059 12,801 (68.3)
Dividend income - - -
Net fees and commissions receivable 26,483 52,426 (49.5)
Annuity 24,046 47,866 (49.8)
Deal 2,437 4,560 (46.6)
Dealing profits (961) (7,181) 86.6
Income from long-term assurance - - -
business
Other operating income (994) (140) <(100)
Other income 24,528 45,105 (45.6)
Total operating income 28,587 57,906 (50.6)
Administrative expenses (44,312) (57,625) 23.1
Depreciation (944) (576) (63.9)
Provision for bad and doubtful - - -
debts
Operating profit/(loss) before (16,669) (295) <(100)
goodwill, exceptional items and
taxation
Share of income of associated - - -
companies before goodwill
Profit/(loss) on ordinary
activities before goodwill,
exceptional items and taxation (16,669) (295) <(100)
Consolidated statements of recognised gains and losses for the year ended 31
March
GBP"000 2003 2002
(Loss)/profit for the year attributable to (63,598) 15,560
shareholders
Currency translation differences on foreign (13,870) (69,737)
currency net investments
Unrealised surplus on revaluation of investment 18,265 10,254
properties
Total recognised gains and losses for the year (59,203) (43,923)
Consolidated cash flow statements for the year ended 31 March
GBP"000 2003 2002
Net cash inflow from operating activities 429,341 680,542
Net cash outflow from return on investments (23,235) (39,315)
and servicing of finance
Taxation (21,151) (19,380)
Net cash outflow from capital expenditure and (486,670) (461,662)
financial investment
Net cash outflow from acquisitions and (9,629) (95,655)
disposals
Ordinary share dividends paid (54,325) (58,606)
Net cash inflow/(outflow) from financing 34,396 (22,510)
Decrease in cash (131,273) (16,586)
Cash and demand bank balances at beginning of 1,165,175 1,181,761
year
Cash and demand bank balances at end of year 1,033,902 1,165,175
Consolidated balance sheets at 31 March
GBP"000 2003 2002
Assets
Cash and balances at central banks 348,343 457,222
Treasury bills and other eligible bills 243,019 197,767
Loans and advances to banks 2,758,797 2,583,205
Loans and advances to customers 4,898,226 4,780,480
Debt securities 1,931,265 4,377,877
Equity shares 147,638 204,352
Interests in associated undertakings 62,422 45,026
Intangible fixed assets 299,773 384,900
Tangible fixed assets 205,982 186,761
Own shares 82,922 42,130
Other assets 1,335,831 1,275,695
Long-term assurance business attributable 108,528 67,116
to the shareholder
12,422,746 14,602,531
Long-term assurance assets attributable to 2,536,319 2,354,401
policyholders
14,959,065 16,956,932
Liabilities
Deposits by banks 2,129,292 3,645,308
Customer accounts 6,354,867 7,068,220
Debt securities in issue 1,089,756 606,246
Other liabilities 1,580,881 2,106,191
Accruals and deferred income 255,281 218,132
11,410,077 13,644,097
Long-term assurance liabilities 2,536,319 2,354,401
attributable to policyholders
13,946,396 15,998,498
Capital Resources
Subordinated liabilities (including 276,897 190,659
convertible debt)
Minority interests - equity 38,804 33,473
Called up share capital 158 7,530
Share premium account 994,108 814,089
Shares to be issued 2,428 41,148
Revaluation reserves 29,160 11,202
Other reserves (173,877) (176,833)
Profit and loss account (155,009) 37,166
Shareholders" funds 696,968 734,302
- equity 696,968 691,201
- non-equity - 43,101
1,012,669 958,434
14,959,065 16,956,932
Memorandum items
Commitments 496,638 506,330
Contingent liabilities 302,035 299,316
798,673 805,646
The financial information set out above does not constitute the company"s
statutory accounts for the years ended 31 March 2003 or 2002. The auditors have
reported on the 2002 accounts for Investec plc; their report was unqualified and
did not contain a statement under section 237(2) or (3) of the Companies Act
1985. The comparative financial information for 2002 is derived from the
accounts as reported in the Preliminary Offering Circular which was prepared for
the listing of Investec plc on the London Stock Exchange and which has been
delivered to the Registrar of Companies. This will form the 2002 comparatives of
Investec plc (incorporating the results of Investec Limited) as a result of its
application of merger accounting. The statutory accounts for 2003 for Investec
plc (incorporating the results of Investec Limited) will be finalised on the
basis of the financial information presented by the directors in this
announcement and will be delivered to the Registrar of Companies following the
company"s annual general meeting.
Segmental analysis - geographical and business analysis of operating profit
before taxation, goodwill amortisation and exceptional items - for the year
ended 31 March 2003
Asset
Private Treasury & Management
Client Specialised Investment &
GBP"000 Activities Finance Banking Assurance
UK & Europe 23,273 (2,850) 6,915 1,646
Southern Africa & 14,473 31,411 5,871 45,494
Other
Australia 1,700 (728) 2,711 -
Israel 1,465 118 1,797 118
United States of - - - -
America
Discontinued - - - -
operations
Total 40,911 27,951 17,294 47,258
Segmental analysis - geographical and business analysis of operating profit
before taxation, goodwill amortisation and exceptional items - for the year
ended 31 March 2003
Group Services
& Other
Activities
Discontinued Total
GBP"000 Operations group
UK & Europe (6,658) - 22,326
Southern Africa & Other (28,706) - 68,543
Australia 2,293 - 5,976
Israel (2) - 3,496
United States of America 1,086 - 1,086
Discontinued operations - (16,669) (16,669)
Total (31,987) (16,669) 84,758
Segmental analysis - geographical and business analysis of operating profit
before taxation and goodwill amortisation and exceptional items - for the year
ended 31 March 2002 (GBP"000)
Asset
Private Treasury & Management
Client Specialised Investment &
GBP"000 Activities Finance Banking Assurance
UK & Europe 28,485 9,726 20,255 2,439
Southern Africa & 12,832 40,466 18,567 49,233
Other
Australia (2,655) 1,273 2,724 -
Israel 3,827 319 4,747 318
United States of - - - -
America
Discontinued - - - -
operations
Total 42,489 51,784 46,293 51,990
Segmental analysis - geographical and business analysis of operating profit
before taxation and goodwill amortisation and exceptional items - for the year
ended 31 March 2002 (GBP"000)
Group Services
& Other
Activities
Discontinued Total
GBP"000 operations group
UK & Europe 3,865 - 64,770
Southern Africa & Other (39,301) - 81,797
Australia (110) - 1,232
Israel (82) - 9,129
United States of America 1,934 - 1,934
Discontinued operations (295) (295)
Total (33,694) (295) 158,567
Consolidated statements of reconciliations of shareholders" funds and movements
on reserves for the year ended 31 March
GBP"000 2003 2002
Balance at the beginning of the year 734,302 578,885
- as previously reported 800,555 579,170
- prior year adjustment - goodwill (66,253) (285)
restatement
Foreign currency adjustments (13,870) (69,737)
Retained loss for the year (117,026) (42,314)
Share issues/to be issued 112,588 391,526
Cancellation of shares (5,079) (134,655)
Conversions from debentures 1 343
Issue expenses (32,213) -
Revaluation of investment properties 18,265 10,254
Balance at end of the year 696,968 734,302
Overall performance
This has been an exceptionally challenging year for the group (comprising
Investec Limited and Investec plc) and generally for all investment banks and
the investment management industry world-wide. The protracted economic slowdown
has seen the FTSE All Share Index and the JSE All Share Index fall by 32.1% and
30.3% respectively over the past financial year.
Against this backdrop, basic earnings per share ("EPS") before exceptional items
and goodwill amortisation declined by 30.2% from 139.8 pence to 97.6 pence.
Headline EPS declined by 28.3% from 126.8 pence to 90.9 pence.
Although the 2003 financial year was a difficult one the group made significant
strategic advances.
Salient features of the 2003 financial year can be summarised as follows:
Established Investec"s Dual Listed Companies Structure in July 2002. This long
sought after achievement was a significant milestone in the history of Investec.
Issued 4 million Investec plc shares, for a consideration of GBP33.2 million, in
July, at a time when markets were exceptionally difficult.
The group adjusted its cost base to compensate for the decline in revenues and
streamlined and rationalised many of its operations, particularly in the United
States ("US") and in the United Kingdom ("UK").
The group continued to restructure and rationalise the life assurance activities
acquired from Fedsure Holdings Limited including implementing two further
transactions, namely, the reinsurance of the annuity business with Capital
Alliance Limited ("CAL"), and the reinsurance and transfer of some of the
businesses of Investec Employee Benefits ("IEB") to Liberty Group Limited
("Liberty"). The group is satisfied that the Fedsure acquisition has now been
completed.
Annuity income as a percentage of total operating income increased from 68.7% to
71.3%.
Operating profit before exceptional items and goodwill amortisation declined
from GBP158.6 million to GBP84.8 million, impacted largely by the weaker
performances of the group"s equity related activities, particularly in the UK
and US, as well as the 9% depreciation of the average Rand/Pound Sterling rate
during the period under review.
The Board is recommending a final dividend of 28 pence per share which, together
with the interim dividend of 26 pence per share paid in December 2002, amounts
to a total dividend of 54 pence, substantially the same as that in respect of
2002. This year"s dividend is covered 1.81 times by EPS before exceptional items
and goodwill amortisation and 1.68 times by headline EPS, as determined in UK
GAAP.
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 of 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 preliminary results for Investec plc presents the results and
financial position of the combined DLC group under UK GAAP, denominated in
Pounds Sterling. The preliminary results for Investec Limited are 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 year end
rate. Reuters quote the average Rand/Pound Sterling exchange rate at 15.04 and
13.65 for the years ended 31 March 2003 and 31 March 2002, respectively. This
represents depreciation of the Rand of some 9.2% during the period under review.
This depreciation of the Rand (in the first half of the year) has a negative
effect on the results expressed in sterling of those Investec businesses that
generate revenues and profits in Rand. Where the impact of Rand depreciation is
key to understanding the performance 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 group"s consolidated EPS before exceptional
items and amortisation of goodwill, denominated in Pounds Sterling and prepared
in accordance with UK GAAP.
Commentary
Business unit review
Investment Banking
The Investment Banking division posted operating profit before exceptional items
and amortisation of goodwill of GBP17.3 million, a decline of 62.6%, reflecting
the prolonged weakness in financial markets and subdued trading volumes in all
geographies in which the division operates.
In South Africa ("SA"), Investment Banking reported declining results, largely
as a result of the lack of realisation opportunities in the direct investment
portfolio from which the division had benefited in the previous year. The lower
average volumes traded on the JSE Securities Exchange negatively affected the
agency business of Investec Securities but were partially offset by the strong
performance from the Structured Equity Desk. Investec Corporate Finance
continued to maintain its strong positioning and deal flow, focusing on
corporate restructuring activities, shareholder activism mandates and black
economic empowerment initiatives. Furthermore, the Private Equity division
enjoyed good quality deal flow.
In the UK, Investec Investment Banking and Securities posted an operating loss.
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. In the circumstances and given the lack of visible prospects of a
market recovery the division"s costs were significantly reduced from a peak
annualised rate of GBP29 million to GBP18 million. Despite the difficult
environment, the division has strengthened its retained corporate client list
and increased its institutional market share. The UK Private Equity division
benefited from a significant realisation in one of the underlying funds
amounting to GBP9 million.
Investec Inc in the US, which was particularly vulnerable to the dramatic
decline in equity markets, posted operating losses. During the period under
review the group decided that it was not prudent to sustain the ongoing losses
in the US investment banking operations. A strategic decision was taken to wind
down the investment banking operations and it is expected that as a result of
the implementation of this decision all investment banking activities will have
ceased by the end of May 2003. The cost of closing this activity is recognised
as an exceptional item in these results.
In Australia, Investec Wentworth performed well advising on 20 deals valued at
A$2.5 billion for the period ended 31 March 2003. The weak equity markets
provided attractive private equity opportunities with Investec Wentworth Private
Equity well placed to take advantage thereof.
Private Client Activities
The Private Client Activities division, comprising both the Private Banking and
Private Client Portfolio Management and Stockbroking divisions, posted
operating profit before exceptional items and amortisation of goodwill of
GBP40.9 million, marginally down on the prior year. A solid performance was
recorded by the group"s Private Banking operations. The severe market
conditions, however, resulted in a weaker contribution from Private Client
Portfolio Management and Stockbroking which suffered as a result of the lower
market prices and reduced demand for equity and related investment products.
Private Banking
The Private Banking division continued its creditable performance with operating
profit before exceptional items and amortisation of goodwill increasing 28.9% to
GBP34.6 million. This performance was driven by sturdy growth in total advances
and non-interest income, in SA, the UK and Australia. Since March 2002, the
group"s private client lending book in SA grew by 24.6% in Rand terms to R17.2
billion (GBP1.4 billion), and the private client lending book in the UK grew by
17.0% in Sterling terms to GBP925 million.
In SA, Investec Private Bank, once again, posted a commendable performance as a
result of its integrated approach to wealth creation and wealth management.
The Private Banking division in the UK continues to perform well with solid
performances from all business areas, particularly structured property finance
and specialised lending. A major initiative completed during the year was the
relocation of the call centre of the division"s deposit business to SA
generating an annual saving of GBP1.2 million. Despite a strong bias in the
lending book towards commercial and residential property exposures, the book is
well secured and the group believes that loan to value ratios are conservative.
In Australia, the private client group experienced a strong performance off the
back of solid growth in its loan portfolio. In addition, the private advisory
business strengthened its client base through referrals from existing clients
and other divisions within the group. The granting of the banking licence
enhanced the group"s ability to attract deposits.
Private Client Portfolio Management and Stockbroking
The Private Client Portfolio Management and Stockbroking division reported
operating profit before exceptional items and amortisation of goodwill of GBP6.3
million, a decrease of 59.8%.
As at 31 March 2003, Investec Securities in SA had total funds under management
of R25.6 billion (GBP2 billion), down from R27.3 billion at the prior year end.
The recent strength in the Rand resulted in Rand hedge stocks declining sharply
and diminishing Rand values of the asset swap portion of Investec Securities"
portfolios. However, the division focused on cost reductions and was able to
supplement its revenue stream with a number of new investment initiatives.
In the UK, Carr Sheppards Crosthwaite"s ("CSC") performance was negatively
impacted by the fall in equity markets resulting in a decrease in total funds
under management to GBP4.7 billion from GBP6.0 billion in March 2002. Despite
the difficult operating environment, net new funds under management of GBP376
million were generated with more than half of the new funds emanating from
private clients and trusts, and in excess of GBP100 million charity portfolio
management mandates were won. In addition, CSC administered a further GBP560
million of Personal Equity Plan and Individual Savings Account funds for third
parties in the period ending March 2003. More recently, and yet to be reflected
in the funds under management, CSC was appointed by the Lord Chancellors
Department to be one of two Panel Private Client Fund Managers.
Treasury and Specialised Finance
The Treasury and Specialised Finance division posted operating profit before
exceptional items and amortisation of goodwill of GBP28.0 million, a decline of
46.0%. The UK & European operations reported an operating loss of GBP2.9
million, while the South African operation"s contribution decreased by 22.4% to
GBP31.4 million.
The SA Treasury and Specialised Finance division"s performance was lower than
expected, with the Banking Activities suffering from the low appetite of SA
corporates for structured deals and a provision required by the Project Finance
division amounting to approximately GBP2 million. The Trading Activities
performed well with strong contributions from the Interest Rate, Currency
Trading and the Equity Derivatives businesses. During the period the group"s
100% held subsidiary Securities Investment Bank was wound up and its activities
absorbed into the SA Treasury and Specialised Finance business.
In the UK, the Treasury and Specialised Finance division suffered from difficult
trading conditions. The interest rate repo desk was closed as it was capital
intensive and used significant counterparty lines. On a more satisfying note,
the division"s Banking Activities made meaningful strides in establishing their
position in the local market with a solid flow of deals and mandates concluded
by the Structured and Project Finance businesses during the period.
In Australia, the Treasury and Specialised Finance businesses are being built up
with the result that costs have exceeded revenue in the current year. The
Project Finance division, which was established towards the end of the financial
period, achieved a mandate to advise one of the large mining houses and was
appointed as co-lead underwriter in relation to a new toll road, the largest
infrastructure project of its kind in Australia.
Asset Management
The Asset Management division, in the face of difficult equity market
conditions, delivered operating profit before exceptional items and amortisation
of goodwill of GBP19.5 million which represented growth of 4.0% in Rand terms
and a 6.8% decline in Sterling terms. Assets under management increased by 3.4%
in Sterling terms to GBP16.8 billion but declined by 20.0% in Rand terms to
R210.6 billion. The major features of the past year were the excellent
investment performance achieved across the division"s core activities, except
for SA balanced mandates, a decisive break into the UK institutional market,
continued sales market share growth in core retail markets, continued success in
SA fixed income and tight cost control.
The UK institutional business has won new business in excess of GBP950 million,
and gained acceptance from a spread of major consultants and multi-managers. The
performance of the London based investment team was key to this success. The UK
local authority fixed income business has continued to develop and grow, on the
back of strong performance.
Against industry norms, Investec Asset Management recorded net inflows of
retail funds of GBP190 million, representing a market share of 2.7% of net
industry sales, up from 0.8% two years ago.
In SA, Investec Asset Management successfully managed the transition of the
South African institutional offering from a predominantly balanced one to a
range of specialist products alongside the traditional balanced offering. The
specialist fixed income unit, created over the past four years, now manages R53
billion of funds. The sound financial performance of the South African Personal
Investments business endorses the strategic direction embarked on two years ago,
but the lack of domestic appetite for offshore investments and general
unwillingness to re-engage the equity markets among IFA"s and their clients
makes the division enter the new financial year with some caution.
Assurance Activities
The group"s SA life assurance activities, conducted by IEB reported operating
profit before exceptional items and amortisation of goodwill of GBP27.8 million
a decline of 10.6%. Operational earnings increased significantly from GBP15.5
million to GBP51.7 million. These results were largely attributable to further
restructuring of the business and its investment portfolios particularly in the
first half of the year. However, since embedded value accounting is applied, the
net movement in the value of in-force business is accounted for in the profit
and loss account, with the result that the current year"s operational earnings
were offset by a negative adjustment of GBP23.9 million, compared to a positive
movement of GBP15.6 million in the prior year.
In the second half of the year the group concluded a deal with Liberty whereby
certain of the liabilities of the retirement fund administration business and
the existing disability claimants business were reinsured with Liberty with
effect from 31 March 2003. A profit of approximately R140 million (GBP11
million), included in the operational earnings mentioned above, arising on the
transaction under SA GAAP is offset by a reduction in the value of in-force
business of approximately R90 million (GBP7 million) under UK GAAP, which has
been recognised in the current period.
Group Services and Other Activities
Group Services and Other Activities posted an operating loss of GBP32 million.
The Central Funding division achieved a significant improvement in its
performance, benefiting 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 year in the current period
as opposed to ten months in the prior period. These gains were offset by the
weaker performance of the group"s Traded Endowment Activities, which were
affected by poor trading conditions caused by the bonus rate cuts announced by
life insurance companies. 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.
Geographic performance
The group"s Southern African businesses accounted for 80.9% (2002:51.6%) of
Investec"s operating profit before exceptional items and amortisation of
goodwill. Highlights of the developments and performance of the regions in which
the group operates follow.
Southern Africa
The operating profit of the group"s South African businesses before exceptional
items and amortisation of goodwill decreased by 16.2% to GBP68.5 million. The
solid performance from the group"s Private Banking, Assurance and Property
divisions were partially offset by the negative variance in the earnings of the
Traded Endowments business of GBP11.5 million and by the weaker performances of
the Investment Banking and Treasury and Specialised Finance division"s, as set
out in the Business Unit Review.
UK
In the UK, the group posted an operating profit before exceptional items and
goodwill amortisation of GBP22.3 million, a decrease of 65.6%. The strong
performance of the Private Banking business was negated by the poor performance
from the equities related businesses which were severely impacted by the adverse
market conditions.
US
Investec"s business in the US was particularly vulnerable to the dramatic
decline in equity markets and operating losses before exceptional items and the
amortisation of goodwill of GBP15.6 million were incurred. The two main
operating entities Investec Ernst and Investec Inc, were dramatically
restructured over the past year by:
The sale of the Private Client Stockbroking business to management in May 2002.
The sale of the Clearing Division of Investec Ernst to Fiserv Securities in
August 2002 for US$44 million.
Winding down the Investment Banking operations involving the closure of the
research, equity sales and trading businesses and the sale of PMG Advisors
during the first few months of 2003. It is expected that all Investment Banking
activities will have ceased by the end of May 2003.
The remaining US operations now comprise of fixed income trading operations, an
Israeli Nasdaq equities trading desk funded by Investec Israel, and legal and
operating support for the rundown of the Investec Ernst business. The overall
headcount has been reduced to 131 from 688 at the prior year end.
The operational losses of these discontinued operations amounted to GBP16.7
million and an exceptional loss arose on termination of these businesses of
GBP9.4 million. The latter represents GBP19.7 million reflecting the write down
of assets, closure costs (including settlement of legal and contract
obligations) and provisions for future costs to be incurred on the winding down
of these businesses. This was partially offset by a net profit of GBP10.3
million on the disposals highlighted above. In addition, goodwill of GBP19.0
million was written-off with respect to the termination and disposal of these
businesses and included as an exceptional item.
Israel
The deteriorating operating environment experienced in Israel during 2002
persisted into 2003. The results of the group"s Israeli operations were
negatively impacted by margin compression and by a significant fall-off in
capital market activity. Notwithstanding this, the bank remained profitable,
posting a profit before exceptional items and goodwill amortisation of GBP3.5
million. On a positive note, the group has been successful in increasing its
mutual funds under custody from NIS5 billion in the previous year to NIS9.9
billion at the year end, with the result that Investec Israel is now considered
to be a dominant player in that activity.
Australia
Significant steps were taken during the period under review to develop
Investec"s business in the Australian market, with overall performance improving
substantially. In August 2002, the bank was granted a banking licence and
towards the end of the period a Project Finance division was established and is
already providing a strong contribution to the Australian business.
Financial statements analysis
Operating income
Operating income of GBP509.9 million decreased by 17.6%. Excluding the impact of
the discontinued operations in both years would have resulted in a decline of
14.2%. The movements in total operating income are further analysed below.
The group"s net interest income declined by 19.8% mainly as a result of the
winding down of the interest rate business in the UK, the closure of the
clearing and execution activities in the US and the lower average Rand/Sterling
exchange rate.
Fees and commissions were impacted by the weaker economic and equity
environment. The Investment Banking division in the UK, the Private Client
Portfolio Management and Stockbroking divisions and the sale of the Clearing and
Execution operations in the US were the primary contributors to this negative
variance. The Private Banking businesses experienced a significant increase in
fees and commissions largely as a result of increased lending turnover.
Dealing profits (trading income) declined by 8.6% to GBP45.2 million. The poor
performance of the Traded Endowments operation was the largest contributing
factor to this decline.
The performance of the group"s long-term assurance activities is
