Investec Limited · JSE:INL
Investec — UBS Financial Services Conference 2003
40 slides from Investec's conference presentation, October 2003
Slide 1: Investec – the challenges for growth
UBS Financial Services Conference Investec – the challenges for growth October 2003
Slide 2: Difficult global environment
Difficult global environment The global banking industry is coming through a tough operating environment not seen since the first Gulf War
Slide 3: Coping with instability
Coping with instability “From reeling economies to impatient investors to agile competitors – there’s little margin for strategic or operational error today. In addition to other corporate challenges, we face the task of creating stability in a world where instability has taken on a sobering new mea
Slide 4: Declining revenue environment
Declining revenue environment “To maintain investment banking returns at pre-2001 levels, the amount of capacity in the market will have to be further reduced by two or three major players” - Oliver, Wyman & Co, Dec 2002
Slide 5: Response from market
Response from market • Global banks with strong investment banking exposure have already cut headcount significantly: – Merrill Lynch: From 71 600 (Dec-00) to 48 300 (Jun- 03) – Goldman Sachs: From 22 627 (Dec-00) to 18 357 (Jun-03) – Morgan Stanley: From 62 679 (Dec-00) to 53 507 (May-03) – Deutsch
Slide 6: Back to basics
Back to basics “Every banking model is now under the microscope. At times like this, when everyone is a little confused by what is happening in the financial markets, you have to go back to basics” - The Banker, December 2002
Slide 7: Grew rapidly, organically and by acquisition
Grew rapidly, organically and by acquisition 1600 1400 1200 1000 800 600 400 200 0 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 92 93 94 95 96 97 98 99 00 01 02 Headling earnings (R mn)
Slide 8: Investec share price
Investec share price 1400 1200 Rebased to 100 1000 800 600 400 200 0 Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- 92 93 94 95 96 97 98 99 00 01 02 03 Investec share price (ZAR) Investec share price (US$)
Slide 9: Strategic focus
Strategic focus • Historically, concentrated on internationalising and establishing Investec as an international brand • With share price pressure and difficult operating environment came to realisation that an acquisition-led model is no longer appropriate as the sole driver of growth
Slide 10: Strategic realisation
Strategic realisation • Investec recognised that it needed to realign its business model by: – Focusing on tightening up costs – Reassessing: • businesses that are underperforming • geographies where its difficult to find an appropriate niche
Slide 11: Costs versus revenues
Costs versus revenues* 5000 25000 4000 20000 Rebased to 100 SA cents 3000 15000 2000 10000 1000 5000 0 0 92 93 94 95 96 97 98 99 00 01 02 03 19 19 19 19 19 19 19 19 20 20 20 20 Total Income (lhs) Total Expenses (lhs) INL share price (rhs) *Based on historical Rand data
Slide 12: Strategic realisation
Strategic realisation • Consequently, the group made considerable adjustments to align its cost structure with the prevailing declining revenue environment by committing to rationalising and resizing in many of its operations • This included significant reductions in headcount, particularly in the U
Slide 13: Strategic realisation
Strategic realisation • The objectives of the rationalisation and realignment were to: – Enable the group to be a lot more focused – Ensure reasonable operating leverage – Avoid building costs where there aren’t acceptable prospects for revenue
Slide 14: Strategic action taken
Strategic action taken • UK – Significant rationalisation of the Investment Banking division and the Trading Activities • US – The US strategy was reviewed and the business was significantly rationalised, with majority of operations sold • Israel – Marginal decline in expenses but further work needs
Slide 15: Headcount by geography
Headcount by geography 6,000 5 529 4 836 4 874 5,000 4 475 4,000 3,000 2,000 1,000 - Mar-01 1 2Mar-02 Mar-03 3 Aug-03 4 SA and Other UK and Europe USA Israel Australia
Slide 16: Headcount by business
Headcount by business 6000 5 529 4 836 4 874 5000 4 475 4000 3000 2000 1000 0 1 Mar-01 2 Mar-02 Mar-03 3 Aug-03 4 Group services and other Private Banking Private Client Stockbroking Asset Management Treasury & Specialised Fin Investment Banking Property Assurance
Slide 17: Continuing operations
Continuing operations Base cost 31 Mar 31 Mar £ millions 2004 2003 2002 Administrative expenses 348.2 392.5 428.5 31 Aug 31 Mar 31 Mar 2003 2003 2002 Headcount 4 475 4 874 5 529
Slide 18: Continual cost containment
Continual cost containment • Notwithstanding the significant reduction in costs to date, Investec continues to examine costs • Recently the group has undergone an extensive exercise to analyse the relationship between costs and projected revenue of the operating business divisions and the cost struc
Slide 19: Improve cost to income ratio
Improve cost to income ratio • The aim is to improve the cost to income ratio, through: – Further reduction in headcount where viable – Eliminate duplication between geography and between product – Moving functions from the UK to South Africa where possible, e.g. the Private Bank call centre and Ass
Slide 20: Focus on rebuilding revenues
Focus on rebuilding revenues • Although the overall cost base adjustment last year is paying off, the revenue environment is still difficult but improving
Slide 21: External focus important
External focus important • Strategically, it is important for the group to move from being inwardly focussed to an external focus • This means: − Building revenues − Tight cost management − Driving earnings growth
Slide 22: When in a hole, the first thing to do is to stop digging
“When in a hole, the first thing to do is to stop digging” “If downsizing, cost-cutting, and ‘getting lean and mean’ were the mantras of the past decade, the desire for growth and renewal will be the major concern of the next.” - Professor Sumantra Goshal
Slide 23: South Africa – the impact of a declining interest rate and low inflation environment
South Africa – the impact of a declining interest rate and low inflation environment Investec in perspective
Slide 24: Impact on Investec
Impact on Investec • Need to bear in mind that 60% of the group’s capital and between 40% and 50% of profitability are currently in a low inflation environment
Slide 25: Impact on Investec
Impact on Investec • On a whole, most of Investec’s South African businesses are well-positioned to take advantage of a declining interest rate and low inflation environment although there are some areas which would be negatively impacted
Slide 26: Private Banking
Private Banking • Underpin strong lending growth – Residential property market – Commercial property market – Private client investment growth and empowerment for established private businesses – Capital investment spending by private business • Lower margins but switch from deposits to investment i
Slide 27: Private Client Portfolio Management and Stockbroking
Private Client Portfolio Management and Stockbroking • Low interest rates will encourage clients to return to equity markets which in the medium term will be good for equity markets • Initial impact of strong Rand has been bad for Rand price of equities but as volatility is reduced it should be posi
Slide 28: Investment Banking
Investment Banking • Increased level of activity in private equity, corporate finance and institutional stockbroking and securities as cost of capital reduces and businesses realign themselves to this new paradigm
Slide 29: Treasury & Specialised Finance Banking
Treasury & Specialised Finance Banking • Corporate South Africa should increase borrowing and invest in additional capacity provided that long term growth prospects are reasonable • Expect specialised lending books to show reasonable growth • More debt capital market activity (corporate bonds, CP an
Slide 30: Treasury & Specialised Finance Trading
Treasury & Specialised Finance Trading • Decrease in volatility in the markets result in a decline in revenues and market opportunity • Structured products and innovative solutions that generate fee income would have then to become a major focus in order to obtain fee income • Trading a money market
Slide 31: Project & Infrastructure Finance
Treasury & Specialised Finance Project & Infrastructure Finance • Declining interest rates usually good for infrastructure • However, projects are typically very long term (20 years +) and hence decisions to pursue are not normally based on interest rates prevailing at a point in time • Existing pro
Slide 32: Resource Finance
Treasury & Specialised Finance Resource Finance • Mining projects can be expected to receive lower interest rates positively - but probably outweighed by the adverse impact of the strong Rand • Low inflation is typically not good for commodity prices in the long term
Slide 33: Property Fund Management
Property Property Fund Management • Generally positive effect as listed property funds likely to continue to attract investor interest Property Management • Could be negative in short-term due to downwards inflationary trends placing pressure on rentals - but would not be material in the short-term
Slide 34: Property contd.
Property contd. General • Rates of return on property (or cap rates) are still not at pre 1998 levels which property bulls regard as an indication that property values still have upside potential
Slide 35: Asset Management
Asset Management • Positive for equities and fixed income • As stability returns increase in savings • Margin decline or compression which will mean the need for tight cost control
Slide 36: Share capital
Share capital • Reduced endowment on surplus cash • Positive for assets that benefit from lower cost of capital
Slide 37: Cost base
Cost base • Total mind-set change required: – Increases – Headcount numbers – Long-term projects • Need to hold costs at below inflation as, historically, inflation covered poor decision and poor cost management
Slide 38: Overall
Overall We believe the South African environment is positive for Investec as we have operated in tough international environment where revenue dried up and costs had to be cut aggressively
Slide 39: Prepare for growth
Prepare for growth “Turbulent times often mandate wrenching changes. But they can also provide opportunity for the bold. Now is the time to try new ideas and innovative methods that address enduring problems to look closely at areas of business that escaped scrutiny in boom times – and to prepare fo
Slide 40: Investec – the challenges for growth
UBS Financial Services Conference Investec – the challenges for growth October 2003