Investec Group (IVTJF) Q2 2021 Results – Earnings Call Transcript

Investec Group (OTCPK:IVTJF) Q2 2021 Earnings Conference Call November 19, 2020 4:00 AM ET

Company Participants

Fani Titi – Joint CEO and Director

Nishlan Samujh – CFO

Conference Call Participants

John Storey – JP Morgan Chase & Co

Fani Titi

Ladies and gentlemen, good morning, and welcome to our financial year ’21 Interim Results presentation. I’m joined by Nishlan Samujh, our Finance Director, on the stage. Before we review the results for the period, I would like to give you a brief update on our COVID-19 response. I’m going to start with an update on our people.

In South Africa, we are beginning to return to the office in the UK, given the second lockdown, staff continue to work from home. Clearly, the future world of work post COVID-19 will benefit from the multiple remote working models now available to us. However, for Investec, we want to protect our culture.

Therefore, the office will remain the center of gravity as we go forward. We continue to support our colleagues through a number of wellness programs as we go forward. Moving on to our clients. Current COVID-19 relief provided to 60, 6.3% of gross loans in the UK and at peak, that number was 13.7%.

In South Africa, the current proportion of the loan book under relief is 2.2% at peak, that number was 23%. So we’re beginning to see some good recovery in both geographies. We also facilitated over ZAR 20 million in donations on behalf of our clients, primarily using income generated from our Private Clients Charitable Trust. In the UK and SA, we are an accredited lender for government schemes. Moving on to our communities.

As we had announced before, we committed GBP 3.6 million of relief, approximately ZAR 78 million, for relief for communities, and about 2/3 of that amount has been allocated to date. We also did indicate earlier that senior leaders and staff donated via salary deductions to community initiatives that were primarily focused on food security, economic continuity, health care, education and programs that support anti-gender based violence, particularly in South Africa.

Moving on to operational resilience. Managing the integrity of our balance sheet has been very primary in this period. So we have conservative levels of capital and liquidity. Firstly, to weather the crisis, second to supply our clients and thirdly, to fund growth in the long term. We have made further investments in IT infrastructure with the aim of supporting our working from home mode of work, but also to continue to enable our staff to support our clients in giving them the kind of client experience that they expect from Investec.

Clearly, where our staff has gone back to work, we have instituted a number of safety protocols. Now looking at an overview of the results. It is clear that the trading environment has been very, very, very difficult, where we have seen, in effect, massive economic contractions. And we also have seen very volatile markets.

Despite these conditions, our client franchises performed particularly well. We saw a net inflows of £336 million in our wealth businesses, with funds under management increasing 15%, by 15% to €51.1 billion. In the Specialist Banking businesses, we saw good client acquisition in both geographies. Our net core loans grew by 1% to £25.2 billion with strong loan growth in our Private Banking business in the UK and that growth being offset by subdued corporate lending activity, as corporates, we’re positioned quite conservatively in a period of crisis, and that happened in both geographies, and we also saw corporate repayments.

Our client engagement has continued to be quite good during this period as we have used our digital platforms to continue to support our clients. As indicated, our balance sheet is very strong with robust capital and liquidity levels. Our loan book has been particularly resilient. The quality of our loan book, obviously, is an indication of this, the quality of our clients and the strength of our business model.

The loan book is conservatively provided, and Nishlan will later unpack our provisioning. The credit loss ratio increased from 23 basis points to 47 basis points, driven largely by macroeconomic assumptions in our models as we calculate our ECLs using IFRS 9, but Nishlan will go into that. This level of provisioning is a little lower than we had during the last half of financial year 2020, and we expect to see our CLR moderating as we go forward.

We have also seen good cost discipline with cost well-managed, costs down by 14% during this period compared to last year, 8.1% down in neutral currency. We continue to to see good execution on our strategic plan. Our plan remains clear and unchanged, and execution will remain key as we go forward. And later on in the presentation, we will indicate progress made on our strategic plans. Just going back to looking at, Nishlan, you are confusing me.

Okay. Starting off, just looking at the operating environment, I have already indicated that we saw a very sharp GDP contractions. You can see in South Africa, our base case assumption is for a 9.2% contraction in GDP for the calendar year 2020. The impact of this contraction is obviously going to drive ECLs higher as we input assumptions in our models. Second, activity levels will be low. That will impact noninterest revenues, but also the value of assets in contracting economies will be lower.

In the UK, our base case assumption is for a 10.1% contraction in GDP. We also saw very volatile markets. On the chart, you will see that we have had the FTSE in the comparative period at about 7,000. And in the current period that we’re reporting on at about 6,000. So you will expect that to impact the revenues in our wealth business in the UK as an example. We also will see asset valuations being down given that level of volatility in the public markets, and that will flow through also into the private markets.

Looking at the second graph, we do see there the level of volatility in the average rate of the rand versus pound sterling. Over the period, the average rand against pound sterling depreciated by 20.6% compared to the prior period. So in our results, you will see the impact of that level of depreciation. Just going to the next slide. Despite this level of volatility and the contraction that we have seen in the economies in which we operate, we are beginning to see some pickup in activity. And to evidence that we have given you on this slide some numbers from our Private Banking businesses.

Starting off with South Africa and looking at Private Bank lending turnover with March, 2020 as a base. You can see the impact of the lockdown in April, May and June. And as, excuse me, as the lockdown started to ease off, in July, you can see turnover pickup quite significantly. Then in September, we saw turnover quite impressively up, albeit it we were still not where we were in March.

If you look at point-of-sale transactions, as measured by the value of cut transactions, again with March as a base, you can see that by September, we have caught up to where we were in March. So encouraging levels of activity. And these will hopefully continue depending, of course, on whether the lockdowns remain, where we are there is no stricter lockdown in South Africa.

In the UK, if you look at the graph on the left, we’re looking at a high net worth mortgage monthly lending turnover. And the light blue bar is 2019, and the darker blue is 2020. Again, you can see activity in the months of May and June being rather subdued, and you can see a pickup. If you look at client acquisition in the UK Private Bank, you can see that in April, May, we saw reductions in client acquisition, but we have seen that pickup since. So we are hopeful that we will continue to see activity improving, and that will inform our view of our outlook of performance in the second half.

Just looking at results, highlight for continuing operations. Adjusted operating profit decreased by 48.4% to GBP142.5 million. Again, the main contributors, as indicated in the economic environment and market volatility will be the compression of net interest margin, the reduction in noninterest revenue, given lower activity and trading income reducing by about 100% giving, given some hedging losses in the UK bank, related to our structured product, and Nishlan will cover that later on. This was offset, obviously by good cost control, as I have indicated. I also have indicated that our impairments were up in the area.

All in all, that led to adjusted operating profit reducing by 48.4%. That translated into adjusted earnings per share coming in at 11.2%, which is 50% behind the prior period, but ahead of the guidance that we had given. Net asset value per share increased quite pleasingly at an annualized 9.3% since March. Our return on equity is reported at 5.3% versus 10.7% in the comparative period. Our cost-to-income ratio increased from 67% to 72%, largely driven by a reduction of 24% in net income that offset, of course, by the cost reduction of 14% that I have referred to.

The credit loss ratio increased from 23 bps to 47 bps, as I have already covered. I’m pleased to announce that we have declared an interim dividend of 5.5p, which is compared to 11p in the comparative period, but I hasten to add that in the comparative period, the results included 80% attributable earnings from Ninety One. We obviously do endorse the guidance notes that have been issued by the sub with respect to banks having to conserve capital and having to support the real economy.

We did not pay a dividend, a final dividend when we announced our results in May. And the current dividend that has been declared is predominantly carried by our capital-light businesses. As we continue to retain a 25% shareholding in Ninety One, and we have 2 wealth businesses that have performed particularly well in this tough environment. So within our banking businesses, while there is a contribution to the payment of dividend, we have substantially built up capital resources in this period.

If we look at the performance of the franchises, very briefly, and Nishlan will go into more detail. So I’m going to be quite high level. Starting off with the South African business, the Specialist Banking business. So adjusted operating profit reduced by £52 million. Again, the biggest contributors were compression in net interest margin given the sharply lower interest rates, a reduction in net noninterest income, given lower activity and lower investment income. And obviously, we spoke about increased impairments and good cost control, reducing the extent of reduction.

In rands, that reduction is 23%, which is quite a commendable performance in the current environment. Our wealth business in South Africa saw profit in rands increasing by 2.3%, and we saw net inflows in discretionary funds under management. Our group investments, where we have our holding of Ninety One, our investment in IEP, IAFP, IPF. We saw a reduction of €29 million, and Nishlan will go into more detail there. So all in all, the South African business recorded a reduction in profit of 45.6%, but in rands, the reduction is 34.3%.

As I indicated, there was a 20.6% depreciation of the average rand versus the sterling pound. The ROE for South African business in total came in at 8.1% versus 13.5% in the prior period. Moving on to the business in the UK. The Specialist Banking business recorded a reduction of GBP67 million or 84%.

Again, the drivers in the banking business were the same. Net interest margin compression, noninterest revenue reduction, increase in impairments and significant cost savings within that business. And in this business, as I have mentioned a little earlier, we saw a hedging loss of GBP53 million. So of the reduction of GBP67 million, GBP53 million has been contributed by the hedging loss, and Nishlan will cover that a little later in the presentation. Our wealth business performed particularly well, as I indicated, the level of the FTSE in this period was about 1,000 points lower.

We saw significant cost reductions as well despite the fact that we had to spend some cost in certain restructure activities that we performed. So a pleasing performance, even though that performance is behind last year’s performance by 5.2%. Group investments relates to our holding in Ninety One.

I’m going to hand over the presentation to Nishlan and to go deeper into the detail.

Nishlan Samujh

Thanks, Fani, and good morning to everyone. It’s really a pleasure to deliver these half year results to you. I’m going to dig a little deeper and just pick up from where Fani left off. I think, again, if we look at the overall business, from a geographic perspective, our operating income, around about 60% of our operating income was contributed from our UK business. And from an operating profit perspective, around about 70% of the operating profit was contributed from our South African business.

From a divisional performance perspective, our Wealth & Investment business contributed 26% to the overall operating income with the Specialist Bank contributing 74%. And from a profitability perspective, you see around about 8% contributed from group investments. That includes the return on the 25% that we hold in Ninety One and other investments that we have chosen to represent separately from our Specialist Banking businesses so that you actually can evaluate the franchises independent of these group investments that we hold. The Wealth & Investment business contributing similar to operating income at 26% and the Specialist Bank at 66%. Now let’s get a little deeper into the franchise businesses, and let’s start with the Specialist Banking business in South Africa.

Looking at some of the core drivers. Net core loans and advances did decrease by 1.6% in the period to ZAR284.4 billion, and that was mainly driven by the fact that our private client book remained relatively flat, and I will give you some detail later on when I decomposed the loan book. But we did see that Corporate South Africa in the main remained fairly defensive from a balance sheet perspective and also fairly cautious from an investment deployment perspective, given the economic outlook. And therefore, we did see a reduction in our levels of corporate activity over this period.

In particular, one of our business lines, Investec for Business, which deals with trade finance and import solutions did see lower activity levels given the uncertain outlook, and again, corporates being cautious on the deployment of working capital, given the uncertain outlook caused by the COVID environment. Customer deposits remained strong, at a reduction of 2.8% to ZAR365 billion in the period is really part and parcel of our overall liquidity management. From an operating income perspective, overall operating income decreased from ZAR6.3 billion for the half year to ZAR5.8 billion in this half year. There was quite an even impact across various line items. And if I unpack that.

Net interest margin did contract, I think more than we would expect at about 41 basis points in this period. When we look at it from an overall year perspective, we would expect that in the second half that this will recover by at least half, if not more, of that reduction in basis points. And that is a function of the fact that our assets have repriced earlier than liabilities and the nature of the sharp decrease in interest rates in the market, particularly over the period January to March. And if we compare to prior year, there’s been an overall 300 basis point reduction in interest rates.

There is an impact that will linger and lower interest rates does result in a lower contribution on our effective endowment capital that we hold, and the fact that we continue to hold a defensive cash position on our balance sheet. From an activity level perspective, lending and transactional fee income was impacted by the sharp slowdown that you saw on Fani’s slides, particularly between April and June. And in fact, as we saw the economy opened up, in September, we saw activity levels above the prior year.

So I think there will remain volatility as we see activity levels impacted by cautiousness around economic activity. And, but I think the resilience of our client base is starting to reflect as the economy is much more active. From an investment income perspective, within the franchise businesses, the investment assets within these, within the pillar did generate lower dividend flow income in the period as well as lower opportunities for realizations. And therefore, we have seen lower investment income. Now we did have positive momentum in terms of markets because there has been a recovery since the end of March. So some of our listed stocks did contribute positively. But we remain, we have continued to adjust down some of the valuations related to our non-listed portfolios.

From a cost-to-income ratio perspective, the overall cost-to-income ratio for the Specialist Bank in South Africa was 55.4%. That is a bit weaker from where we have operated historically, and that’s notwithstanding the fact that costs have reduced by 6% in the period. And that included a reduction in variable as well as discretionary spend in the period. You will see in both South Africa and the UK, headcount has been quite conservatively managed throughout this period as we ensure the strength of the overall business. From an operating income perspective, a reduction of 8.7% as I had unpacked that.

Turning to our Banking business in the UK, from a net core loans and advances perspective, we saw an increase of just under 1% for the period, so annualized at closer to 2%, growing to GBP12 billion, and that was mainly experienced within our high net worth mortgage book, which continued to experience higher growth levels as we continue to expand that particular base.

Similar to South Africa, we saw lower overall corporate lending activity. Customer deposits in our banking business in the UK grew by 2.4% in the period to GBP15.6 billion. Unpacking operating income, and again, very similar effects that we saw across our banking businesses. Net interest income did decline by 2.1% over the period with NIM net interest margin reducing by about 25 basis points since September 2019.

That reduction, I think, mainly driven by lower interest earned, again, on our balance sheet position. And similar to South Africa, we are experiencing an improvement as repricing of liabilities takes effect as well as repricing for credit risk. From a cost-to-income ratio perspective, overall cost-to-income ratio did reduce in the current period. And that’s within the context of having reduced operating costs by 12%, which is mainly driven by a combination of variable remuneration and discretionary costs.

And again, we will unpack. That with operating income reduced by 21.1% overall cost-to-income ratio for the period was at 80.7%. From a Wealth & Investment perspective, again, let’s focus on the drivers and turning to our South African business. I think we were quite pleased in the period where with net inflows into our discretionary platform of ZAR 3 billion and positive markets, mainly driving the increase of funds under management by 16.2%, up to ZAR 293 billion. We did see outflows in our nondiscretionary funds, but that’s really off the back of clients managing their portfolios.

Adjusted operating profit for the period increased by 2.3% to ZAR 264 million, and that was supported by strong demand for our offshore offering, which does yield foreign currency earnings as well as increased brokerage activity, particularly in the early stages of the period. Higher average annuity and discretionary from as well as cost management continued to contribute. We did experience lower interest rates, and that has a somewhat a negative impact.

From an operating margin perspective, the operating margin improved from 32.3% to 32.8%, with operating income up 1% against operating costs increasing by 0.4%. Our Wealth & Investments business in the UK, here again, with positive market momentum. We saw funds under management increase by 13.3% to £37.6 billion, and we did experience net inflows over the period of £315 million into the portfolio.

From an operating profit perspective, we did see a reduction of 5.2% to £28.9 million. And that was notwithstanding the fact that we did have higher funds under management. But as Fani had alluded, there were lower market fundamentals affecting the level of fees earned in the period. Brokerage was strong in the period, particularly on our nondiscretionary funds as clients continue to manage their underlying portfolios.

Lower interest rates does have a negative impact, and that has been absorbed effectively into the base, given the current interest rate outlook. From a cost perspective, costs were well-managed in the period, but there were increases in regulatory costs, particularly the FSCS levies that we contributed. From an operating margin perspective, a slight decline from 18.8% to 18.6%, really influenced by a slightly higher reduction in operating income at 4.4% compared to a reduction in operating costs of 4.3%. This is a new pillar, which is group investments.

And given our holding in Nighty One, we felt that it is appropriate to reflect these assets, which at the end of the day, are assets that the group has generated through various historical activities and platforms. And the main pool of assets in these, which we have separated from our franchise Specialist Banking business is our investment in Nighty One. Our investment in IEP in South Africa, our investment in the Investec Property Fund and our investment in the Investec Australia Property Fund.

The Investec Property Fund delivered its results yesterday. And what you see in this slide, it’s really an unpacked of every income statement line that is influenced by the fact that we consolidate some of these investments and that there’s a large portion attributable to minorities. So for example, the Investec Property Fund, we hold 24% interest in the fund and recognize the impact on the left-hand side of this graph on 100% basis and then allocate the portion attributable to minorities in non-controlling interest.

So the large negative valuations is driven by the fact that the funds have reduced the carrying value of, in, of their property investments, as is experienced in these kind of, in these markets. And lower valuations and lower equity accounted income from IEP, which is really a function of the lockdowns that you saw, which would have affected activity within the portfolio itself.

A large portion of the reduction is effectively reduced out of this, out of the numbers through our noncontrolling interest. In this period, we equity accounted about GBP18 million of income from Nighty One, who released their results two days ago. And we anticipate, not anticipate, but we will receive a dividend of about GBP14 million on about the 23rd of December from that particular investment. The rest of the portfolio effectively accounting for the net reduction from GBP30 million contribution last year to GBP13 million in the current period.

Now if we look at revenue, and this is really bringing the picture back to the combined group. Overall operating income decreased from GBP959 million to GBP729 million. Net interest income, net fees and commissions, really driven by the fundamentals that we have spoken through. Investment and associate income driven by what have unpacked in our group investments portfolio and trading income driven by what Fani had mentioned, was a GBP53 million effectively loss recognized in the period, and thus a reduction in trading income of just over 100% in the current period. And that is associated with our financial products business in the UK and effectively our structured deposit business.

And in this current period, what we have done is effectively stopped the, any new business associated with some of the high-risk profile in that particular book. The heightened cost of GBP53 million includes costs incurred in the current period to reduce risk in the portfolio and to exit certain elements of the portfolio. This is still effectively a deposit taking and a successful business overall, and we continue to incur risk management costs navigating the current market.

We are guiding to the fact that in the second half, we will continue to see heightened costs experienced, and that’s really off the back of continuing to execute derisking of the underlying portfolio, which places us in a much better position as we enter into ’21, into the ’22 financial year and the ’23 financial year. From an operating income perspective, you see the mix with annuity income increasing to 81.1% as the level of deal income in this type of environment has had a lower weighting on our overall revenue.

From an earnings driver perspective, again, a summary of what was presented from the divisions, our third-party funds under management increased from GBP45 billion, up 15.5% in the period to GBP52 billion or 14.6% on a neutral currency perspective. That was on the basis of net inflows of GBP336 million in the portfolio and driven by recovery of markets that we have seen since the end of March. Core loans and advances increased by 1% to 30, sorry, to GBP25.2 billion, and that is a reduction of 0.4% in neutral currency, with strong performance within our Private Banking business, particularly on the, in the UK platform. Customer accounts up 1%. If we unpack some of our loans, and firstly, I’ll start with the South African loan book. Here, we saw flattish performance within our mortgage and high net worth lending books. That includes turnover as well as new activity in the period. Our property lending has well relatively muted on the early part of this particular period. But the negative movements on the portfolio, again, been driven by corporate lending.

Now we did see strong growth within our corporate and acquisition finance portfolios and a reduction in other portfolios as corporates repaid and manage their balance sheet liability positions as well as lower activity levels. Unpacking the UK net core loans and advances, you see strong growth in our private client lending activity of 11% in the period as well as high net worth and specialized lending of 16% in the period. This has been a core strategic area of focus for the group, and we are pleased with the level of growth achieved. There was positive momentum also achieved with some of the regulatory initiatives in the UK, in particularly around stamp duty relief.

The corporate activity in London or in our UK business and other jurisdictions remaining relatively steady in the period, but with no real growth experienced. Coming back to the income statement. Our cost-to-income ratio has weakened from 67% to 72% in the period. And as Fani had highlighted, that’s driven by the fact that in neutral currency, revenue was down 17.8%, with operating costs reducing by 8%. Operating income was influenced by lower net interest margin and valuations, offset by a continued activity levels within our underlying franchise portfolios.

From a cost perspective, the main areas in which we experienced reductions in costs related to personnel, where we had fixed personnel costs reducing by 6.2% in the period as well as marketing costs, and that reduction really driven by us, the activations in the COVID-19 period reducing. And we did eliminate certain sponsorship arrangements and obviously, a tighter focus on overall allocation of resources.

Now looking at impairments. I think impairments, it’s important to note that we did report at the end of March 2020. We were already effectively in a COVID environment at that point in time. And we did see a marked increase in impairments as we reported. With overall impairments increasing from about £31 million in the first half of last year to £102 million in the second half. In this period, we continue to increase our impairment levels with the overall impairment charge at £66 million. And that, as Fani has highlighted, is mainly driven by the update to our macroeconomic scenario.

So having applied scenarios that we generated off the back of the March results now into the September results. The reduction in the macroeconomic environment, I think, really driven within the first half of this financial year. There has been an increase in some of our stage 3 provisioning as we have continued to ensure that we’re well covered, taking into consideration collateral. For the past 12 months, we have raised impairments or created impairment charges to the income statement of around about GBP168 million.

Looking at it by geography and a South African perspective, our net credit loss ratio closed at 35 basis points for this period, significantly up from 18 basis points and ahead of our sort of long term experience, but significantly lower than what we had experienced in the second half of last year, where our credit loss ratio was 55 basis points. From an overall charge again in South Africa, cumulative charge over the last 12 months of about ZAR 1.4 billion, with impairments charge for this period of GBP573 million, markedly up from last year, September, but below our second half experience. And that’s a consistent experience as we move on to our results in our UK and other geography.

Here, our credit loss ratio was at about 60 basis points compared to 97 basis points in the second half of last year and 28 basis points in the first half. From an overall group perspective, we guide towards a credit loss ratio of between 30 to 40 basis points through the cycle. And with the group credit loss ratio at about 47 basis points, we remain elevated.

From a balance sheet provisioning perspective, on the left-hand side of this slide, we detail our PLC or our UK and other geography, and on the right-hand side, our Southern African businesses or Investec limited. Balance sheet provisioning, again, providing you a mix between our stage 1, stage 2 and stage 3 portfolios, seen an increase in our stage 2 provisioning, as we did migrate a larger portion of our book into stage 2, and I’ll unpack that in the next slide.

And overall, impairments really driven by migration between portfolios and particular write-offs that would have taken place in the current period. Our overall coverage ratio for stage 1 at 30 basis points, stage 2 at 3.4% is down from our coverage ratio of 5.4% in the prior year. Now here, we increased our Stage 2 portfolio from about GBP576 million to around about GBP1.3 billion. And the migration into stage 2 was really driven from our forward-looking macroeconomic scenarios rather than any observed credit deterioration or credit quality deterioration.

The portfolio that we would have been migrated to stage 2 based on credit quality continue to maintain a higher level of coverage. And given the lower probability of default on the portfolio that has migrated into that particular staging, we saw a reduction, a net reduction in overall coverage ratios. Stage 3 is really a function of the specific assets in that portfolio. And in the current period, we would have had some write-offs for assets that were more fully provided and closure on those particular transactions.

And therefore, or closure on our views, and therefore, a slight reduction in our stage 3 provision. From an Investec Limited perspective, we continue to see an increase in overall balance sheet provisioning with our coverage on stage 1 increasing 2.5%, stage 2, relatively stable at 2.4% and stage 3 at 33.3%, again, is a function of a mixture of the assets and write-offs experienced in the current period. This slide effectively details the migration that we saw between Stage 1 and 2 in PLC and in South Africa. So overall, our Stage 2 portfolio at 11.5% compared to 5.1% in the prior year. And in South Africa, at 6.4% compared to 5.3%.

Again, the majority of the staging is really driven by modeling factors that we have brought in. Migrations between stage 2 and stage 3 are really specific to exposures, and we haven’t seen any specific trending either within areas that we may be concerned at from a COVID perspective and the overall portfolio. Now trying to bring the picture to a close a couple more slides. ROE on this slide, we unpack it for you between the various businesses. The Specialist Bank in South Africa generating an ROE of 9.1% in the period. And utilizing around about 39.2% of the capital base of the group.

With the Specialist Bank in the UK, generating a 0.7% ROE with a credible performance from the underlying portfolio offset by the reduction in trading income arising from the £53 million loss that I’d mentioned earlier. Our overall, Wealth & Investment businesses continue to generate significantly to the underlying ROE of the business. These businesses, their capital requirements are really driven by their operating income. So the higher your operating income, there are, higher your capital requirements. And in the UK, we did have an acquisition historically that has goodwill associated with it. Group investments in the UK that’s solely the return from Ninety One.

And in South Africa, it’s the return from Ninety One and a positive contribution from our Investec Australia Property Fund, offset by negative movements given the valuation adjustments coming through in this particular period. So overall, ROE coming in at 8.1% for South Africa and 2.8% from a UK perspective. And I think it’s very important that these ROEs are contextualized within the environment that we are operating in. And what we’ve seen from across the sector. From a return on tangible equity, the material difference in this ROE is really represented in our wealth businesses, which includes a higher level of intangibles.

From a balance sheet perspective, overall capital ratios remaining robust in both South Africa and the UK. I think it’s important to note that we report on a standardized basis in the UK and on the FIRB basis in South Africa. In South Africa, we continue on the journey to AIRB. We have received model approval on several models to migrate to AIRB, and we’re currently on a parallel run process for implementation successfully in January. But there is one material portfolio where we are still in discussions in terms of the overall modeling approach with the SA. Our, we continue to quantify that the differential to AIRB is around about 2% positive uplift on capital. From a liquidity perspective, loans and advances to customers as a percentage of custom deposits was at about 76.4%. And we’ve continued to manage and maintain high levels of readily available, highly liquid assets, with overall cash and near cash at GBP12.9 billion.

Now having presented the current results, and we haven’t really done this in the past, but we have introduced a slide, which gives you a view of our expectations to the year-end. I think it’s in the context of it is a forecast and take it as such. Overall, we anticipate that client activity will continue to recover, and we’ve seen that in the months past September, and we expect that trend to continue.

Net interest margin, as I’ve indicated, is also expected to improve, notwithstanding the low interest rate environment for factors that I’ve highlighted. Noninterest income is expected to improve relative to the first half. But overall, we still expect double-digit and, we say early double-digit decline for the full year, given negative movements on investment income.

With regard to trading income, we expect it to continue to be markedly lower, driven by the fact that we will continue to manage down risk in our structured products book and that we anticipate if markets remain as they are to continue to incur the same level of cost, risk management costs that we incurred in the first half. From an expected ECL perspective, we expect to see continued moderation and cost from an overall full year perspective is expected to decrease in the mid- to upper single-digit in overall.

So bringing all of this together, we expect to be ahead of the first half in the second half of this financial year. Fani, I now hand back to you to be…

Fani Titi

Nishlan, thank you for that comprehensive unpacking of the results. I would now like to cover sustainability. We look at sustainability as an integral part of our business. That’s why we continue to integrate it into business strategy.

As we always say at Investec, we live in society and not off it. So this is quite an important part of who we are and what we do, but also, we do see significant business opportunity in sustainability. So we talk of creating a financial and social value by living in a sustainable way, ensuring a low-carbon and inclusive world. Our framework is based, as I said, on living sustainably in our operations. We also partner with our clients on their ESG journeys, and we offer sustainability products and services.

I did earlier on indicate when I talked about how we have reacted to COVID, how we have partnered with our clients to distribute certain aid to communities. We also align our community initiatives and corporate social investment to our SDG priorities. If you look at our priority areas, SDG 10 being reducing inequality in SDG 13 being climate action are our core priorities. And secondary priorities include clean water and sanitation, affordable and clean energy, industry innovation and infrastructure and a few others. And in our corporate banking business, a number of opportunities have risen out of some of these areas of work.

Our advocacy and thought leadership is based on our active participation in the United Nations Global investors for sustainable development, the UN GISD. We also work with industry in the UK and South Africa to ensure policy coherence around sustainability. Also as there is a transition towards a more sustainable world and planet, but also in the transition around global warming. We also use the strength of our brand to educate and promote sustainability thinking. Just looking at what we have been able to achieve in the period under review, we published our first stand-alone TCFD report, the Task Force and Climate-related Financial Disclosures.

We also tabled some resolutions at our AGM in August, where we received overwhelming support from our shareholders, 99.95%. We also committed to net zero during this period and purchased carbon credits to achieve same. We were ranked at number 55 out of 5,500 corporates in the Wall Street General top 100 most sustainable companies and 9th in the social category. In South Africa, we are rated level one in terms of the financial services code. And as I indicated, we have launched a number of ESG-related product, including in the UK. So to conclude the presentation, I would like to take a bit of stock as to where we are.

Clearly, we have concentrated on protecting our resilient balance sheet have kept high levels of capital, and we are lowly leveraged, and we have high levels of liquidity to continue to navigate a crisis of our lifetime. And to continue in that vein to support our clients and to be prepared to fund future growth. That remains our position, and our confidence has been demonstrated in the fact that we have declared a dividend in this period and our expectation of the second half is for a much improved performance. We believe the business is well positioned for the long term. Over the last 18 months or so, we have engaged on a program of simplification. You will remember that we did exit a subscale wealth operation in Ireland.

We did close Click & Invest, the Robo adviser in our wealth business because we did not believe we would get through the kind of scale that we required. We exited the Hong Kong investment portfolio because the risk to our inappropriate as far as we were concerned. So we have continued to simplify our business. We now are substantially complete, sorry, we will be substantially complete in terms of our simplification process by the end of the current financial year. We announced this week, the conclusion of the sale of Investec Australia Property Fund Management company with proceeds of about AUD 40 million. We also have completed a JV partnership in India with the largest bank in India to strengthen our position there.

And we have announced earlier during this period, closer integration of business enabling functions in the UK and as announced earlier, unregrettably, we will have about 210 of our colleagues being made redundant as a consequence of that. If you look at what we have been able to achieve in terms of cost discipline because that is what we have control over in this period of crisis, we have made significant strides in terms of cost discipline.

In the UK Specialist Bank, fixed costs have been reduced by GBP40 million since we presented to the market during February ’19, during our Capital Markets Day. The changes that Ruth and her team have announced will obviously impact future costs. So we do expect cost to decline in the medium-term within that business. Group costs, we expect to reduce to under GBP35 million at the end of fiscal year 2020.

Again, a 24% reduction to the level that we saw at the Capital Markets Day presentation. We also have had a strong focus on growth. We indicated in reporting on these numbers of the progress we have made in a high net worth mortgage lending book in the UK and that we are on track to reach the 6,500 clients that we needed to reach to breakeven.

And from there, we will continue to grow clients and to have that platform move into profitability. We have also launched in South Africa, an online business banking business, business banking platform, rather. And we expect over time to do well out of that platform. Our Investec Life proposition has gained traction. So as we look forward, we will have a strong focus on growing those selected initiatives that we have chosen to invest in.

While we will be quite disciplined on cost, we will continue to invest for the future. We had also talked about capital optimization and the rightsizing of our direct investment portfolio in line with our stated strategy. In South Africa, over this period, we have seen that portfolio reduced by GBP1.1 billion. Clearly, in these markets, it is difficult to rightsize that portfolio because we are not in the business of throwing away valuable assets, we will not sell for the sake of selling. So the progress has been much slower than we would have anticipated given the environment.

So we think the fundamentals of our business are particularly strong, and we’re confident that our business is well positioned for the long term. And we have deep and well-established relationships with our clients, and we continue to foster our client-centric entrepreneurial culture, where our people live for our clients, as we say, colloquially, we do break China for our clients. We remain committed to great client experience demonstrated by our agility and increasing intensity of client engagement in a time of need. We will continue to execute on our strategic plan. While our medium-term targets are under review, given the effects of the pandemic on the economies in which we operate and the markets that we operate in. We are, however, making significant progress to advance our strategic objectives, positioning the business for the long term.

We are now ready to take questions. Thank you.

Fani Titi

I think we will start with Audio Africa. And then thereafter, go to questions that have been e-mailed to us.

Question-and-Answer Session

Operator

[Operator Instructions] The first question we have is from John Storey from JP Morgan.

John Storey

Just wanted to get a quick sense on the size of the structured book that you referenced today. Just trying to have a look at the £53 million cost relative to the size of the book, if you could just provide some insight on that?

Fani Titi

Yes, John, we haven’t disclosed the size of that book. Needless to say, we have given you guidance as to what we think the cost to reduce risk and to manage risk will be. We’ve given an indication for second half cost of £53 million. And given the activities to reduce cost already taken and those to be taken, we believe, in the next financial year, those costs would be less than half. As Nishlan indicated, we have seized the issuance of the complex and high-risk products that we have seen in the portfolio. Just to give you an indication, the capital at risk product of a kick out nature. As an example, if the FTSE were to increase over the next 12 months to about 7,300, 7,500, the size of that portfolio would reduce dramatically. Clearly, obviously, if you continue to have lower markets, you would have a tenure of 2 to 3 years. But we’ve taken significant action to contain the risk, we’ve given the market very transparent guidance as to what we think the relevant costs are likely to be going forward.

Operator

[Operator Instructions]. Sir at this stage, there seems to be no further questions in the question queue.

Fani Titi

Thank you. We’ll take questions from the e-mail line. Tesh?

Unidentified Analyst

Okay. The first question is from Mark de Toy. He’s from Oystercatcher Investments. I’m going to read verbatim. So could you give me more detail on the hedging loss in structured products? What products caused these losses? Is it perhaps colors that you have written or is it, or what is causing these losses? Is it related to listed property stocks?

Fani Titi

Not related to listed property stocks. As indicated, we have a structured deposit book where we issue products raising deposit at the back of that to our clients. And obviously, we have to hedge out that risk when we have this product on book. In volatile markets, it became difficult to hedge the underlying risk given: Firstly, the level of volatility; second, the drying up of liquidity in terms of some of this product. As I said, some of the products were quite complex and had a number of indices and we have substantially reduced some of those products. We will continue to do so. I think we can give further details to, what is his name?

Unidentified Company Representative

Mark de Toy?

Fani Titi

To Mark de Toy, if he wants to engage. Clearly, we wouldn’t give any detail to one person as opposed to the whole market. But I just think I don’t want to spend all the time talking about this one issue. As I said, we’ve given very clear guidance as to our expectations of costs going forward.

Unidentified Company Representative

Great. The second question is from Diana Wan, sorry, Mawandidia. He’s, she’s from RiskCo Asset Management. As your capital position has improved, how are you currently looking at your associates? For example, your associate IPF, Investec Property Fund? Are you looking at selling your stake at the current low share price? You aim to complete the simplification plan for about the year-end. So I would like to know if Investec will keep holding IPF, if IPF share price does not recover.

Fani Titi

I don’t want to address one specific asset. I think as a general principle, while we want to reduce the level of, the size of our investment portfolio, as I indicated, we will not do so in a manner that destroys value. That’s, as a general principle. You will know that we had wanted to sell 10% of Ninety One during the demerger, but felt that the price that was on offer at the time during the demerger was inappropriate, and we decided to hold on to Ninety One, and it has turned out to be a good call on our part. So we are not in the business of selling assets in a subeconomic way.

Unidentified Company Representative

The next question is from Chris Steward, Ninety One. Please can you give a sense of the financial impact of the IPF Manco?

Nishlan Samujh

Is that the go-forward financial?

Fani Titi

That should be the go forward, yes.

Nishlan Samujh

Yes. I think in the overall context of the results, it would not have an overall material impact in terms of earnings.

Unidentified Company Representative

Okay. The second question, the last question is from Massi Shaba Makura from Melbourn Douglas. Thanks Fani and team for a comprehensive presentation. Please unpack the regulatory hurdles you were able to overcome to be able to declare an interim dividend. Many thanks.

Fani Titi

Yes. I’ll try to answer the question during my section of the presentation. As indicated, we are supportive of the regulatory objective of preserving capital, given the level of uncertainty going forward, first. Second, given the need for banking institutions to support the real economy. And Investec has been in the forefront in South Africa, and we play a part in the UK in supporting the real economy. And we have participated in the different schemes that have been set out. So we support those objectives.

As indicated, we did not declare a final dividend in May when we released our results in keeping with the spirit of those guidances. Clearly, our Board looked at our capital position, looked at our outlook over the next little while and believed that we have the capital resources, both to continue to support the economy to weather the storm and to be able to declare a dividend. Equally, I did indicate that the majority of the dividend is supported by the proceeds that we have received from, that we will receive from Ninety One and also that we received from our wealth business.

So the majority of the dividend will be from capital-light businesses, and we believe that we will have substantial buildup of capital over this period, given that we did not declare a dividend. And that, as indicated, our loan book has not grown significantly given the level of uncertainty in the market. Clearly, when we do this type of thing, we will never want to surprise our regulators. There would have been appropriate interactions, and regulators wouldn’t either approve or not approve this type of action because it is always up to the Board, but our actions will not be a surprise to our regulators.

Unidentified Company Representative

Shall we do one more question? So Chris Steward, Ninety One, just clarifying that you’re referring to the profit on disposal of the IAPF Manco sale, not the ongoing impact.

Nishlan Samujh

Okay. In terms of the gain on the sale, that will be in our second half results, it was held in the UK portfolio. So it’ll be in the overall results from a UK perspective.

Unidentified Company Representative

Those are all the questions.

Fani Titi

Do we have any further questions from Audio Africa?

Operator

At this stage, sir, there are not, no questions.

Fani Titi

Okay. Ladies and gentlemen, thank you very much for your interest in our business and for your attendance of the presentation. We hope to see you in another 6 months or so when we present our final year results. As indicated, we would expect that performance in the second half will be better than the reported performance given our expectation around a number of the areas that we spoke about. But thank you so much for your attendance.

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