Johannesburg, 15 December 2021 – GCR Ratings (“GCR”) has affirmed the international long and short-term issuer ratings of Investec Bank plc at BBB+/A2 respectively. The outlook is Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Investec Bank plc||Long Term Issuer||International||BBB+||Stable Outlook|
|Short Term Issuer||International||A2||–|
The ratings of Investec Bank plc (“IBP”) are based on the credit profile of the consolidated United Kingdom (“UK”) group, Investec plc. Investec plc (“the group”) is the non-operating holding company of the broader group’s non-Southern African operations, including the UK and other international markets. The main subsidiary of Investec plc is IBP and GCR views IBP to be the core operating entity within the sub-group, representing 98.4% of the total asset base as at 1H FY22. Accordingly, the ratings of IBP are equalised to the group Anchor Credit Evaluator.
The ratings affirmation reflects stronger asset quality and earnings supporting sound capitalization, sustained liquidity strength and stable funding structure through an unpredictable operating environment over the past 12-18 months. These strengths are offset by limited scale, although we believe the group is highly competitive within its target market and has a comparatively large wealth and investment business that supports earnings stability and diversity.
Asset quality was better than expected, with very low GCR calculated annualized credit losses (0.07%) and reduced GCR calculated non-performing loans (“NPLs”) reported at September 2021 (2% vs 3.1% at March 2020). Improved operating conditions and strong government support were amongst the key catalysts underpinning good asset quality. We believe the credit loss ratio may normalise between 0.15%-0.2% over the next two years once government support measures are curtailed. This could cause a deterioration in credit quality, particularly for Small and mid-size enterprises (“SMEs”) and other vulnerable sectors that may have benefited from support (8.5% of Investec plc’s loan book is to COVID-19 vulnerable sectors, which includes aviation, and retail, hotel and leisure properties amongst others), while also noting uncertainties that could derail sustained economic growth, such as persistent inflationary and supply chain pressures. That said, Investec plc’s asset quality may, in time, outperform peers given the resilience of its target market to economic shocks, its mostly secured lending pool and full run down of its legacy NPLs (currently GBP49mn, of which those reported in stage 3 account for c.0.5% of reported NPLs).
Capital and leverage is sound, with the group reporting one of the highest leverage ratios (reported 7.7% at September 2021) compared to UK banking peers. The GCR total capital ratio improved slightly to 13.14% at September 2021 (March 2021: 13.0%) as stronger earnings and temporary dividend suspensions in 2020 more than offset above average loan growth. Investec plc calculates risk weighted assets on a standardized approach which arguably understates risk adjusted capital metrics. Sound capital is likely to be maintained, balancing above industry loan growth and normalization in credit losses, with stronger GCR calculated return on assets (“ROA”) of 0.8% at September 2021 based on lower cost of funding, sustained momentum in fee and commission income (due to higher client transactional activity), absence of restructuring costs (such as exit of Australian business and right sizing of other subsidiaries) and lower risk management costs related to the structured products. Management advised that the recently announced share distribution of Ninety One (at group level) is not expected to materially impact key capital metrics for Investec plc.
The funding structure is underpinned by good stability and source diversification with low reliance on wholesale funds. Retail deposits form the core of the funding base. Elements supporting stability also include a skew towards term and notice deposits and a high proportion of UK customer deposits being covered under regulatory protection. The group also grew deposits by 3.9% to GBP16.7bn in the 6 months to September 2021 (5.2% year-on-year to March 2021) and improved the cost of funding to 1.1% on an annualised basis (according to GCR calculations), from 1.5% at March 2021. Relative to peers, reliance on wholesale funding is low, and utilized to add diversity and lengthen the maturity profile. The group reported a net-stable-funding ratio (“NSFR”) of 127% at September 2021 (129% at March 2021), which is viewed to be adequate in the context of the market.
Large quantum of liquid assets and relatively contained leverage (measured by a loan to deposit ratio of 82% at September 2021) drives sound liquidity. The liquid coverage ratio (“LCR”) was high at 284% and we expect the group’s LCR to remain strong, sustaining good liquid asset coverage of short-term wholesale funding.
Investec plc is a niche bank in the UK banking sector, with relatively low market shares across assets, loans and deposits, limiting the competitive position assessment. This is largely due to a well-defined business model that targets high net worth clients and mid-market businesses (including founder and entrepreneur-led businesses, private equity and listed companies). Positively, the loan book is viewed to be well diversified across sectors, with moderate geographic dispersion, mostly in developed markets. A key differentiator (and of key support to the competitive position assessment) is the large private client wealth and investment business, with Assets Under Management (“AUM”) well above UK banking peers (GBP44.7bn at September 2021), providing a stable source of low-risk income and revenue diversification.
No other Environmental, social and corporate governance (“ESG”) considerations have shaped the ratings.
The Stable Outlook reflects our view that ROA can be maintained at 0.8% over the rating horizon, underpinned by strong through-the-cycle asset quality, normalisation in costs and improved non-interest income supported by higher post-pandemic client transactional activity and strong revenue generation from the wealth and investment business. In turn, capital generation capacity should improve and adequately cater for above average loan growth and resumption of dividend payments and potential asset distributions. Funding and liquidity are also expected to remain strong and supportive of the ratings.
We could upgrade the ratings if our view of the operating environment improves (particularly a more positive view on the financial sector risk assessment) or if the issuer’s GCR capital ratio can be maintained around the 17% range. An upgrade could also result from through-the-cycle asset quality outperformance while sustaining capital and liquidity strength. Conversely, negative rating action may result from a material and sustained weakening in earnings, accompanied by a significant deterioration in capital. Asset quality metrics that are weaker than peers or a worsening funding structure could also cause downward rating pressure.
|Primary analyst||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, October 2021|
|GCR Financial Institutions Sector Risk Score, December 2021|
Investec Bank plc
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||International||A-||Stable||October 2000|
|Short Term Issuer||Initial||International||A2||N/a||October 2000|
RISK SCORE SUMMARY
|Rating Components & Factors||Risk scores|
|Country risk score||14.50|
|Sector risk score||11.00|
|Management and governance||0.00|
|Capital and Leverage||0.25|
|Funding and Liquidity||0.50|
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Investec plc participated in the rating process via teleconference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Investec plc and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 March 2021 (plus four years of comparative numbers;
- Unaudited interim financial statements to 30 September 2021; and
- Industry comparative data.