Johannesburg, 22 December 2020 – GCR Ratings (“GCR”) has affirmed the international long and short-term issuer ratings of Investec Bank plc at BBB+/A2. 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 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 98.6% of the total asset base as at 1H FY21. Accordingly, the ratings of IBP are equalised to the group Anchor Credit Evaluator.
The assessment of Investec plc is underpinned by strong liquidity and a resilient financial profile that provides adequate loss absorption capacity in times of economic stress. While the niche market focus is viewed to positively impact on the group’s asset quality, this does limit loan book scale which constrains the overall competitive profile relative to the broader market. The COVID-19 pandemic and ongoing Brexit discussions brings a high degree of uncertainty into the United Kingdom (“UK”) operating environment and, as a result, the banking sector is expected to face a number of challenges over the course of the next year. It remains to be seen what the ultimate impact on incumbent UK banks will be, however GCR believes Investec plc is well placed to defend its existing market position and sustain adequate profitability (with its core client base of high net worth individuals expected to mitigate any potential significant asset quality deterioration) which could support better than expected credit metrics.
Competitive positioning is strained by the group’s limited market share in its core UK banking operations. This is somewhat balanced by a degree of geographic diversity of the loan book (c.22% exposure to countries across Europe, North America, Australia and Asia) and niche market focus, with a well-defined focus on high net worth clients which GCR views to be of lower risk and more resilient in times of economic stress. GCR believes the group’s business strategy and product offering enhances the value proposition to the target market, positioning the bank well to leverage off group affiliations and defend its status within its niche. This, coupled with the capital light wealth and investment division (which has become a material contributor to group revenue and is viewed to differentiate the bank with peers) is expected to support revenue diversity and stability through the cycle.
Investec plc’s capital and leverage is assessed to be adequate. This encompasses an expectation for the GCR total capital ratio (GCR adjusted total capital/Risk Weighted Assets – standardised approach) to register at 11.9% over the next two years on the back of moderate loan growth and adequate earnings. GCR expects Return on Assets (based on core earnings / adjusted assets) to stabilise at around 0.2%, after recording consecutive reductions between FY19 (0.9%) and FY20 (0.6%). The higher proportion of annuity type fee and commission income (non-interest income / operating revenues equated to 57% at 1H FY21) is expected to somewhat cushion earnings from the prolonged low interest rate environment and slightly higher credit costs over the next 12-18 months.
Overall risk is viewed to be contained, and neutral to the ratings. Asset quality is good, with the group historically reporting low ongoing credit losses below 0.5%, although this has risen to 0.7% (based on GCR calculated credit losses) as at 1H FY21 on the back of the COVID-19 impact and additional provision overlays. GCR calculated credit losses are expected to remain elevated at 0.6% given the macro conditions, but at this level, would still compare favourably to peers. The group’s reserving is viewed to be appropriate in the context of a mostly secured book with conservative loan to value ratios, with loan loss reserves covering 49% of stage 3 loans at 1H FY21.
Non-performing loans have been quite stable over the past two years, and GCR expects the ratio to register around 3% over the next two years. However, the operating environment is expected to present a number of challenges to incumbent banks in the UK banking sector given the high degree of uncertainty around the duration of the COVID-19 pandemic, impact of Brexit and broad economic conditions post recovery over the next year. GCR believes the group’s niche client focus may support profit resilience over the period and could lead to a strengthening in asset quality, although there could be some pressure from the exposures to vulnerable sectors (c.13.5% of loan book at 1H FY21) where asset quality could deteriorate as government support measures are curtailed.
A good funding profile and strong liquidity supports a positive factor assessment. IBP derives the majority of its funding from customer deposits, of which the majority is sourced from retail clients and is mainly term and notice deposits. As such, there isn’t an undue reliance on wholesale funding and according to management, is used selectively in order to diversify the funding base. Overall, the group net stable funding ratio was reported at 126% at 1H FY21 and is viewed to be adequate and aligned with the UK banking sector.
Strong liquidity is supported by a large quantum of liquid assets (c.£6.2bn at 1H FY21), covering total wholesale funding by 2.6x. The group also reported a very high Liquidity Coverage Ratio of 335% at 1H FY21, with IBP recording one of the highest ratios across peers at 353%. GCR expects Investec plc’s current funding and liquidity profile to be sustained over the rating horizon, even after factoring in a degree of portfolio optimisation which could see excess cash being deployed into higher earnings assets.
The stable outlook is premised on GCR’s expectations that asset quality will continue to hold up well amidst an uncertain operating environment, primarily due to the resilience of the group’s core customer base. The diverse earnings base, adequate loss absorption capital buffers and strong liquidity are expected to cater for any adverse economic shocks, preserving the group’s overall financial profile at the current level.
Should asset quality and/or earnings deteriorate beyond GCR’s expectations, thereby jeopardising currently adequate capital, the rating could be downgraded. Negative ratings action could also emanate from a weakening operating environment. Upward rating movement could stem from asset quality measuring better than peers over the outlook horizon, and/or from a sustained improvement in capitalisation and/or earnings while maintaining strong liquidity.
|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, November 2020|
|GCR Financial Institutions Sector Risk Score, August 2020|
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||14.00|
|Sector risk score||11.00|
|Management and governance||0.00|
|Capital and Leverage||0.00|
|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 2020 (plus four years of comparative numbers;
- Unaudited interim financial statements to 30 September 2020; and
- Industry comparative data.