Announcements Financial Institutions Rating Alerts

Investec Bank plc international scale ratings affirmed at BBB+/A2. Outlook Stable.

Rating Action

Johannesburg, 20th December 2019 – GCR Ratings (‘GCR’) has affirmed the international scale long term and short term issuer ratings on Investec Bank plc at BBB+ and A2 respectively, with the outlook affirmed as stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Investec Bank plc Issuer Long Term International BBB+ Stable Outlook
Issuer Short Term international A2

On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, all ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the review under the new methodology. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the rating revised in line with the new methodology.

Rating Rationale

London-based Investec Bank plc’s (‘IBP’, ‘the bank’) ratings reflect its niche business position in the United Kingdom, alongside adequate levels of capital, improving risk position, stable funding and good levels of liquidity.

IBP operates as a specialist bank and wealth manager, predominantly in the United Kingdom but with some overseas lending and client exposures. The competitive position score balances its small market share and relatively limited client base in the U.K, with its strong niches and well-established wealth management business. The private banking division delivers a full range of retail banking services to high net worth individuals (HNWIs) and a more selective range of products and services to customers of its sister bank (South Africa based Investec Bank Ltd) and other U.K clients. IBP’s corporate and investment banking division focuses on small to mid-sized UK corporates, traditionally where larger investment banks do not compete. Within this space, the bank has particular strengths in fund finance and asset finance. The wealth and investment division of IBP is a significant differentiator versus other small and specialised banks operating in the U.K. Firstly, the franchise is good versus other domestic wealth managers with funds under management of approximately GBP41bln at Sept 2019, growing over 35% since 2011. Secondly, and more importantly, the division provides a significant amount of capital light revenues (31.6% of IBP revenues). Overall, we consider the revenue stability of the bank to be strong, with total capital light revenues contribution 50% of total revenues in 2019.

We consider capital and earnings to be a broadly neutral ratings factor. This opinion balances our expectation that the GCR capital ratio will range between 12.5%-13.5% over the next 12-18 months. Whilst the capital range is just at the lower end of the intermediate assessment, IBP has adopted the Basel III standardised approach for its capital calculations, which attracts more punitive risk weightings than many U.K. peers. As a result, due to the fact that the GCR leverage ratio is a strong 8%, we believe capitalisation to be adequate. GCR’s forecast balances moderate risk asset growth with slightly quicker internal capital generation and ultimately retention. Over the ratings horizon (12-18months), we expect IBP to return around 10% of equity, spurred by some ongoing improvements in the currently lagging efficiency of the entity. Cost to income ratio of IBP was around 75% at September ’19.

The risk position is a neutral ratings factor, reflecting a strong turnaround in the asset quality of the entity over the past few years.Stage 3 gross loans reduced to around 3.1% of total gross core loans at September ’19. However, once accounting for legacy loans the NPL ratio approaches the 1.7% level, which is similar to its UK banking peers.Loan loss reserves covered 42.9% of stage 3 loans at September ’19, which is broadly considered to be adequate given the collateral levels (coverage of 1.05x stage 3 loans) and recovery prospects. Going forward we anticipate performance to broadly correlate to the economy and industry, with credit losses of between 30-40bps.Positively, loan concentrations are modest with the top 20 loans accounting for less than 10% of gross loans but a relatively high 50% of GCR nominal capital in 2019.Furthermore, the industry breakdown shows good diversification, especially reflecting a drop in commercial real estate exposure since the crisis.More than many UK based banks, IBP has exposure to general aviation and fund finance.

Funding and liquidity are broadly positive rating factors, supported by generally stable funds and good levels of liquidity.Retail deposits account for the majority of customer deposits, although some are structured and maybe more confidence sensitive than traditional mass market retail deposits.Positively, the bank has made good traction in the private and mass market banking sector, which (in part) has driven down the UK cost of deposits.IBP has limited wholesale market funding and faces no large refinancing risks. Positively, the bank is a net placer of funds on the interbank markets. Liquidity is considered to be sound, with cash and near cash accounting for 47% of total customer deposits and 3.4x wholesale funding.Furthermore, on a solo basis IBP runs a strong LCR ratio of 329% at Sept 19, which compares well to domestic peers.

Outlook Statement

The stable outlook balances our expectation that the GCR capital ratio will range between 12.5% and 13.5% of total capital over the next 12-18months, with the GCR leverage ratio maintained at around 8%. We expect asset quality to continue improving towards the UK banking sector average and credit losses to range around the 30-40bps level. Earnings are expected to improve over the medium term as IBP moves towards achieving its FY2022 financial targets.

Rated Triggers

We could lower the ratings if we believe that the capital or asset quality deteriorates from the above expectations. We could consider an upgrade if there is a material improvement in capital or asset quality, but consider it unlikely over the outlook horizon.

Analytical Contacts

Primary analyst Matthew Pirnie Financial Institutions Analyst
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771
Committee chair Corné Els Senior Structured Finance & Securitisation Analyst
Johannesburg, ZA CorneE@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, June 2019
GCR Financial Institutions Sector Risk Score, December 2019

Ratings History

Investec Bank plc

Rating class Review Rating scale Rating Outlook Date
Issuer Long Term Initial National A- Stable Oct. 2000
Last National BBB+ Stable Dec. 2018
Issuer Short Term Initial National A2 n.a. Oct. 2000
Last National A2 n.a. Dec. 2018

Risk Score Summary

Risk score
Operating environment 25
Country risk score 14
Sector risk score 11
Business profile -1.5
Competitive position -1.5
Management and governance 0
Financial profile 0.5
Capital and Leverage 0
Risk 0
Funding structure and Liquidity 0.5
Comparative profile 0
Group support 0
Government support 0
Peer analysis 0
Total Score 24

Glossary

Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
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.
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.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

Investec Bank plc participated in the rating process via video conferences, 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 Bank plc and other reliable third parties to accord the credit rating(s) included:

  • Audited financial results of the bank at 31 March 2019 (plus four years of comparative numbers);
  • Unaudited financial results of the bank as of 30th Sept 2019
  • Corporate governance and enterprise risk framework;
  • Reserving methodologies and capital management policy;
  • Industry comparative data and regulatory framework; and
  • A breakdown of facilities available and related counterparties.


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