The boss of Investec Bank’s local arm says the impact of Covid-19 will be sharper than that of the 2008 global financial crisis and he expects a long, gradual recovery in economic activity.
“The contraction and recovery will most likely be L-shaped and will take much longer than the global financial crisis. It is a massive shock. Even during the global financial crisis we didn’t see revenue for some businesses go to zero like we have with Covid-19,” says Investec Bank SA CEO Richard Wainwright.
The distinguishing feature of the pandemic is the psychological effect it has on people, he says. “People are fearful of going back to work or sending their children back to school. In this way it’s similar to the impact 9-11 had on the airline industry, and for that reason I think it will prevent a V-shaped recovery from happening.”
This view is supported by the results of a survey undertaken by AskAfrika and published on Thursday. It showed the fear of contracting the virus jumped by 10 percentage points to 25% as the country moved from a level 5 lockdown to level 4
Investec’s newly appointed UK boss, Ruth Leas, draws another parallel with the global financial crisis.
“The financial crisis began in the US, as early as the back end of 2006, before it began to affect the system in 2007-2008. The speed of this pandemic has seen vibrant economies being shut down in a matter of months, compounding the shock,” says Leas.
While the UK expects a decline in GDP of approximately 8%-9% this year, the government fiscal stimulus package has been “incredibly bold and decisive and much greater than anticipated”, says Leas.
The CEOs were speaking at the presentation of the group’s results for the year ending March, which saw the specialist banking and wealth management group report results without Investec Asset Management (since renamed Ninety One) for the first time.
The group reported a 40.7% decline in headline earnings per share — the primary measure of profit that excludes one-off items — to 29.2p with return on equity falling from 14.2% in the prior year to 11%.
Investec’s board did not declare a final dividend in light of regulatory guidance provided to banks in SA and the UK.
In one of the clearest signs of the effect of the pandemic on the company’s performance, the bank saw its expected future write-offs for bad loans more than double from the prior year, rising to £133m (R2.8bn). This represented an increase of 43% in SA and 209% in the UK.
In line with new accounting standards, banks have to forecast bad debt write-offs over the life of a loan and allocate a percentage of the loss upfront. If conditions change over the life of a loan, expected write-offs need to accommodate this.
“Excluding Covid-19, the credit loss ratios would have been in line with the prior year,” says Wainwright.
Other factors weighing on the group’s lower profitability included 47% lower trading income from customer flows, representing a decline of £57.4m. The group wrote down the carrying value of its investment in the Bud Group (formerly called Investec Equity Partners) and other joint ventures by £45.4m.
The group was able to lower operating costs by 7% and sees other opportunities for revenue generation and client acquisition.
“We have 5,000 high net worth clients in the UK in our wealth and investment business, but only 16% of them have Investec private bank accounts. So we think there is an opportunity to further integrate our private and wealth management platforms,” says Wealth & Investment UK CEO Ciaran Whelan.
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