Investec’s British arm says it will stop offering retail clients the type of structured products that contributed to a sharp decline in the bank’s profitability and could leave it with nearly R4bn in hedging costs.
The bank said on Wednesday that it would not launch any further retail structured product plans after the current series closes on April 1.
The products, which it had been offering in the UK since 2008, were caught on the wrong side of the volatility that engulfed global markets as the spread of Covid-19 led to lockdowns in key markets in March 2020.
Business Day reported in November costs associated with hedging Investec’s structured deposit book, a financial product that yields higher returns compared with a standard deposit, could run into hundreds of millions of pounds if volatile market conditions persisted.
When it reported results for the six months to September, Investec said the UK bank incurred hedging costs of £53m (R1.1bn) on its structured deposit book, contributing to the division’s £66.5m decline in profits.
The bank said it would continue to support existing plans. The decision is also part of the group’s plans to streamline and simplify its business under the new leadership team of CEO Fani Titi. This has already caused the banking group, which is predominantly focused in SA and the UK, to trim costs, prompting brokers such as JPMorgan to include Investec among their top picks locally.
The products were popular in a market in which interest rates have been close to zero for more than a decade since the global financial crisis.
They incorporate derivatives to provide a higher return than was possible from a conventional cash deposit product providing a return purely based on an interest rate. The derivative provides a return by giving investors exposure to an index linked to a commodity, currency or equity index, without putting capital at risk.
But the possibility of exten-ded lockdowns and drastically reduced economic activity associated with the Covid-19 pandemic resulted in many large publicly traded companies suspending dividends indefinitely.
This development had an outsize effect on the pricing of equity derivatives linked with indices such as the FTSE 100 and S&P500.
Investec Bank CEO Ruth Leas said the exposure of its structured deposit book was "predominantly weighted" to the performance of equity indices.
This led to unprecedented swings in the pricing of many derivatives and forced Investec and some of its competitors into counteractive action to hedge and reduce risk in a market that lacked liquidity.
For the financial year ending March 2020 and the six months ending September last year the bank incurred £82m in hedging costs associated with the retail and institutional products.
It also indicated it could incur a further £106m across the current fiscal year and 2022 as it manages the risks associated with the products.
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