The Anglo-South African bank is the latest casualty of the market volatility seen earlier this year but remains “committed” to retail structured products.
Investec’s structured products business has suffered a significant blow as the trading income arising from customer flows netted a loss of £8.5m relative to a profit in the prior period of £62.8m, according to the bank’s interim results for the six months ended 30 September 2020.
Trading losses from hedging activities related to Investec’s structured products have resulted in the bank reducing its offering and de-risking its trading books over time.
Investec reported last week a revenue fall of 24% (17.8% in neutral currency) compared to H1 2020 with risk management and risk reduction costs related to hedging of its structured products book resulting in a trading income decline of 100.6%.
We will always support our customers, and remain committed to offering them high quality products
The group’s UK & other specialist banking activities also saw their adjusted operating profit declining by 83.8% to £12.9m (H1 2020: £79.4m). Despite increased equity capital markets activity and good levels of lending turnover across private client and certain corporate client lending areas, hedging costs related to the bank’s structured products book at £53m were the main cause of a profit reduction of £66.5m.
Investec Bank CEO Ruth Leas (pictured) stated that the bank has no ‘appetite to take the risk going forward’.
‘We will let the products mature but will not roll out any new ones as we move to close the book,’ said Leas. ‘We have and will continue to take active steps to de-risk the profile of this book.’
However, a source at the bank told SRP that the decision will not impact the public offering programmes in the UK, Ireland and the Nordics, at least for now.
"As noted in our half year results, we are focusing on other funding channels rather than issuing new institutional structured products,” said the source. “However, this does not affect retail structured products. Irrespective of any product changes, we will always support our customers, and remain committed to offering them high quality products, carefully designed to help them meet their investment goals."
Market rumours emerged last week after Investec announced its results for the April-September 2020 period which showed headline earnings per share for the group declining by 45% to 9.2p and return on equity fall from 10.7% to 5.3% compared to the same period last year.
The bank’s net interest income decreased by 15.6% impacted primarily by lower interest rates while non-interest revenue declined by 30.7% impacted by lower lending fees, subdued client transactional activity, and lower investment and associate income.
According to the report, risk management and risk reduction costs on hedging Investec’s structured products book following the market dislocation and dividend cancellations was the major driver of the loss.
Net interest income declined by 2.1% with growth in average core loans offset by lower interest rates while non-interest revenue decreased by 43.5% - the recovery in equity capital market fees and an improvement in investment income was offset by lower lending fees and risk management and risk reduction costs associated with hedging its structured products book - risk reduction costs incurred by the bank during the last six months included ‘the purchase of protection against a repeat of the severe market moves experienced in March and April 2020’.
“Investec losses, and shift out of the market, could change the UK landscape because other issuers were not paying up for cash as aggressively,” a senior market source told SRP.
Cost of risk reduction
For the 2022 financial year, the bank expects risk management and risk reduction costs to be less than half of that anticipated in the current financial year, and progressively reducing in the 2023 financial year.
The bank’s trading income from client flow will continue to be negatively impacted by risk management and risk reduction costs on hedging its structured products book, but it expects the costs to decline by ‘mid to high single digits’ for the full 2021 financial year compared to 2020.
‘We anticipate a similar level of risk management and risk reduction costs in the second half of the 2021 financial year in particular, as we continue to reduce the risk on the book,’ stated the bank.
Wealth & Investment reported net inflows of £336m and growth in funds under management (FUM) of 14.9% since 31 March 2020 to £51.1 billion.
The Specialist Banking business’ net core loans grew 1.0% since 31 March 2020 to £25.2 billion, with strong loan book growth in the UK. The bank’s Private Banking business was offset by subdued corporate lending activity in both geographies and higher repayments although client engagement was ‘consistent and proactive, leveraging off the various digital platforms at our disposal’.
Despite the background noise, analysts at Bank of America sounded a positive note on Investec’s shares yesterday as losses and negative mark-to-markets on structured products were the result of ‘significant dislocations’ caused by the pandemic ‘but should fade as stability continues to improve’.
Investec Structured Products
SRP data shows a 25% fall in issuance year-on-year (94 products YTD20 v 126 products in 2019) however issuance and sales for the six months since April 2020 period were flat (50 products/£195m v 57 products/£223.5m). The bank remains the main provider of structured products in the UK retail market.
The bank has over 550 live structures in the UK market worth an estimated £2.5 billion mainly linked to the FTSE 100 (511 products/US$2.6 billion), Investec EVEN30 Index (35 / US$160.52m); Eurostoxx 50 (27 / US$112.24m), and S&P 500 (21 / US$73.35m).
The bank is also active in the Nordics and Ireland. Investec's first appearance in the Nordics was in Finland after striking local partnerships with distributors such as Wallstreet Asset Management (now Korkia) and Garantum. It also has products listed on the Nasdaq Helsinki exchange.
In Sweden, Investec Bank is a top three issuer and has marketed over 60 products worth an estimated US$106m in 2020 using domestic providers SIP Nordic and Strukturinvest as distributors. In Ireland, the bank is also the third most active provider with 12 products worth US$27.8m launched YTD
Earlier this year, Investec Structured Products partnered with UK asset manager Protean Capital to launch a new structured product fund targeted at UK retail investors. The VT Protean Capital ELDeR Fund provides investors with the benefits of the defined returns of structured products but in a unitised, open-ended Ucits format.
Most recently, the bank launched the UK’s first retail ESG-linked deposit plan - the FTSE4Good 6 Year Deposit Plan 1 - a six-year fixed term deposit plan tied to the FTSE4Good UK 50.
The product was part of Investec’s 100th launch, marking 12 years in which Investec has offered consistently available deposit plans and investment plans, with 1,175 matured products and no capital loss.
Click in the link to read the full report.