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| Operating financial review |
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Geographic and operational diversity support growth in challenging
markets |
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Investec has continued to deliver growth in operating profit, during a volatile period for the global financial system. We benefited
from the geographic and operational diversity of our business units and were able to meet four of our five stated financial objectives
in a tough trading environment.
South Africa delivered a strong performance, growing operating profit by 26.5% to £340.0 million (2007: £268.7 million), while the
UK felt the impact of difficult credit market conditions posting a marginal decline in operating profit to £164.6 million
(2007: £167.4 million). The Australian business was less affected by these conditions; however, activity levels in the second half
slowed somewhat resulting in this geography posting a 9.7% increase in operating profit to £33.1 million (2007: £30.1 million).
Adjusted earnings per share (before goodwill and non-operating items) grew by 6.8% to 56.9 pence, from 53.3 pence, falling short
of our financial growth objective of EPS growth to be 10% greater than UK RPI. The board recommended a final dividend of
13.5 pence per ordinary share, bringing the total dividends per share for the year to 25.0 pence, up from 23.0 pence in 2007. |
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Balanced portfolio of businesses showing resilience |
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The group's operating profit growth was supported by profitability from all divisions with Private Client Activities, Property
Activities and Asset Management continuing to grow. |
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Private Client Activities |
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Private Client Activities reported growth in operating profit of 9.8% to £193.7 million (2007: £176.5 million).
A more diversified set of revenues, increased distribution capacity and greater penetration across all areas of specialisation
underpinned the Private Banking division's performance with operating profit increasing by 7.8% to £166.4 million. Notable growth
in contribution to operating profit came from Growth and Acquisition Finance and Wealth Management, as funds under advice
grew 45.4% to £3.7 billion. Earnings from lending were up in all geographies with the private client core lending book growing by
29.9% to £8.9 billion (2007: £6.9 billion). The division increased its retail deposit book by 18.8% to £6.6 billion (2007: £5.6 billion),
expanding activities and product development in all jurisdictions. The weaker credit cycle affected the division's performance and
impairments increased in all geographies. The outlook for next year is tempered as uncertainty in the global credit markets persists.
Private Banking expects to consolidate around current levels of profitability, benefiting from the growth strategy and diversification
initiatives already implemented.
Private Client Portfolio Management and Stockbroking reported growth in operating profit of 23.8% to £27.3 million
(2007: £22.1 million). The Private Client business in South Africa benefited from the launch of new products, increased volumes
and asset swap activity. Funds under management, expressed in Rands, increased by 6.8% to R112.7 billion (2007: R105.6 billion).
The results of the UK operations include Investec's 47.3% share of the directors' estimate of the post-tax profit of Rensburg
Sheppards plc. |
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Capital Markets |
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Capital Markets' advisory, structuring and asset creation activities continued to perform well with a number of mandates successfully
closed in Project Finance, Structured Finance, Equity Finance and Resource Finance. The division's treasury and trading activities
benefited from increased market volatility while core loans and advances increased by 22.6% from £3.1 billion to £3.8 billion. The
majority of the specialisations within Capital Markets performed well, however, operating profit decreased marginally to £115.8
million (2007: £117.3 million) following write downs of £48.9 million on our US structured credit investments held within the
Principal Finance business. During the year we acquired the business of Kensington Group plc (“Kensington”), a specialist mortgage
provider in the UK, with a view to enhancing our securitisation capabilities in this market. Difficult market conditions have
subsequently impacted the growth potential of this business requiring a realignment of Kensington's business model to maintain a
profitable platform and an ability respond quickly as markets change.
The diversified portfolio of activities should continue to support growth in the medium term; however, short term growth is
dependent on liquidity and stability returning to the markets. |
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Investment Banking |
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Investment Banking delivered a mixed performance across geographies reporting an overall decrease of 15.2% in operating profit
to £77.3 million (2007: £91.2 million). The South African operations posted good results, supported by a stable deal pipeline,
dividends received, realisations and an increase in the value of underlying investments held within the Principal Investments
portfolio. This portfolio is now well established, delivering a meaningful base of annuity earnings for the division. Prime Broking and
expansion of the international distribution business drove growth in the agency business. The UK operations were affected by a
weaker performance from some of the investments held within the Private Equity and Direct Investments division and a lower level
of IPO and fundraising activity.
The Investment Banking business has successfully developed a core level of sustainable earnings supporting performance through
varying cycles. Out performance going forward will depend on market conditions and an ability to take advantage of opportunities
presented in the current climate. |
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Asset Management |
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Investec Asset Management has built a highly scalable platform which continues to deliver steady growth in operating profit. The
division posted an increase in operating profit of 12.8% to £76.8 million (2007: £68.1 million). This result was driven by an enhanced
global distribution reach, strong retail inflows particularly in the first nine months of the year and solid long term investment
performance. Assets under management in Pounds Sterling decreased by 3.8% to £28.8 billion (2007: £29.9 billion) (assuming a
neutral Rand/Pounds Sterling exchange rate would have resulted in an increase of 3.1% to £30.8 billion).
The long term track record and growing demand for specialist high performance products support the fundamentals of the Asset
Management business while new initiatives in the pipeline should support longer term growth. |
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Property Activities |
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This division, based mainly in South Africa, had an exceptional year benefiting from an increased contribution from the investment
property portfolio. An operating profit of £36.3 million (2007: £14.1 million) represented growth of 156.8% from the prior year.
During the course of the year, we sold our property fund management and administration business to Growthpoint Property
Limited (“Growthpoint”) in exchange for Growthpoint shares. Shortly thereafter we disposed of our shareholding in Growthpoint,
monetising the proceeds of the transaction and realising a non-operating gain of £72.9 million on the sale of the business which
was established over a number of years and primarily supported Growthpoint's property operations. Following this divestment, the
South African Property division remains focused on trading and development opportunities and property fund management (listed
and unlisted). Progress has been made in expanding the South African model into the UK and Australia. Property funds were
successfully launched in both geographies and are now well positioned to pursue further opportunities.
Property fundamentals have weakened in all geographies and, while this business is unlikely to repeat the performance seen in the
current year, good expertise and a solid portfolio will continue to drive profitability. |
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Group Services and Other Activities |
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Group Services and Other Activities performed well benefiting from an increase in net interest income which was partially offset
by an increase in interest paid on sub-debt and a lower return on certain assets in the South African portfolio. |
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Strict management of risk and liquidity |
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Disciplined risk and financial management are important elements for sustainable and appropriate growth in the current market
environment. We maintain capital ratios in excess of our targets and continue to focus on maintaining a stock of readily available,
high quality liquid assets to support our activities.
We have successfully implemented Basel II on the standardised approach and are comfortably meeting these requirements. The
capital adequacy of Investec plc (applying UK Financial Services Authority rules to its capital base) is 15.3%. The capital adequacy
of Investec Limited (applying South African Reserve Bank rules to its capital base) is 13.9%. |
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Maintaining a broader responsibility |
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In a world of growing complexity and increasing demand for resources, we recognise the responsibility to protect the longevity of
our environment. Our formal philosophy on our sustainability approach, known as “Our Business Responsibility”, continues to
develop within the group and this initiative is now represented by three overlapping key themes - Planet, People and Profits.
Environmental factors received increasing attention as we tackle the challenges posed by climate change and the scarcity of energy
resources. The South African business leveraged off a more established internal initiative in the UK which featured strongly in the
City of London Prize, winning the Chairmans Cup.
The nurturing and development of talent and leadership and a focus on diversity underpinned our efforts on the people front.
Externally, our focus on people continued on developing entrepreneurial skills and increasing the available skills pool amongst
previously disadvantaged South Africans in the financial, maths and business fields.
Transformation in South Africa remains a business imperative. While we strive for greater representation within the organisation,
we continued our external focus on supporting black entrepreneurs and creating empowerment platforms, winning leading BEE
financier awards and receiving recognition for innovation in the BEE financing arena at the Wits Business School/Barloworld 2008
Empowerment awards. We were also awarded sixth position (first in the banking sector) in the Financial Mail/Empowerdex Top
Empowerment Companies 2008 award. The survey was based on the Department of Trade and Industry's Codes of Good Practice.
We recently submitted our third Financial Sector Charter report to the Financial Sector Charter Council, which was audited and
included a comprehensive analysis of our positioning in this regard. We are pleased to have sustained an 'A' rating. |
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Promoting confidence in our business conduct |
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Our core values of integrity, responsibility and risk consciousness are represented in our culture of sound governance. We believe
that effective communication is fundamental in building stakeholder relationships and, as a board, we are committed to providing
meaningful, transparent, timely and accurate financial and non-financial information to all our stakeholders. In keeping with our
commitment to promoting confidence in our conduct as a business and corporate citizen, we apply recognised corporate
governance practices of a high standard in each of the jurisdictions in which we operate. |
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Credit to our people |
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Talent, leadership and diversity are key to the sustainability of our business. Today, we have more than 6 000 employees around the
world, endeavouring to make our organisation distinctive. We thank all of them for their contribution to our performance. Our
thanks also go to our board of directors whose leadership and commitment have helped us navigate through a difficult
environment. Donn Jowell retired from our board during the year and we extend our appreciation to him for his invaluable
contribution over his 18 year tenure.
We are always mindful that our financial performance is very much dependent on continuing support from our clients and
shareholders, and we will continue to remain responsive to their evolving needs. |
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Pursuing a growth strategy |
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We strive to be a distinctive specialist banking group driven by commitment to our core philosophies and values. Maintaining a
balanced portfolio of businesses, leveraging off our existing platforms and growing our key earnings drivers remain important to
achieving our sustainable growth objectives and supporting our growing base of recurring income.
We will continue to seek organic growth across all geographies while building non-lending revenue with a specific emphasis on
careful management of capital, risk and liquidity. |
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Driving a resilient business |
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The global environment remains challenging. We have established a well diversified and resilient business with an experienced
management team and strong risk controls. This gives us confidence that we will be successful in meeting the challenges, and taking
advantage of any opportunities, which may arise in ongoing difficult trading conditions. We will remain focused on delivering against
our key financial objectives. |
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Hugh Herman
Chairman |
Stephen Koseff
Chief Executive Officer |
Bernard Kantor
Managing Director |
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(“Operating profit” as used in the text above refers to operating profit before goodwill, non-operating items and taxation.)
The operating financial review provides an overview of our strategic position, performance during the financial year and outlook
for the business. It should be read together with the sections that follow, which elaborate on the aspects
highlighted in this review. |
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