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Edited Transcript of INVP.L earnings conference call or presentation 21-May-20 8:00am GMT

Full Year 2020 Investec PLC Earnings Call

Sandton Jun 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Investec PLC earnings conference call or presentation Thursday, May 21, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fani Titi

Investec plc - CEO & Executive Director

* Nishlan Andre Samujh

Investec Limited - Group Finance Director & Executive Director

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Conference Call Participants

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* Harry Botha

Avior Capital Markets (Pty) Ltd. - Banks Analyst

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Presentation

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Fani Titi, Investec plc - CEO & Executive Director [1]

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Good morning, and welcome to our financial year 2020 results presentation. I'm joined by Nishlan Samujh, our Finance Director; and Kieran Whelan, the Chief Executive of our Wealth & Investment business in the U.K. We have an apology from Richard Wainwright, who is joining a meeting with the President to discuss the reopening of the economy. As you know, Richard is the incoming Chairman of the Banking Association of South Africa, so he is representing the banking association.

We are also joined from the homes in London by Ruth Leas, the Chief Executive of the bank in the U.K.; and David van der Walt, our Group Executive Director. Our Chairman, Perry Crosthwaite and directors and staff joined us from their homes around the globe.

This morning, we address you from a rather empty auditorium in our offices in Sandton. We hope that you can watch this webcast safely from your homes as we battle the pandemic, that is COVID-19.

In a matter of months, our lives have been disrupted irreversibly. So let me start the presentation by reading out the quote from Nassim Taleb, the author of the Black Swan. And I quote, "The system delivers these events with regularity," in other words, disruptive events. The problem we have today is that these events are delivered so much faster. So the effects of the pandemic on human life have been devastating, and it has scarred our sense of personal safety, financial security and mental well-being. Its effect on the world economy have been unprecedented in both scale and speed, as Nassim said in the quote, that it is how much faster the impacts unfold.

So how have we responded as Investec to this pandemic and the crisis? First and foremost, we focused on the safety and well-being of our colleagues, providing them a safe environment to work from and supporting their general well-being. We have transitioned into an agile and a digitally enabled workforce to provide uninterrupted service to our clients. We have provided relief to those clients in need and to the businesses that we needed to enable them to weather this particular storm. In this time of crisis, we use our creativity to provide innovative solutions to our clients and helping some of them to restructure their affairs or their businesses or to raise debt or equity capital where appropriate.

We have moved swiftly to support those communities hardest hit by the pandemic, providing support ranging from food relief to education. You can see on the screen the activities that we have supported. In total, we have committed over GBP 3 million or ZAR 71 million in relief, supporting hundreds of thousands of our fellow citizens in desperate need. Our global executive team and the Board have heeded the call to make a solidarity contribution of 30% of salary for 3 months to charity. The profits we are reporting today will naturally be lower given the environment. But this moment, in my view, may yet be Investec's finest tower because of how we have responded to the crisis.

I'm hugely impressed by the response of our people to this crisis, and I'm proud of every one of our 8,500 colleagues around the world. I know they will be disappointed by the much lower bonuses given the performance and the environment, but we can be proud of the contribution that we are making to society. It has obviously been a very difficult year and a difficult trading environment through the course of the year. And this was then exacerbated by the advent of COVID-19.

Despite the impact of COVID-19 on the results, and we will go through that in some detail, I do hope that you will take away from the results, the following 5 messages: One, our client franchises have proved very resilient. This is borne out by the increase in car loans and advances of 9.2% in neutral currency. The increase of 12.6% in customer deposits to GBP 32 billion, and the funds under management recording net inflows of GBP 599 million.

Two, we have robust levels of capital and liquidity with which to weather the crisis. Let me add that we will quickly and prudently put this capital and liquidity to work to support our clients in the real economy.

Three, we have provided prudently for expected credit losses. Nishlan will take you through the substantial increases in the credit loss ratios as a consequence of COVID-19. So we are comfortable with our loan book exposures.

Four, good progress has been made with our previously announced strategic initiatives. We demerged Ninety One in March. Operating costs were significantly reduced, being 7% down on last year and bold actions were taken in dealing with noncore and subscale areas as will be evidenced later.

And lastly, while we look ahead with caution, we remain confident in the long-term opportunities for Investec. We are committed to making a positive difference in society through the work that we do.

Before we get into the numbers, it is worth remembering that both our home markets were already facing headwinds pre COVID-19. I know the results are generally colored by COVID-19, but even before that, we had some headwinds. The Brexit-related malaise in the U.K. through most of 2019 and a recessionary environment in South Africa. Since then, both economies have been tipped in a deep sharp recessionary shock and the global world economy as well has been hard hit. Both economies continue to be under substantial lockdowns in force to combat COVID-19. That's why we are presenting to an empty auditorium this morning. We are now expecting unprecedented reductions in GDP in 2020 in both markets.

We have assumed peak to trough GDP contractions of 9.4% and 10.9% in the U.K. and South Africa, respectively. As Nishlan will explain later, this is factored into our outlook and forms the basis of our provisioning charges taken at the year-end. This is an area of great interest to the market, I'm sure, have we been prudent and our assumptions are stringent enough.

And now moving to the numbers. Since we updated the market at the preclose on the 20th of March, which is just 2 months ago, the severity of the COVID-19 crisis has deepened very considerably. The impact on our business is much more significant. We estimate an impact of GBP 105 million on adjusted operating profit. In rand, this impact is about ZAR 2.3 billion. Nishlan will go through this in some detail shortly.

As a result, we have come in slightly below the bottom of our guided range. Adjusted operating profit per share of ZAR 0.465 (sic) [0.465p] was 23.6% lower than the prior period, thus, narrowly missing the bottom end guided 23%.

While overall, this is a disappointing outcome, we are clearly in exceptional times, and there are a few points to highlight with these numbers. Adjusted operating profit was down some 17% to GBP 609 million, after absorbing the GBP 105 million COVID-19 impact mentioned previously. This was achieved despite a significant increase in the credit loss ratio to a 52 basis points. This compared to 31 basis points in the prior year. The result, in part, reflects the careful management of costs, which, as I've stated, were down 7% with a cost-to-income ratio of 68.2%, up only 1% despite the revenue challenges experienced as a consequence of the operating environment. Operating income before impairments was down 7.5% in the period. The lower net asset value reflects rand weakness of 17.8% over the year partially offset by profit generation and the uplift from the demerger.

Reflecting clear regulatory guidance for banks in both South Africa and the U.K., no final dividend will be paid to shareholders at this moment. And given this regulatory guidance, dividends will, therefore, remain under review throughout the cost of this year. Finally, it is worth reminding shareholders that in March, they received approximately 73p of value per share in the form of 91 shares following the demerger.

Now let me take you to the overall business unit performance. The U.K. banking business recorded pleasing growth in the loan book, supporting net interest income. And I'm particularly pleased with the progress made in the U.K. private bank. As you know, this was an initiative that we backed as a management team. The U.K. Private Bank saw mortgage book growth going up by 36% to GBP 2.5 billion. Performance in the bank was also supported by a strong cost control, as already mentioned.

The business saw higher credit loss charges and lower investment and trading income. Profits, as you can see on the charts, were down GBP 85 million from the prior period, of which decrease GBP 55 million was attributable to COVID-19 impact.

Now moving on to the South African banking business. This business recorded adjusted operating profits, 8.5% behind the prior year in rands, after absorbing ZAR 1.1 billion of COVID-19 impacts.

In pound sterling, as the chart indicates, profits were down GBP 34 million after absorbing COVID-19 impact of GBP 50 million. The lending franchises performed well despite the nil growth environment pre COVID-19.

Now moving on to the performance of the Wealth businesses. The performance has been generally satisfactory with net inflows of just under GBP 600 million. The South African business recorded profit growth of 6% in rands in a very tough operating environment. The U.K. business recorded flat revenues in a difficult market. However, headwinds from the Financial Services Compensation Scheme, levy and essential technology investments, led to profits reducing by GBP 8 million.

Nishlan will talk later about how we have dealt with the asset management business, which we deconsolidated from around the 16th of March or so. As the charts indicate, this business increased profits by GBP 10 million.

Now moving to our strategic initiatives. In March, we were pleased to complete the demerger of Ninety One. I would like to thank all my colleagues both at Ninety One and at Investec for the considerable efforts that they made to achieve this important milestone for both companies. And also, I would like to wish Hendrik and his team and all the people of Ninety One, the very best as they embark on the next phase of their journey.

Clearly, market conditions could not have been more challenging for an IPO. And as a result, we decided not to sell the 10% we had originally planned to sell. We were disciplined on value, conscious that we did not need to sell at the time. And we are confident in the prospects of Ninety One as an independent company, so we retained the full 25% shareholding in Ninety One. We did, however, still achieve an uplift in our capital ratios, albeit, this was lower than the previously guided uplift due to the largest stake that we have retained. As previously announced, we closed Click & Invest, our robo adviser, in the U.K., and we sold our Irish wealth business as well. The costs and the gains of doing so have been previously reported.

In the second half, we took a further write-down on the rundown of the Hong Kong direct Investments business. And within the restructured Irish branch, we have booked further losses, including a provision relating to an ongoing litigation in respect to a previously disclosed legacy matter. Let me pass at this stage to say that because there is an ongoing investigation, we will not be able to shed more detail on this particular topic. However, we do feel that we have provided conservatively within the numbers that we are publishing.

On the cost front, we have reduced total costs by 7%, including a material reduction in fixed cost in the U.K. as well as a variable remuneration in the light of weaker revenue performance. In the group center, these costs have risen, as you have seen in the published numbers, these costs would have fallen, had it not been for the early termination of a large long-term contract. This will lead to annual savings going forward. And this year, we expect to reduce central cost to below GBP 35 million, reflecting the savings -- these savings on the long-term contract as well as the previously announced GBP 10 million of cuts.

So as you can see, this was a pretty busy year for us and tough calls were made. I hope you will agree that the substantial progress has been made to simplify and focus the business as we pursue disciplined growth in the long term.

And with that, let me hand over to Nishlan to take us through the detail of the numbers. Nishlan?

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [2]

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Thanks, Fani, and good morning to everyone. It really gives me great pleasure to present the results to you in more detail. I am going to focus on the continuing business. And just to be clear, what does that mean? Well, it's the business post the demerger of Investec Asset Management or the newly listed Ninety One business, which presented their results yesterday. So the continuing business really focused on our Bank and Wealth businesses, including our group investment pillar, which I will refer to in a short while.

From an overall performance perspective, as Fani had highlighted earlier, our adjusted operating profit number decreased by 24.1% to GBP 419 million. I think noting that the impact of COVID of about GBP 105 million against this number reflects the reduction from GBP 552 million in the prior year. Obviously, we are operating in a backdrop that was quite tough over the period, but there have been good traction across our franchise businesses as we will get into detail. Adjusted earnings per share is 30.4% lower at 33.9p and the net asset value per share at 414.3p, is 4.6% behind the prior year, and this is notwithstanding the demerger of the Ninety One business.

I think it's worth noting that in terms of equity, we had a negative GBP 200 million movement on equity, driven by the 17.8% reduction in the rand against the pound. So the net asset value per share was positively impacted by the demerger by profits that we generated in the period and negatively impacted by currency movements.

The return on equity for the continuing business is at 8.3% against 12% last year. And COVID-19 has shaved off about 2.5% of the return on equity in the period.

Cost-to-income ratio has come in at 68.2%. So notwithstanding the drop-off in revenue in the period, you will see that cost containment has reasonably matched the drop-off of revenue in the current period, with the overall credit loss ratio at 52 basis points.

Let's go to some detail. Firstly, if we look at the mix of earnings, from a revenue perspective, it's worth noting that the U.K. and other segment or geography generated about 53% of the group's revenue compared to South Africa generating around about 47% of revenue. From a divisional perspective, the specialist bank generating 78% of the revenue and the wealth businesses generating 22% of the revenue.

From a profitability perspective, South Africa contributed 68% to the bottom line. With the U.K. business contributing 32% to the bottom line, wealth & Investment contributing 19% and the Specialist Bank, 81%.

If we get into these businesses and our core franchises, looking at the Specialist Bank in South Africa, net core loans and advances were up 6.5% to GBP 288.9 billion in the period. And I think that's in the context of a position at the end of March. And I think it's also worth noting that a lot of that growth has actually been driven by organic growth. The net increase or credit extension driven from COVID-related release has been less than 1% of the book at the end of March.

Our private client book growth was partially offset by subdued corporate client activity over the period. Customer accounts and deposits grew by 9.9% to GBP 375.5 billion. And if we look at the operating income analysis, you can see that there's been a strong contribution from net interest income and recurring fees and commissions across the businesses. The area where we did take the pain in these results is there was net reduction in investment and associate income. I think also worth noting that in the prior year, we did have a significant realization within IEP when it realized its investment in Vumatel last year. So we did not have a repeat of that level of realization in the current period. And then lastly, obviously, the impact on listed and unlisted investment valuations in the period and to the end of March, factoring in the sharp decline in the market that actually took place in that period. From a cost-to-income perspective, the cost-to-income ratio for the business increasing slightly from 51.7% to 52.3%, with both revenue and costs being maintained relatively flat over the period.

From a specialist banking business in the U.K., again, I think we saw significant growth in core loans and advances, which were up 12.9% to GBP 11.9 billion in the period. And a lot of that growth actually came in from our high net worth platforms and our mortgage book. And I will give you some color on that in a few more slides. There's been a reasonable origination as well in our corporate activity and the ability to actually sell down and manage the level of risk that we take on to our balance sheet.

From a deposits perspective, the deposit book grew by 16.3% to GBP 15.3 billion over the period. Again, analyzing operating income, we see that net interest and fee annuity fee income has performed relatively well over the period, given the backdrop of the ability to grow the book and to continue with good activity levels over the period. However, there were lower equity capital markets fees from persistent market uncertainty has influenced our other forms of fees and commissions.

Now some of the areas where we have been impacted is hedging losses from our structured products, and I will give you some detail when we get into the COVID slides and negative fair value on certain listed and unlisted positions. The cost-to-income ratio in the U.K. -- in the Specialist Bank in the U.K. actually improved from 71.6% to 71.1% and with costs reducing from GBP 554.7 to GBP 449.8 million over the period. And obviously, revenue decreasing, as I had highlighted previously, but given the drastic steps taken around costs and the ability to actually manage down fixed costs by about GBP 32 million and variable costs combined, resulting in an overall reduction of a GBP 96 million on the cost base in the business.

Turning to our wealth businesses. The Wealth & Investment business in South Africa. AUM did decrease by 16% to GBP 252 billion, but what we did notice is that our discretionary funds actually remain constant over the prior year at about GBP 132 billion, and there was a marked decrease in our nondiscretionary portfolios following mainly market movements and clients managing their own positions. The business did effectively have net inflows in the period of around about GBP 2.2 billion, and that within the context of a tough South African environment, with GBP 8 billion of net inflows into the discretionary portfolio, offset by GBP 5.8 billion of outflows in the nondiscretionary portfolio.

Adjusted operating profit for the period was up 5.7% to ZAR 501 million, representing a diverse revenue stream and, in fact, a higher level of foreign-based fees within the base; obviously, supported by higher AUM, and that's our discretionary AUM and a stronger demand for our offshore offering. Costs did increase at an above-inflation basis as the business continued to invest in the technological base, and there were certain one-off personnel costs incurred. So during the period, the net interest -- I mean, the operating margin decreasing from 31.1% to 30.4%.

Our Wealth business in the U.K., again, within a challenging backdrop, AUM decreased by 9.7% to GBP 33.1 billion, and that was largely driven by market movements, particularly in the last quarter of the year. The business did have net inflows of GBP 484 million in the period. And as I've highlighted, closing AUM impacted by markets.

Adjusted operating profit decreased by 10.8%, and that's in the context of actually slightly higher revenue base for the period, offset by higher costs, as the business absorbed higher regulatory fees and levies in terms of the FSCS levies as well as higher discretionary technology costs in terms of driving the business forward for the future. Operating margin is on the low end at 19.8%, and the business has put in processes and procedures to enhance the operating margin looking forward.

Now if we have to take an overall look at operating income and look at the line items that were impacted. Again, net interest income, and this is the combined businesses, so it's both Specialist Bank and Wealth and the total business. Net interest income was 4.5% higher in the period; annuity fee is 1.7% higher and other fees, down by 5.6%. But the biggest drops coming from a 62.2% drop or GBP 109 million drop in investment and associate income, again, just reiterating some of the realization impact that we had in the prior year.

Trading income was lower at -- by 42.9% to GBP 68 million, and that's both trading income and balance sheet management, as we did not see some recurrence on some of the positives that we had in balance sheet management in the prior year, and we did incur certain hedging losses in our structured products and market volatility and nonrepeat of gains in the prior year.

From an operating mix perspective, very similar to the conversation that I had highlighted earlier.

In bringing the picture together, third-party assets under management has decreased from GBP 55.8 billion to GBP 45 billion. And that's off the backdrop of net positive inflows of GBP 599 million over the period, and obviously, markets influencing the overall outcome at the end of March. We also dispose of our Irish Wealth & Investment business in a period, and that would have resulted in a comparative difference over the period.

Our loan book and deposit books, I have spoken through the detail. Now let's just unpack some of the growth in terms of our loan book. As I've highlighted, the U.K. business growing net core loans and advances by 12.9% in the period. And that was primarily driven by the high net worth and other private client lending activities in the period and -- as well as our mortgage platform offering to our high net worth clients. And there has been diversified growth across multiple asset classes in corporate and other lending.

In South Africa, net core loans and advances were up by 6.5% in rand terms, obviously, with the 17.8% reduction in the exchange rate. When you look at this in sterling terms, it appears to have moved slightly backwards.

Again, growth really driven by mortgages and our high net worth specialized lending in the private bank and certain select areas of growth within our corporate book within a challenging context in South Africa.

Now if I do unpack the impact of COVID, as we had said, a pretax impact of about GBP 105 million in the period, and that's split between the 2 banking businesses, largely. We haven't isolated any significant impact in our wealth businesses. The U.K. business, reducing profitability pretax by GBP 55 million, of which GBP 61 million is driven by investment and trading activities and GBP 38 million by an increase in ECLs.

Operating costs of GBP 44 million or cost savings in the period, really driven by variable remuneration. Now that business did experience hedging losses from our structured products of about GBP 29 million due to market dislocation in March and effectively dividend cancellations that took place following regulatory guidances across the market.

The South African business really driven by a drop-off in listed and unlisted mark-to-markets in the period as well as increased expected credit loss provisions that we had taken, both in the U.K. and South Africa, effectively adjusting our outlook to a more severe negative outlook. Now some of those, as Fani has highlighted in South Africa, from a peak-to-trough perspective, we built into our models a decline in GDP of 10.9% and in the U.K. for around about 9.4%, but further to that, we've also effectively forecasted a protracted recovery over the period, and that has been built into our modeling. Post-tax and impact of around about GBP 86 million across the group.

So from a cost-to-income perspective, cost-to-income ratio increasing from 67.3% to 68.2%. That's off the backdrop of operating income, that was down by 7.5% for the reasons that I'd identified. And operating costs following sharply as well, down by 7% in the period.

From a cost analysis perspective, we did not have a repeat of some of the double rental that we incurred in the prior year in our U.K. business, so we saw premises costs decreasing in the period as well as personnel costs decreasing by around about 9.5% in the period, as we tightly managed headcount across the businesses given the economic background that we are experiencing.

From an overall ECL perspective, I think if you look at this chart in the periods, March '16, '17 and '18, we did have a high level of ECLs passed on our legacy book, and there's a nonrepeat of those really moving into March '19 and March '20, as we've incorporated the remaining book, which is really at an insignificant level compared to the overall book. Overall, ECLs increasing to -- from GBP 67 million to about GBP 133 million in the period. And as we've highlighted, the overall credit ratio increasing from 31 basis points to 52 basis points. Now had the world been through a period where COVID had not entered, and we had the same economic background that we had over the last financial year just prior to the effects coming in, in the last quarter, we would have expected our credit loss ratio to be at around about 28 basis points in the period.

We -- well over 90% of our portfolio resides in the stage 1 category. And just to highlight, stage 1 is your performing book. Stage 2 is where you've identified a significant increase in credit risk. And stage 3 is your default book. So we've got a high degree of our book continuing to reside in stage 1, but we've increased our credit loss ratio such that the coverage of that book has increased from about 20 basis points to 40 basis points, as we anticipate a deterioration in the quality of the book as we flow through the passage of time.

So in -- I think let's go on to the next couple of slides where you can get some detail. In the U.K., in the first half, we reported a credit loss ratio of 28 basis points. And that in the second half has significantly increased to 97 basis points. Now we have guided previously that through the cycle, we'd anticipate credit loss ratios of about 30 to 40 basis points for the group. So we are operating currently outside of those, given the vast deterioration that we have seen over the recent while.

And that 97 basis points represents about 41 basis points of normalized ECL, 15 basis points associated with stage 3 or default clients and 41 basis points associated with the pickup in coverage based on our overlays that we have put into our modeling, taking into account the COVID environment. And that gives you a blended cost to -- I mean, credit loss ratio of 69 basis points in the period.

From an SA credit loss perspective, we reported an 18 basis points loss in the first half of the year. And in the second half, we would have anticipated around about a 25 basis points level. However, taking into account COVID and the economic scenarios that we have plugged in, an increase of 30 basis points resulting in the second half charge of 55 basis points for the period and a blended charge for the year of 36 basis points.

I've highlighted before, the mix of our book between stage 1, stage 2 and stage 3, and really what this next slide provides for you is a view of our balance sheet provisions, where you can see a significant increase in our stage 1 provisioning in both South Africa and the U.K., with South Africa increasing from about ZAR 538 million to just over ZAR 1 billion. And the U.K. increasing from GBP 14 million to GBP 37 million. We have seen a blend of movements in our stage 2 and stage 3 provisions, and that's really driven by asset quality migrations in the period between the different stages. Again, highlighting that our stage 2 book in the U.K. accounts for around about 5.1% of our book, and our stage 3 book about 3.3% of our book with the rest represented in stage 1. And in South Africa, similarly, about 5.3% of our book is in stage 2, and 1.5% of the book is in stage 3 and the rest represented in stage 1.

I think it's also worth reflecting on the nature of our loan book. And what this next section tries to present to you is our analysis of where we believe we do have exposure to vulnerable sectors. I think as you can see it from overall book in the U.K. of about GBP 12 billion, we have indicated that we've got about 4% of the book exposed to aviation, 1.7% of the book exposed to other transport, 1.5% of the book exposed to retail hotel and leisure properties; 0.9% in leisure, entertainment and tourism; and 0.9% in retailers and about 5% in other sectors within what we would refer to as small ticket finance. Now at the end of the year, we have closely analyzed these exposures. I think within these exposures, they are diversified types of exposures as well as diversified levels of collateral against the book, and we will continue to closely monitor the outcome across these particular areas, but we have really closely analyzed it in terms of positioning for the year-end March '20.

In South Africa, similarly, we have split out our book in South Africa of total ZAR 292.2 billion portfolio. We have about 1% -- 1.5% of the portfolio in aviation, which amounts to ZAR 4.4 billion, 1% in automotive, 0.4% in hotel and leisure; 1.5% in leisure, entertainment and tourism; and 0.8% in discretionary retail exposures; and 1.5% against trade finance. And I think it's also important to note that the businesses have remained active and very close to our clients over this period. And to the extent that clients or where we have identified that clients needed assistance, we have remained extremely active over the period.

Now getting on to ROE. I did report that our ROE was 8.3% and about 2.5% impact of COVID in the period, and that split out with an ROE of 10.7% in South Africa and 6% in the U.K. business. In South Africa, the Specialist Bank's ROE was at about 12%, around about 14.5% pre COVID. And the South African group investment portfolio generated an ROE of 2.9%. Now what is that South African group investment portfolio? That really represents our investment in Ninety One. And in South Africa, we hold about an 8.4% interest in Ninety One, and we effectively carry these positions across South Africa and the U.K. as associates and have, therefore, not taken into account the subsequent positive market movement.

We've switched Ninety One, our 25% holding that we have across the group into an associate holding and have effectively equity accounted income for the last 2 weeks of the month of March, which has brought in about just over GBP 4-odd million of income in these numbers, so fairly insignificant. So that's the one asset. The second is our investment in IEP and that represents about just over 47% interest in that platform. And in the period, we did raise an impairment against our carrying value of IEP, effectively reducing out goodwill that existed in our carrying value. And the portfolio is represented by businesses that, I think, have got a good representation across the South African platform, particularly around chemical and industrial services clusters as well as an investment in a life business.

We also include our investment in Investec property fund. The group holds an investment of just over 24%. And we consolidate our investment in the property fund as well as from a group perspective, an investment of, I think it was just under 9% in the Investec Australia property fund, which excludes the investment held in the Investec property fund. So that portfolio in this period generated an ROE of 2.9%. And I think world over any portfolio of that nature will generate an ROE at that level given the current markets and valuation principles applied across the group.

From a U.K. perspective, the bank generated an ROE of 6.2%. We had previously highlighted to you that we were tracking the impact of the banking proposition, which we had indicated to you at CMD, we anticipate to have reached a breakeven by about the end of 2022. And currently, that has an impact of about 1.5% on the overall ROE of the U.K. Bank. So excluding the banking proposition, the ROE is at 7.7%. Now the bank did benefit from a tax settlement in the current period of about GBP 18 million release in provisions that were held. And if you had to isolate that out of the numbers, I think we would be closer to about the 5.5% mark.

The U.K. group investments really represents our 16.6% holding in Ninety One in the U.K., and that's really the return for the 2-week period, weighted for the period, returning an ROE of about 8.4% in the period. The wealth businesses across South Africa and the U.K. generating high ROEs, and I think on the next slide, we provide you with details on our return on tangible equity, where you can see the most material impact is in our U.K. wealth business, where the ROE on a tangible basis is at 60% and the intangible really arising from our historical sale of Carr Sheppards and repurchase of Rensburg Sheppards over the period. So overall ROE, or return on tangible equity, coming in at 9.2%. So thanks to everyone.

And one more slide that I've actually just forgotten that I had to present. Okay. Let's bring this picture together in terms of capital and liquidity. So the leverage ratios, as we said, across the group relatively strong with the U.K. leverage ratio at 7.8%. South Africa did see a decrease in the leverage ratio from 7.4% to 6.4%. It's a perverse thing because it's actually arising from prudence being applied on the balance sheet. We've had higher cash and near cash positions, and, in particular, we increased our cash placements with the Central Bank from about ZAR 10 billion to ZAR 30 billion. And perversely, that has a negative impact on leverage. And had we been a U.S.-regulated entity, you would actually have seen that stripped out.

Secondly, we had a negative impact on our HQLA, which is our high-quality liquid asset portfolio due to the widening of credit spreads that took place in March, and we carry that portfolio at fair value as well as our remaining credit investment portfolio. And with the widening of credit space, it was about an 85 basis point impact on the capital ratio as well as the leverage ratio. Now a fair amount of that has actually come back, as credit spreads have normalized up to this period in time.

The overall capital ratio for the PLC coming in at 10.7% and 10.9% in South Africa. For those of you who had followed the circular, you would have anticipated for that ratio to be probably between 50 and 60 basis points higher. And that's really as a result of us holding on to the full 25% investment, which we assessed and are very comfortable to hold on to given our capital ratios.

So overall, we are comfortable with our capital ratios. And I think it's one more point to note is that in South Africa, when we adopted FIRB at the end of March, there was an increase in the capital ratio of about 1.1%. While we continue on the path to adopting AIRB, we have submitted our applications to the regulators, that's subject to review and acceptance by the regulators, which does take time as there's multiple models that go into these calculations. But based on the models that we've run for the last couple of years, our current quantification is about a 2% increase in the overall CET1 ratio. So when you compare it to market, we operate close to 13% in South Africa on an AIRB basis.

Cash and near-cash has remained elevated at about GBP 12.7 billion at the end of the year. And we continue to manage liquidity on a heightened level across the group and the depth of liquidity, including dollar funding across our South African balance sheet. Advances as a percentage of customer deposits at about 76.3%.

So thank you, and I think that's really a summary of the numbers. Fani, I now hand back to you.

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Fani Titi, Investec plc - CEO & Executive Director [3]

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Thank you, Nishlan. That was quite comprehensive. Nishlan normally takes about 15 minutes or so for these types of presentations. Given the unusual and unprecedented economic and market conditions we are in, we thought to give you a lot more detail and also be transparent around the quality of our book because we believe that when our shareholders and analysts understand the detail, they will come to the conclusion that we have provided particularly prudently. So thanks, Nishlan, for that level of detail.

Nishlan also went into the detail of our franchises. And I hope out of his presentation, you will agree that these franchises are particularly strong, both private banking, corporate banking, wealth and investment businesses in the U.K. and SA. Nishlan also covered in some detail the impact of COVID on the numbers, including a breakdown of the exact impact on trading and investment income and also on ECL. So thank you for the great work Nishlan.

And lastly, Nishlan covered capital and liquidity, which in a market like this is really important. So while you took about twice the time you normally take, I think it was worth doing at this time.

So if I may get into the closing stretch, let me take just a few moments to remind you of what Investec is today post the demerger of Ninety One. We are a client-centric business, relationship-focused, offering high-touch service that is supported by advanced digitalized technology. What we, at Investec, colloquially call, high-touch and high-tech. Our high service culture is underpinned by an approach that is refreshingly human. You will see when you get any communication from us, we continue to remind you that you can relate with us at the human level, in that we understand you, we get you, we are empathetic and we offer true partnering.

You will have seen our campaigns around partner with Investec as you can see the background that I have. We thrive by being more nimble and more innovative than our competitors. We specialize. As you know, we are in 2 specific home geographies, one being South Africa and the other being the U.K. and allied territories. And we also focus on market niches where we can differentiate and add value to clients. So we are not all things to all people, we are specialized.

We have a strong culture, one that is entrepreneurial and gets the best out of our passionate and talented people. This culture is carefully nurtured by our experienced leadership teams. These distinctive attributes combine powerfully to form the brand that is Investec.

I'm sure, as you go around the markets where we operate, you can see the prints in Zebra on some billboards. This iconic brand has been built and honed over 4 decades and really encapsulate the [EFOs] of who we are as a business. And finally, everything we do needs to be sustainable. If we get all these things right, then we will create a better, more valuable business and shareholders and stakeholders will get their due returns over time.

The next slide, which you're looking at, at the moment, shows more precisely our target lines and niche specializations. I will not elaborate any further on that.

Now let's move to sustainability. Approach to business is framed by our belief that everything we do has to have a long-term effect, and we are minded to be long-term in everything that we undertake. We believe we can leverage the power of capital and the spirit of enterprise to contribute meaningfully to building a better world. As we like to say at Investec, we live in society, not off it. We do well and better when our stakeholders benefit from what we do. So sustainability is core to what we do, and it informs how we conduct our business and engage with our stakeholders.

In this reporting period, as you can see on the slide, we have made significant progress in codifying our policies our impact, both negative and positive on different metrics, including on the planet. Not only is sustainable business practice the right thing to do, it also creates substantial business opportunities for us. The COVID-19 crisis has shown a very sharp light on -- in quality in our societies. You have seen the level of suffering as a consequence of COVID-19. As I indicated earlier, we responded particularly swiftly and with great impact. So the need for an inclusive economic era, even as we look to restart economies post COVID, could not be greater. We will continue to walk the talk at Investec.

And I'll flip to the next slide to show you what we have been able to achieve, as we work the sustainability journey. Again, I do not intend to cover this slide in detail. The results we have presented today are necessarily largely backward looking, as you would expect of financial results for a year. I would now like to pivot slightly to addressing our approach to the future. You can see on the slide how we have tried to frame our thinking. In the short term, we have to deal with the challenges that COVID-19 presents to us. I look at it in 3 steps, specifically. Firstly, we look at our immediate focus and that remains on balance sheet strength, ensuring we manage capital and liquidity rigorously and prudently, cost control, being laser-focused on excess cost in the business, being there for our people, making sure that they have what they need to do their jobs and to support our clients and, in turn, the society, at large. This is something that my senior team and I are very focused on, the well-being and health of our staff is right at the top of our agenda. Monitoring our credit exposure in this period is quite key, which means doing thorough stress testing and modeling as the economic environment changes, while working very closely with our clients to manage risk.

So secondly, in the near term, our attention will turn to reintegrating our people into the workplace from home. As I said earlier, Richard is attending a meeting call by the President, where these issues of reopening the economy are under discussion. So this will be a focus for us in the near term. We will continue to support our clients deal with the effects of the crisis. We will remain vigilant to spot opportunities in this dislocated world. Some of you may have seen an announcement yesterday where we have helped 8 clients of us to raise capital at a pretty substantial level. So we remain vigilant to spot opportunities for ourselves and for our clients.

And lastly, we will continue to invest in our people and platforms to position ourselves ready to support our clients in the long-term and to capture the opportunities that the future inevitably holds. In the months to come, we will hopefully get more certainty on the development of the COVID-19 crisis, in particular, the health side of it, and the trajectory on the economy. As of today, it is simply too early to accurately judge the economic outturn for this year or the next couple of years. And while our ambition remains undeemed, and the strategy we are pursuing is clear and unchanged, we may well be forced to revisit the targets we set ourselves in the light of the outlook once things stabilize. I think most businesses talk about getting to a new normal and understanding what that looks like. So we'll update you on that when we are in a position to do so. But in the meantime, we remain focused on driving the business forward and on improving financial performance.

Now to wrap up, what do we think lies ahead in the short term? We think the recovery is likely to be protracted, as Nishlan said earlier today. Client activity will likely be muted in this environment of uncertainty. Our net interest income will be impacted by lower interest rates. In fact, in most countries, you know there is this concept of lower for longer. And in fact, in Europe, you even have negative interest rates. Credit loss provisions will remain elevated, as we saw in the slide that Nishlan presented comparing the first half credit loss charges versus the second half credit loss charges. But phasing into this environment, we will be very disciplined in controlling costs and rigorous in the management of credit risk. When the revenue outlook is uncertain, we have to be able to do as best as we can to control those things that we can control. At all times by staying close to our clients and remaining focused on what we do well, we will be positioned to see the opportunities that lie ahead. We are determined to navigate the rough seas. We will keep our periscope above the choppy waters and the waves, and we will focus a clear eye on the long term.

So as we conclude, I hope that we have demonstrated to you that our client franchises have been resilient, that we are strongly capitalized in liquid, that we have provided prudently for expected credit losses given the environment, that strategic execution has been strong and substantial and that we remain poised to capture the long-term opportunities that lay ahead. My colleague, Malcolm Fried, in London, in the last day or so, reminded me of the motto of alma mater, Berkeley in the -- in California. That motto reads Fiat lux, which means let there be light. So in a crisis, there needs to be a clarity of purpose, a clarity of plans and a resolve to execute and stay the course.

Thank you for your attention and support. We are happy to take questions. Again, the presentation has been about 40 -- 20 minutes longer than normal, but we are in unprecedented times, so we will take the first questions from the conference call.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question is from Harry Botha of Avior Capital Markets.

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Harry Botha, Avior Capital Markets (Pty) Ltd. - Banks Analyst [2]

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Just on the provisioning and sensitivity of those provisions to you your GDP declines. If we, for example, had to track in a GDP decline of minus 15%, how sensitive do you think, particularly your stage 1 provisions would be? And then you did speak to the decline in CET1, but could you potentially give us a bit more detail on the Investec plc excluding the demerger? Maybe why lack of sale effect would be CET1 level? I guess my question would be isn't at fair value. And then finally, does the round profit impact of the Irish branch restructure when it was so much [via] in H2?

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [3]

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Yes, Harry, in fact, in the U.K., what we did do is we developed what we would call a COVID short and a COVID long scenario...

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Fani Titi, Investec plc - CEO & Executive Director [4]

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Nishlan, just raise your voice a little bit. I think -- is it all right? Okay. Thank you.

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [5]

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So COVID short and a COVID long scenario, and we did take into account potential for a deeper sort of recession in the period, but weighted that much more to the short period at about 75 basis points. What we did find in the scenarios is that a deeper GDP with a sharper recovery actually didn't have a material impact on the overall expected loss. But obviously, if you had to protract it at a much deeper level, then I think that you will see a continuation of our second half provision levels into the new year.

On your second question in terms of capital. Firstly, I'd like to reiterate that in the U.K., we actually measure capital on a standardized basis. And our actual risk weight density to total assets is at a much higher level than any of the other AIRB measured banks. So we believe that the capital measure is relatively conservative. So that's just one point. The impact of the demerger did have about a 58 basis points positive impact on the U.K. capital ratio and about 40 basis points in South Africa. And that was on the basis that we hold the remaining 25% in Ninety One. We remain relatively comfortable.

Now if you were to sell down the position, you probably get in an additional 30 to 40 basis point improvements on the capital ratio. So not that material from an overall capital position.

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Fani Titi, Investec plc - CEO & Executive Director [6]

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Nishlan, if I may say, at the time of the listing, where we had a flow price of GBP 190, if we panicked into selling a piece of Ninety One, we probably would have had to sell at close to GBP 160. So as I said earlier in the remarks, we are very conscious. We didn't panic, held on to the stake. And as you know, Ninety One is trading much better. It's a quality business. And we're happy that we made the decision that we did. Just talking to your question, Harry, on the increase in write-downs in the restructured Irish business, I did indicate in my earlier remarks that we disclosed previously that there is a legacy matter that is under investigation, and we have provided what we believe is prudent and adequate for that potential outcome. And given that the investigation is live, we wouldn't want to disclose any more detail, so that we do not prejudice the position of the business. So I hope you understand that the matter is legally privileged, ongoing. We've provided adequately, and we wouldn't really want to talk much further on it at this stage.

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Harry Botha, Avior Capital Markets (Pty) Ltd. - Banks Analyst [7]

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Maybe going back to the CET1 Investec plc, as I understand the Ninety One is about the deduction threshold. So why this change, I guess, in terms of the impact of the demerger versus the previous guidance in the separation document?

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [8]

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So it's simply that if you had to sell down. So the guidance -- sorry, if I miscalibrated. The guidance was at about 1.2% increase in the capital ratio. We've now indicated that it's been about 58 basis points. And remember that at the time when we produced a circular, we had utilized a price of about GBP 2.05, and the reduction is really driven by a lower price that's been applied. We took on the investment at around about a price of about GBP 1.47 recording it at the 16th of March in our books.

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Fani Titi, Investec plc - CEO & Executive Director [9]

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Thanks, Nish. I hope that is clear, Harry?

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Harry Botha, Avior Capital Markets (Pty) Ltd. - Banks Analyst [10]

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Yes.

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Operator [11]

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(Operator Instructions) Seems we have no further questions on the conference call at the moment.

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Fani Titi, Investec plc - CEO & Executive Director [12]

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Okay. Shall we go to the webcast then?

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Unidentified Company Representative, [13]

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There's a few questions and the first one on queue from [Bankole] from Bank of America. The first one says...

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Fani Titi, Investec plc - CEO & Executive Director [14]

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Tash, we are struggling to hear you. Is the mic on?

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Unidentified Company Representative, [15]

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Can you hear me now?

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Fani Titi, Investec plc - CEO & Executive Director [16]

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I think just shout as much as possible.

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Unidentified Company Representative, [17]

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Can you hear me now?

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Fani Titi, Investec plc - CEO & Executive Director [18]

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Yes.

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Unidentified Company Representative, [19]

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Okay. Fine. All right, this from [Bankole], Bank of America. The first one is, what are your assumptions in the GDP recovery on 2021? And do you see the rates of provisions staying elevated in 2021?

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [20]

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Yes. If I take that question, [Bankole], with these results, we've issued a detailed analyst booklet. So I think there's about 3 pages that's dedicated with the absolute detail that you're looking for, and I would refer you to that detail. But to reiterate, we did indicate that it will probably take about, I think, about 3 years for there to be a recovery to level pre the crisis, and some of that also extended in the stress scenarios that we had applied.

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Fani Titi, Investec plc - CEO & Executive Director [21]

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Yes. I think on the issue of our expectation of the economy, the basic fact is that we've made certain assumptions. We've been quite explicit as to what those assumptions are. But the feature is so uncertain that we really do not know what will happen. In fact, 2, 3 days ago, Jay Powell of the Fed said exactly the same that his guess is as good as anyone. Said if the Chairman of the Fed tells you that he really doesn't know what is likely to occur because the economic malaise is linked to a health crisis. If as an example, you do get a vaccine over the next 6 to 12 months, the prognosis for a recovery may well be very different. Even with that, I think the impact on individuals, their psychology and mental well-being, as I said, is likely to be such that you will not get back to the old normal. Even if there's a vaccine, I suppose I will take a lot more time to be comfortable to go into a restaurant, a stadium to watch a game and every time I hop onto an aeroplane, I'm sure that my family will be a bit nervous.

So we don't know how long it will take. We've given our assumptions, and there's a lot of detail in the book. And all of us have different assumptions.

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Unidentified Company Representative, [22]

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Okay. The second question is also from [Bankole]. And he wants to know is, can you unpack the GBP 45 million impairment of IEP? And how you see your other equity investments so being unwound in this environment?

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [23]

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Yes. Firstly, let's deal with the impairment that translated to about ZAR 937 million against what was a carrying value of just over ZAR 6.6 billion. And we've reduced -- of ZAR 6.5 billion, we reduced the carrying value to about ZAR 5.6 billion. Now inherent in our carrying value, there was a goodwill of about ZAR 680 million, and we took the view that given the compressed revenue environment in the short term, it was opportunistic for us to effectively rebalance the carrying value. I think what's worth noting is that write-off has had a 0 impact on capital because we effectively haircut the investment by about ZAR 2.4 billion prior to this particular haircut. And there still remains a significant capital haircut. So there's capital protection around the investment. With regard to the rest of our investment portfolio, at the end of the day, we look to realize these assets for value. I think we always got to be cognizant of opportunity costs around carrying investments. But we believe that there are always opportunities at the right timing with the right partners. And at no stage, are we looking at any forced sale requirements and are quite comfortable with the carrying of these assets on our balance sheet, albeit we have a very clearly stated mandate that we want to reduce the investment portfolio in South Africa, which, including all the assets that we have in our franchise businesses as well as around about ZAR 23 billion, which includes our investment in Ninety One, our trading property portfolio as well as our investments across these assets that I have described. And our desire is to decrease that portfolio to probably closer to ZAR 15 billion to ZAR 16 billion subject to balance sheet growth over the period. So it's really a risk appetite debate that we have internally. And overall, quite comfortable with the capital position and the returns that we have on these assets in the shorter to medium term.

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Fani Titi, Investec plc - CEO & Executive Director [24]

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Yes, strategic intention around the reduction of that portfolio remains quite clear. But this is not a season to be dumping assets as we demonstrated with Ninety One. In March when the season wasn't right, we held onto it. So we are disciplined on value. In the right season, we will do what is right with respect to the investment portfolio that Nishlan spoke about.

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Unidentified Company Representative, [25]

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Okay. The next one is also from Bankole. He wants to know how much is left in the Hong Kong direct investments business.

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [26]

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We've got 2 conflict in disclosures. So it's either GBP 26 million or GBP 34 million. I think it's GBP 34 million. The asset that carried risk has now been fully written-off. And at the end of the day, the remaining portfolio, in fact, if you look at the level 3 disclosures that we've provided, we provide a range of downside of about GBP 8 million and upside of probably around GBP 3 million.

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Unidentified Company Representative, [27]

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Okay. The next one is from Douglas Wallace, Visio Capital. He wants -- he says, I would like to clarify your comments on the watchlist. You have mentioned the vulnerable sectors you are monitoring more closely, could you also quantify your exposure to SMEs in U.K. and SA? What proportion of these clients have sought payment holidays? And what was their performing status at year-end? And how has that evolved post year-end?

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [28]

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Yes. I think, again, what's relevant is, firstly, I wouldn't call it a watchlist, I'll call it the fact that we have disclosed to you what is common market practice to indicate our exposures to vulnerable sectors. I think if you're looking for watchlist detail, look at our stage 2 and stage 3 disclosure that we have provided in the booklet. In terms of relief that has been provided, I think in the U.K., it amounts to about 0.8% of the book. And there has been quite a decent coverage across the client portfolio, but that is relatively spread. And in South Africa, I think, again, relief of about 0.7% of the book, amounting to about 20% of the overall book size in terms of clients that we have interacted with, I think that's about 3,500 clients.

And we will remain active with our client base as we go through, but we have seen a slowdown in some of that activity.

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Fani Titi, Investec plc - CEO & Executive Director [29]

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Yes, it is really important to understand that the disclosure is for purposes of transparency. As I said, we believe we have provided prudently, we are also being very transparent so that you have a sense of those sectors like hotels, hospitality and certain retail type property that you may be worried about, so that you know exactly what our exposures are, as Nishlan says, it doesn't mean that these are on the watch list. And the relief provided at the moment is fairly low. And if you look at South Africa and the U.K., these markets are very different. In the U.K., you have substantial support from the government there in terms of support to the economy. To kickstart it in South Africa, we know our fiscal space is relatively limited. So the support that you have is lower. So you have to think about these things very differently for each of these economies.

I'm going to ask that we try to wrap it up in the next 5 minutes or so. Nishlan and myself have an engagement in a few minutes. I'm sorry, it's taken us a bit long to go through the detail that we have gone through. And if there are questions after these 5 minutes, we will be able to take them privately.

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Unidentified Company Representative, [30]

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Are you going to take one more question?

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Fani Titi, Investec plc - CEO & Executive Director [31]

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Yes, let's take one more question.

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Unidentified Company Representative, [32]

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Okay. So it's from [Graham Bell] and he says, please, say more about your exposure to the aviation sector, example with regard to the collateral and ongoing assistance. And is there any government support?

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Fani Titi, Investec plc - CEO & Executive Director [33]

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Nishlan, the last one is for you.

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Nishlan Andre Samujh, Investec Limited - Group Finance Director & Executive Director [34]

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Is it? I was pointing to you. But I think in the presentation, we've provided the actual quantum of exposure. I think in the U.K. was about GBP 400-odd million. I think we do have a spread of exposure across the portfolio. A large portion of the book is actually supported by significant government entities behind those businesses. And again, some of these exposures are not direct exposure. So to some extent, it could be to leasing houses as well as to large airlines with [carry] support behind it. Tash, I think that pretty much covers it.

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Fani Titi, Investec plc - CEO & Executive Director [35]

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Ladies and gentlemen, that's it for today. I hope you were able to get a sense of how we look at the business, the current crisis and what work we have done to understand its impact on our business and that we remain prepared for building the business in the long term. And that in the short term, we have taken significant pain to make sure that we can take the business forward with confidence.

The outlook, as we said, is uncertain, and we will continue to monitor it, and thank you for your support. Thank you, and please stay safe.