Bloomberg News

Investec Has Top-Paid Bank CEO Along With Lowest Returns

May 31, 2012

Stephen Koseff, South Africa’s best- paid banker, has made Investec Ltd. (INVP) the country’s worst- performing bank stock. Investors say he needs to cut costs -- starting with his own compensation.

Koseff’s salary and bonus at the nation’s fifth-biggest bank rose 29 percent last year to 3.4 million pounds ($5.3 million), excluding share awards. Standard Bank Group Ltd. (SBK), Africa’s largest lender with a market value almost five times that of Investec, paid its CEO, Jacko Maree, 24.7 million rand ($2.9 million).

Weighed down by acquisitions Koseff made in the U.K., Investec’s Johannesburg shares have risen 29 percent in South Africa over 10 years, while the FTSE/JSE Africa Banks Index (JBNKS) has gained more than 250 percent. Investec’s return on equity dropped for a fifth consecutive year in fiscal 2012 to 7.8 percent, the worst among South African banks.

“We want to see some real change,” Patrice Rassou, head of equities at Cape Town-based Sanlam Investment Management, one of Investec’s three largest shareholders, said in a telephone interview. “Investec hasn’t been aggressive enough in cutting heads and cutting costs. The pay issue is now very topical, and there’s lots of noise and saber-rattling in the market.”

U.K. Expansion

Koseff, 60, took over as CEO in 1996 after being the No. 2 executive for eight years. Since Investec’s shares started trading on the London Stock Exchange in 2002, he has spent 734 million pounds on three all-stock acquisitions in Britain, including the 2007 purchase of subprime mortgage provider Kensington Group Plc, investment manager Rensburg Sheppards Plc in 2010 and stockbroker Evolution Group Plc last year. While he calls the timing on Kensington “pretty poor,” given the subprime crisis, Koseff says the U.K. expansion will pay off.

“The remuneration committee is sitting in the next few weeks, and I’m sure their decision will reflect the performance we’ve had,” he said in a telephone interview. “We think we can get those returns up to a reasonable level. The days of 20 percent for a banking group are gone.”

Investec wants to reach a return on equity of 12 percent to 16 percent in two to five years, he said.

In a report in February, Johannesburg-based research firm Prophet Analytics called Koseff South Africa’s most overpaid CEO. Koseff was overpaid by 30.7 million rand, or about 2.75 million pounds, in 2011, Loane Sharp, a labor economist, calculated, based on Koseff’s total basic compensation and short-term bonuses, shareholder returns and the company’s number of employees and risk profile.

‘Expansion Was Wrong’

“A lot of shareholders at the time thought the international expansion was wrong and that turned out to be correct,” Sharp said in a telephone interview. “Management’s expansion overseas suited themselves rather than investors. They benchmark pay in the U.K. so they used international exposure to augment their pay.”

Neville Chester, a fund manager at Cape Town-based Coronation Fund Managers Ltd. (CML), and David Couldridge, a fund manager at Element Investment Managers in Cape Town, said they want improved profitability and to see pay and performance linked. If profit is muted, pay should be, too, they said.

“Pay is an issue I think all shareholders have raised with the board,” said Chester, who like Couldridge holds Investec shares. “We will look at whether or not there has been an unjust enrichment of management. If we see it, we’re absolutely prepared to vote against that.” Investec’s annual general meeting is in August.

Investec’s executive compensation is benchmarked against the FTSE 350 General Finance Index firms, said Ursula Nobrega, the lender’s head of investor relations, without naming the companies used for comparisons.

‘Huge Push Back’

Banks globally are showing a “huge push back” to regulation and “have not done themselves proud” on issues such as executive pay, South Africa’s central bank governor, Gill Marcus, said in a presentation on May 30. “There’s very little recognition that the distrust is not just about politicians,” she said. “It’s also about banks’ leadership and the kind of role they’re playing. You’ve got to rebuild trust, and you don’t rebuild trust by thumbing your nose at the people who are paying the price for your greed.”

Since Koseff became CEO 16 years ago, Investec has increased assets more than 14-fold to 51.6 billion pounds as the company expanded from its South African origins to banking, money management and property in the U.K. and Australia.

Costly for Shareholders

As a so-called specialist bank, Investec provides private- banking services to high-net-worth clients and offers companies services including lending, structured finance, foreign exchange and advisory support. In South Africa, Investec Asset Management has grown into one of the three largest money managers with 40 billion pounds under management in the country and 60 billion pounds managed around the world.

Koseff’s push into the U.K. over the past decade has been costly for shareholders, said Kokkie Kooyman, head of Sanlam Investment Management Global, who has been twice voted fund manager of the year by Investment Week, a British industry publication. The Australian expansion, begun in 1997, hasn’t worked out either, said Faizal Moolla, an analyst at Avior Research in Cape Town.

“They made very poor acquisitions in the run-up to the 2008 crisis,” Kooyman said, adding Investec paid “with very undervalued shares, which makes the acquisitions expensive.”

“Investec is a bull market stock, so in a bear market all the warts are revealed,” he said. He called Koseff “one of the cleverest and best bankers I know, but too thinly stretched.”

U.K., Australia

Since beginning trading in London, the contribution from Investec’s U.K. and Australian units to operating profit dropped to 31 percent in 2011 from 48 percent in 2002. In the 10 years to 2012, the company’s total net income has doubled while Standard Bank, which continues to trade only in Johannesburg, almost trebled its profit. Investec’s U.K. profit was little changed in fiscal 2012 after increasing in 2010 and last year. The Australian unit reported a decline in profit last year and a loss for 2012.

From 127.6 million pounds 10 years ago, Investec’s profit reached a record 344.7 million pounds in 2008. While net income grew in 2010 and 2011, profit slipped in 2012 to 257.6 million pounds, 25 percent off its high four years earlier.

Stephan Potgieter, a UBS AG analyst in Johannesburg, who has a buy rating on Investec, said the company should consider closing its U.K. banking operations. Moolla, the Avior analyst, said Investec should pull out of Australia, where the company has said falling residential property values and slower-than- expected economic growth has hurt results.

‘Very Good Base’

Koseff, whose 0.83 percent stake in Investec is valued at about 24 million pounds, said he has no intention of divesting in the U.K. or Australia.

“We have created a very good base in the U.K. and reshaped the business in Australia quite dramatically,” Koseff said. “We’re now in a position to generate the right kind of returns. It’s not a one-day game.”

Buying Kensington just before the subprime crisis “caused us a lot of trauma,” he said. Impairment losses at Kensington increased to 99.4 million pounds in fiscal 2012 from 69.9 million pounds a year earlier, Investec said on May 17.

In London, Investec Plc’s shares have risen 101 percent in 10 years compared with a 6.2 percent gain in the FTSE 100 Index. Investec’s London shares have lost 1.5 percent this year while the benchmark is down 5 percent. The stock closed 1.6 percent higher in London trading today, adding 5.3 pence to finish at 333.8 pence.

U.K. Benchmark

With 70 percent of earnings and 56 percent of the net asset value in South Africa, Investec should benchmark compensation against South African, not U.K., banks, Henry Hall, a Citigroup Inc. analyst in Johannesburg, wrote in a note on April 18.

“Investec’s executive directors earn significantly more than their South African peers despite an inferior ROE and cost of equity ratio,” wrote Hall, who this month was ranked South Africa’s top bank analyst by the Financial Mail. “The disconnect between operational performance and executive directors’ compensation, as well as the high relative levels of compensation, need to be rectified. Failure to take action could mean Investec is a good place to work, but not necessarily a good company in which to invest.”

To contact the reporter on this story: Renee Bonorchis in Johannesburg at rbonorchis@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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