The world’s second biggest bank has the hots for Investec

Bank of America, the second-largest bank in the world by market cap, remains positive on Investec’s prospects for the coming years and has reiterated its buy rating on the stock.

In its latest financial results, Investec generated a return on equity of 13.9%. This was a decrease from 14.6% a year prior, but was still within its target of 13% to 17%.

Although the South African- and UK-focused bank’s headline earnings per share dropped by 0.3% to 72.6p, the group still upped its total dividends from 34p to 36p after increasing its payout ratio.

Merrill Lynch, a division of Bank of America, said that Investec is undervalued compared to its circa 15% ROE potential over the next three years.

While margin compression from interest rate normalisation in the UK could occur, Investec is still well placed to grow its private client and mid-market Corporate and Investment Banking operations.

Merrill Lynch analyst Harry Botha added that Investec is well capitalised, with excess capital in both SA and the UK.

Investec also retains a 10% stake in South Africa’s largest asset manager, Ninety One, which would be needed to support acquisitions, growth or shareholder returns.

Botha added that Investec’s 2025 results position the group to deliver 9% earnings per share growth over the next three years on a compound annual growth rate, 3.5 percentage points ahead of consensus.

He also said that rate cuts should support continued lending and fee growth, while Investec’s expansion into new products, including UK private banking, could add roughly £750 million to revenue by 2030.

Investec also targets a roughly 30% profit contribution from its wealth operations by 2030, a notable increase from its current approximately 15%.

Lower interest rates in South Africa and the UK should also support lending growth in both markets of 8-12% and 7-9%, respectively, from 2026 to 2028. This should offset the lower net interest margin from lower rates.

Bank of America also expects above-consensus increases in net interest revenue in both regions in 2026-27 as client activity levels increase amidst higher economic growth. 

Better than other banks

Investec’s price to book value (P/BV) currently sits at 0.87 when using Bloomberg’s last reported NAV/share and 5.5x forward price to earnings (P/E) consensus earnings per share.

Investec’s P/BV is currently 25% lower than the average for South African and UK bands, compared to an 11% discount over the last 10 years.

For context, its P/BV is lower than Standard Bank’s 1.49, FirstRand’s 2.0, and Nedbank’s 1.06, while being tied with Absa.

It is also lower than the UK banks of Lloyds and NatWest at 0.99 and 1.19, respectively. It is still slightly ahead of the former Absa parent company, Barclays, which sits at 0.76. 

Bank of America thus increased its price objective by 10% to R167 on an estimated earnings per share increase of 4% to 10% over 2026 to 2029. It has thus reiterated its Buy rating.