Integrated Annual Report 2015

Financial review

Introduction – understanding our results

Investec operates under a DLC structure with primary listings of Investec plc on the London Stock Exchange and Investec Limited on the JSE Limited.

In terms of the contracts constituting the DLC structure, Investec plc and Investec Limited effectively form a single economic enterprise in which the economic and voting rights of ordinary shareholders of the companies are maintained in equilibrium relative to each other. The directors of the two companies consider that for financial reporting purposes, the fairest presentation is achieved by combining the results and financial position of both companies.

Accordingly, the year-end results for Investec plc and Investec Limited present the results and financial position of the combined DLC group under International Financial Reporting Standards (IFRS), denominated in Pounds Sterling.

All references in this document to Investec or the group relate to the combined DLC group comprising Investec plc and Investec Limited.

Sale of businesses

During the year the group sold a number of businesses namely, Investec Bank (Australia) Limited, Kensington Group plc and Start Mortgage Holdings Limited as set out below.

Sale of Investec Bank (Australia) Limited

The sale of Investec Bank (Australia) Limited’s Professional Finance and Asset Finance and Leasing businesses and its deposit book to Bank of Queensland Limited was effective 31 July 2014 for cash proceeds of £122 million. This has resulted in the derecognition of approximately £1.7 billion of assets and approximately £1.7 billion of liabilities associated with the businesses sold. We continue to have a presence in Australia, focusing on its core activities of Specialised Finance, Corporate Advisory, Property Fund Management and Asset Management. The remaining business will operate as a non-banking subsidiary of the Investec group. As a result, we have decided to no longer report the activities of our Australian businesses separately, with these activities now reported under the ‘UK and Other’ geographical segment and the ‘UK and Other’ Specialist Banking segment.

Sales of Kensington Group plc and Start Mortgage Holdings Limited

On 9 September 2014 we announced the sale of our UK intermediated mortgage business Kensington Group plc (Kensington) together with certain other Investec mortgage assets to funds managed by Blackstone Tactical Opportunities Advisors L.L.C. and TPG Special Situations Partners for £180 million in cash based on a tangible net asset value of the business of £165 million at 31 March 2014. This transaction became effective on 30 January 2015.

On 15 September 2014 we announced the sale of our Irish intermediated mortgage business Start Mortgage Holdings Limited (Start) together with certain other Irish mortgage assets to an affiliate of Lone Star Funds. This transaction became effective on 4 December 2014.

This has resulted in the derecognition of approximately £4.1 billion of assets and approximately £2 billion of external liabilities associated with these businesses sold.

Impact of these sales on our operational performance

The sales of these businesses have had a significant effect on the comparability of our financial statutory position and results. As a result, comparison on a statutory basis of the 2015 results with 2014 would be less meaningful.

In order to present a more meaningful view of our performance, additional management information is presented on our ongoing businesses. This information is only set out in volume one of our annual report. The additional information presented on an ongoing basis excludes items, that in management’s view, could distort the comparison of performance between periods. Based on this principle, the following items are excluded from underlying statutory profit to derive ongoing operating profit:

A reconciliation between the statutory and ongoing income statement is provided here. All information in our annual report comprising volumes one, two and three are based on our statutory accounts, unless otherwise indicated.


Exchange rates

Our reporting currency is Pounds Sterling. Certain of our operations are conducted by entities outside the UK. The results of operations and the financial position of our individual companies are reported in the local currencies of the countries in which they are domiciled, including South African Rands, Australian Dollars, Euros and US Dollars. These results are then translated into Pounds Sterling at the applicable foreign currency exchange rates for inclusion in our combined consolidated financial results. In the case of the income statement, the weighted average rate for the relevant period is applied and, in the case of the balance sheet, the relevant closing rate is used.

The following table sets out the movements in certain relevant exchange rates against Pounds Sterling over the period.

  31 March 2015 31 March 2014
Currency per £1.00 Year end Average Year end Average
South African Rand 17.97 17.82 17.56 16.12
Australian Dollar 1.95 1.85 1.80 1.72
Euro 1.38 1.28 1.21 1.19
US Dollar 1.49 1.62 1.67 1.59

Exchange rates between local currencies and Pounds Sterling have fluctuated over the period. The most significant impact arises from the volatility of the Rand. The average Rand: Pounds Sterling exchange rate over the period has depreciated by 10.5% and the closing rate has depreciated by 2.3% since 31 March 2014.

The following tables provide an analysis of the impact of the Rand and Australian Dollar depreciation on our reported numbers.

  Results in Pounds Sterling
  Actual as 
reported 
Actual as 
reported 
Actual as 
reported 
Neutral 
currency^
Neutral 
currency 
  Year to  Year to    Year to   
  31 March 
2015 
31 March 
2014#

change
31 March 
2015 

change 
Operating profit before taxation* (million) £493  £451  9.4%  £532  18.0% 
Earnings attributable to shareholders (million) £246  £331  (25.7%) £273  (17.5%)
Adjusted earnings attributable to shareholders** (million) £340  £327  4.0%  £368  12.5% 
Adjusted earnings per share** 39.4p  37.9p  4.0%  42.6p  12.4% 
Basic earnings per share 24.4p  34.3p  (28.9%) 27.3p  (20.4%)
Dividends per share 20.0  19.0p  5.3%  n/a  n/a 

 

  Results in Pounds Sterling
  Actual as 
reported 
Actual as 
reported 
Actual as 
reported 
Neutral 
currency^^
Neutral 
currency 
  At 31 March 
2015 
At 31 March 
2014#

change 
At 31 March 
2015  

change 
Net asset value per share 364.9p  376.0p  (3.0%) 365.2p   (2.9%)
Net tangible asset value per share 308.1p  309.0p  (0.3%) 308.4p   (0.2%)
Total equity (million) £4 040  £4 016  0.6%  £4 087   1.8% 
Total assets (million) £44 353  £47 142  (5.9%) £44 981   (4.6%)
Core loans and advances (million) £17 189  £17 157  0.2%  £17 430   1.6% 
Cash and near cash balances (million) £9 975  £9 136  9.2%  £10 090   10.4% 
Customer deposits (million) £22 615  £22 610  < 0.%  £22 908   1.3% 
Third party assets under management (million) £124 106  £109 189  13.7%  £125 149   14.6% 

The following tables provide a comparison of the group’s results as reported in Pounds Sterling and the group’s results as translated into Rands.

  Results in Pounds Sterling Results in Rand
  Year to 
31 March 
 2015 
Year to 
31 March 
2014#

change 
Year to 
31 March 
2015 
Year to 
31 March 
2014#

change 
Operating profit before taxation* (million) £493  £451  9.4%  R8 817  R7 309  20.6% 
Earnings attributable to shareholders (million) £246  £331  (25.7%) R3 970  R5 329  (25.5%)
Adjusted earnings attributable to shareholders** (million) £340  £327  3.9%  R6 076  R5 293  14.8% 
Adjusted earnings per share** 39.4p  37.9p  4.0%  704c  614c  14.7% 
Basic earnings per share 24.4p  34.3p  (28.9%) 387c  552c  (29.8%)
Headline earnings per share 35.8p  33.8p  5.9%  640c  548c  16.8% 
Dividends per share 20.0p  19.0p  5.3%  362c  327c  10.7% 
  At 31 March 
2015 
At 31 March 
2014#

change 
At 31 March 
2015 
At 31 March 
2014#

change 
Net asset value per share 364.9p  376.0p  (3.0%) 6 559c  6 602c  (0.7%)
Net tangible asset value per share 308.1p  309.0p  (0.3%) 5 538c  5 425c  2.1% 
Total equity (million) £4 040  £4 016  0.6%  R72 625  R70 505  3.0% 
Total assets (million) £44 353  £47 142  (5.9%) R797 218  R827 649  (3.7%)
Core loans and advances (million) £17 189  £17 157  0.2%  R308 957  R301 224  2.6% 
Cash and near cash balances (million) £9 975  £9 136  9.2%  R179 242  R160 405  11.7% 
Customer deposits (million) £22 615  £22 610  < 0.1%  R406 485  R396 952  2.4% 
Third party assets under management (million) £124 106  £109 189  13.7%  R2 230 197  R1 917 347  16.3% 
* Before goodwill, acquired intangibles, non-operating items and after other non-controlling interests.
** Before goodwill, acquired intangibles, non-operating items and after non-controlling interests.
^ For income statement items we have used the average Rand: Pounds Sterling and Australian Dollar: Pounds Sterling exchange rates that were applied in the prior year, i.e. 16.12 and 1.72, respectively.
^^ For balance sheet items we have assumed that the Rand: Pounds Sterling and the Australian Dollar: Pounds Sterling closing exchange rates have remained neutral since 31 March 2014.
# Restated. Refer to note 59 .

Ten-year review

Salient features*

For the year ended 31 March  2015  2014  % change 
2015 vs 
2014
 
2013  2012  2011  2010  2009  2008  2007  2006 
Income statement and selected returns                                  
Operating profit before goodwill, acquired intangibles, non-operating items and taxation (£’000)ø  493 157  450 676  9.4%  426 278  358 625  434 406  432 258  396 766  508 717  466 585  388 767 
Operating profit: Southern Africa (% of total)ø  70.8%  66.0%     67.5%  80.7%  69.1%  67.2%  74.0%  66.7%  57.6%  68.3% 
Operating profit: UK and Other (% of total)ø  29.2%  34.0%     32.5%  19.3%  30.9%  32.8%  26.0%  33.3%  42.4%  31.7% 
Adjusted earnings attributable to ordinary shareholders before goodwill, acquired intangibles and non-operating items (£’000)  339 532  326 923  3.9%  309 310  257 579  327 897  309 710  269 215  344 695  300 704  230 017 
Headline earnings (£’000)  308 770  291 561  5.9%  265 227  217 253  286 659  275 131  261 627  301 499  294 881  222 805 
Cost to income ratio  67.6%  67.6%     65.7%  64.7%  61.7%  57.8%  55.9%  56.1%  59.0%  58.7% 
Staff compensation to operating income ratio  47.4%  46.3%     43.9%  43.0%  40.7%  36.1%  34.9%  37.2%  40.9%  40.1% 
Return on average adjusted shareholders’ equity (post-tax)  10.6%  10.0%     9.4%  7.8%   11.2%  13.5%  14.8%  23.6%  26.1%  25.5% 
Return on average adjusted tangible shareholders’ equity (post-tax)  12.7%  12.3%     11.7%  9.6%   13.2%  15.4%  17.4%  28.6%  31.7%  32.7% 
Return on average risk-weighted assets  1.25%  1.14%     1.06%  0.91%  1.23%  1.33%  1.36% 
Return on average assets (excluding assurance assets)  0.86%  0.75%     0.67%  0.57%  0.76%  0.83%  0.84%  1.31%  1.46%  1.35% 
Operating profit per employee (£’000)  59.7  54.9  8.7%  53.5  47.8  64.4  69.7  62.6  84.4  92.3  91.5 
Net interest income as a % of operating income  32.4%  33.6%     35.2%  36.2%  34.9%  37.0%  46.6%  39.3%  29.2%  26.8% 
Non-interest income as a % of operating income  67.6%  66.4%     64.8%  63.8%   65.1%  63.0%  53.4%  60.7%  70.8%  73.2% 
Recurring income as a % of total operating income  74.2%  70.7%     68.6%  67.7%   62.3%  60.4%  70.0%  65.1%  58.7%  56.9% 
Effective operational tax rate  19.6%  17.1%     18.4%  18.1%  15.5%  20.6%  21.1%  22.6%  26.3%  27.3% 
                                   
Balance sheet                                  
Total capital resources (including subordinated liabilities) (£’million)  5 219  5 355  (2.5%)  5 693  5 505  5 249  4 362  3 762  3 275  2 665  2 042 
Total shareholders’ equity (including preference shares and non-controlling interests) (£’million)  4 040  4 016  0.6%  3 942  4 013  3 961  3 292  2 621  2 210  1 820  1 512 
Shareholders’ equity (excluding non-controlling interests) (£’million)  3 501  3 572  (2.0%)  3 661  3 716  3 648  2 955  2 297  1 911  1 542  1 226 
Total assets (£’million)  44 353  47 142  (5.9%)  52 010  51 550  50 941  46 572  37 365  34 224  26 300  23 901 
Net core loans and advances to customers (£’million)  17 189  17 157  0.2%  18 415  18 226  18 758  17 891  16 227  12 854  10 095  9 605 
Core loans and advances to customers as a % of total assets  38.8%  36.4%     35.4%  35.4%  36.8%  38.4%  43.4%  37.7%  38.4%  40.2% 
Cash and near cash balances (£’million)  9 975  9 136  9.2%  9 828  10 251  9 319  9 117  4 866  5 028 
Customer accounts (deposits) (£’million)  22 615  22 610  –   24 461  25 344  24 441  21 934  14 573  12 133  10 650  8 699 
Third party assets under management (£’million)  124 106  109 189  13.7%  110 678  96 776  88 878  74 081  48 828  52 749  56 121  56 331 
Capital adequacy ratio: Investec plc°  16.7%  15.3%     16.7%  17.5%  16.8%  15.9%  16.2%  15.3%  24.7%  17.7% 
Capital adequacy tier 1 ratio: Investec plc°  11.9%  10.5%     11.0%  11.6%   11.6%  11.3%  10.1%  9.2%  14.8%  11.6% 
Common equity tier 1 ratio: Investec plc^^°  10.2%  8.8%     8.8%  9.3%                   
Leverage ratio: Investec plc^^°  7.7%  7.4%                            
Capital adequacy ratio: Investec Limited°  14.7%  14.9%     15.5%  16.1%   15.9%  15.6%  14.2%  13.9%  14.7%  16.3% 
Capital adequacy tier 1 ratio: Investec Limited°  11.3%  11.0%     10.8%  11.6%   11.9%  12.0%  10.8%  10.0%  10.4%  11.5% 
Common equity tier 1 ratio: Investec Limited^^°  9.6%  9.4%     8.9%  9.3%                   
Leverage ratio: Investec Limited^^°  8.1%  7.8%                            
Credit loss ratio (income statement impairment charge as a % of average gross core loans and advances)  0.68%  0.68%     0.84%  1.12%  1.27%  1.16%  1.08%  0.51%  0.17%  0.11% 
Defaults (net of impairments and before collateral) as a % of net core loans and advances to customers  2.07%  2.30%     2.73%  3.31%  4.66%  3.98%  3.28%  1.29%  0.92%  0.52% 
Gearing ratio (assets excluding assurance assets to total equity)  9.4x  10.3x     11.6x  11.3x  11.3x  12.5x  13.0x  13.8x  12.2x  12.5x 
Core loans to equity ratio  4.3x  4.3x     4.7x  4.5x   4.7x  5.4x  6.2x  5.8x  5.5x  6.4x 
Loans and advances to customers: customer deposits  74.0%  72.0%     71.5%  67.8x  72.4%  76.2%  103.6%  98.4%  89.1%  105.6% 
                                   
Salient financial features and key statistics                                  
Adjusted earnings per share (pence)#  39.4  37.9  4.0%  36.1  31.8  43.2  45.1  42.4  56.9  53.3  41.9 
Headline earnings per share (pence)#  35.8  33.8  5.9%  31.0  26.8  37.7  40.1  41.2  49.7  52.3  40.6 
Basic earnings per share (pence)#  24.4  34.3  (28.9%)  31.7  25.7  49.7  44.0  38.5  57.7  54.7  53.8 
Diluted earnings per share (pence)#  23.1  32.3  (28.5%)  29.8  24.3  46.7  41.5  36.1  54.0  50.4  50.0 
Dividends per share (pence)#  20.0  19.0  5.3%  18.0  17.0  17.0  16.0  13.0  25.0  23.0  18.2 
Dividend cover (times)  2.0  2.0  –   2.0  1.9  2.5  2.8  3.3  2.3  2.3  2.3 
Net asset value per share (pence)#  364.9  376.0  (3.0%)  384.2  392.0  416.0  364.0  308.8  260.6  216.0  182.1 
Net tangible asset value per share (pence)#  308.1  309.0  (0.3%)  310.9  317.0  343.8  324.1  266.3  215.0  178.6  148.9 
Weighted number of ordinary shares in issue (million)#  862.7  862.6  –   856.0  809.6  759.8  686.3  634.6  606.2  563.8  548.8 
Total number of shares in issue (million)#  899.4  891.7  0.9%  884.8  874.0  810.0  741.0  713.2  657.6  609.3  593.0 
Closing share price (pence)#  561  485  15.7%  459  382  478  539  292  339  658  588 
Market capitalisation (£’million)  5 045  4 325  16.6%  4 061  3 340  3 872  3 993  2 083  2 229  4 009  3 488 
Number of employees in the group (including temps and contractors)  8 254  8 258  –   8 151  7 781  7 237  6 123  5 951  6 333  5 430  4 453 
Closing ZAR:£ exchange rate  17.97  17.56  2.3%  13.96  12.27  10.88  11.11  13.58  16.17  14.20  10.72 
Average ZAR:£ exchange rate  17.82  16.12  10.5%  13.44  11.85  11.16  12.38  14.83  14.31  13.38  11.43 
* Refer to definitions.
^ Calculation not comparable.
^^ The group’s expected Basel III ‘fully loaded’ numbers are provided here.
° Capital adequacy figures prior to 2008 are disclosed under Basel I. Investec Limited’s numbers have been reported in terms of Basel III since 31 March 2013, and Investec plc has been reporting in terms of Basel III since 31 March 2014.
# For comparative purposes historical information has been adjusted for the 5:1 share split that took place on 4 September 2006.
ø Information prior to 2008 is shown before non-controlling interests and thereafter post other non-controlling interests.

 

Track record

Up 4.0% to 39.4 pence

Core loans: flat at £17.2 billion since 31 March 2014
Deposits: flat at £22.6 billion since 31 March 2014

Adjusting for the sale of Investec Bank (Australia) Limited and Kensington (refer here) core loans increased 11.9% and deposits increased

Up 3.9% £339.5 million

Up 13.7% to £124.1 billion since 31 March 2014

 

* Historical EPS numbers have been adjusted for the 5:1 share split that took place on 4 September 2006.
# Restated. Refer to note 59 in volume three.

Financial targets

Target We have set the following target over the medium to long term: Group ROE: 12% to 16% over a rolling five-year period in Pounds Sterling
Target In the medium to long term, we aim to achieve adjusted EPS growth of 10% in excess of UK inflation (in Pounds Sterling). We continually strive to build and maintain a sustainable business model. We intend to maintain a dividend cover of between 1.7 to 3.5 times based on earnings per share as defined above, denominated in Pounds Sterling
Target We have set the following target over the medium to long term: Group COI ratio: less than 65% in Pounds Sterling
Target We intend to maintain a sufficient level of capital to satisfy regulatory requirements, as well as take advantage of opportunities that may arise in the financial services industry focusing on increasing our return on equity in the medium to long term. We target a capital adequacy ratio range of between 14% and 17% on a consolidated basis for Investec plc and Investec Limited, and we target a minimum tier 1 ratio of 11.0% (by March 2016) and a common equity tier 1 ratio above 10.0% (by March 2016)
* ROE is post-tax return on adjusted average shareholders’ equity as calculated here.
** Adjusted EPS before goodwill, acquired intangibles and non-operating items as defined here. The numbers have been adjusted for the 5:1 share split that took place on 4 September 2006.
*** Capital adequacy figures prior to 2008 are disclosed under Basel I. Investec Limited’s numbers have been reported in terms of Basel III since 31 March 2013, and Investec plc has been reporting in terms of Basel III since 31 March 2014.
# Restated. Refer to note 59 in volume three.
   
Note:
The numbers shown in the financial targets graphs on this page are for the years ended 31 March, unless otherwise stated.

 

An overview of the operating environment impacting our business

Southern Africa

Our views

South Africa faced a difficult year in 2014, with strike action in the platinum belt persisting for close to two quarters and GDP growth consequently slipping to 1.5% year on year as consumer spending, domestic fixed investment and production were all negatively affected. Nevertheless, gains were still made as GDP per capita rose to R56 122 in real terms from R56 044, and real disposable income per capita also lifted.

 
 
1.5%   2.2%
2014/15
Economic growth
  2013/14
Economic growth
 

GDP per capita has risen

 
2015   2014
R56 122   R56 044
 
The World Bank evidences that South Africa has established a more equitable society over the past 20 years via social assistance programmes, particularly spend on education and healthcare

Upward social mobility persisted, largely on the ongoing roll-out of social services, which accounted for 68% of government revenue. Redistribution between the rich and poor via direct (personal income) taxation is progressive, and the World Bank shows South Africa achieved the largest reduction in poverty and inequality compared to the other middle income economies studied on the provision of free basic services and direct monetary transfers to households. South Africa’s Gini coefficient on income is measured at 0.77 before taxes and social spending and 0.59 after. It is still high, but the fiscal space to spend more to achieve even greater redistribution is extremely limited, with South Africa already receiving a number of credit rating downgrades over the past few years. More needs to be done to reduce inequality, in particular South Africa needs substantially faster economic growth via a tripling in the size of the private corporate sector in order to achieve single digit unemployment, an eradication of poverty and a further reduction in inequality.

South Africa increased its interest rates by 75bps over 2014 and further hikes are expected from current, still low, levels. Electricity supply constraints have proved an inhibitor to economic performance, while higher interest rates and indebtedness impacted household consumption expenditure in 2014.

2014/15 has seen a more conservative budget released than in recent years, detailing reduced projections on government net debt as a percentage of GDP and projected consolidation of the fiscal deficit, with some reduction in government expenditure. If achieved, this should assist South Africa to maintain its credit rating of BBB- from Standard and Poor’s on its long-term foreign currency sovereign debt.

 
UK, Europe and Other

Our views

The UK recorded the firmest pace of growth of all the advanced economies in 2014, and saw its fastest growth pace since 2006.

 
 
1.5%   2.1%
2014/15
Economic growth
  2013/14
Economic growth
 

GDP per capita has risen

 
2015   2014
£27 770   £26 731
 
The health of the labour market has also continued to improve markedly with the latest unemployment reading at 5.6% – the lowest level seen since July 2008

UK monetary policy remained steady throughout the financial year, with the bank rate held at 0.5%, marking six years at a record low. Meanwhile the level of the Bank of England’s asset purchase scheme was maintained at £375 billion. Over the same period the UK’s economic fundamentals continued to strengthen.

Employment growth has also been robust with 617 000 more in work than a year earlier.

The inflation backdrop has been one of very subdued price growth, particularly in the latter part of the fiscal year where CPI inflation fell to a record low of zero in February and March 2015; the main driver has been lower fuel prices, reflecting the sharp decline in the wholesale price of oil. Hence despite the strengthening recovery, there has been little appetite on the MPC for higher interest rates, with the UK Monetary Policy Committee looking to see out the soft price patch and not adjust policy until it gains confidence that inflation is headed back to the 2% target; hence immediate talk of rate hikes has been limited.

The recovery of the UK’s housing market stuttered from summer 2014 onwards as the pace of house price growth eased from its 11.9% June 2014 high as activity, particularly mortgage approvals, stumbled after tighter checks on loan affordability and limits on high loan to income ratio mortgage origination were introduced.

Australia

Our views

Australia experienced moderate economic performance over the last calendar year, with GDP growth firming to 2.5%, from the 2.3% that was witnessed over 2013.

 
 
2.5%   2.3%
2014/15
Economic growth
  2013/14
Economic growth
 

GDP per capita has risen

 
2015   2014
A$68 102   A$67 061
 
The health of the labour market has also continued to improve markedly with the latest unemployment reading at 5.6% – the lowest level seen since July 2008

On a quarterly basis the pace of growth was slower than historical averages, with quarter-on-quarter growth averaging just 0.5% over the year.

Headwinds to the economy were centred on the resources sector where falling commodity prices contributed further to a decline in mining investment, weighing on output overall. Outside of mining activity was mixed, with household consumption below trend, dampened by slow income growth and rising unemployment. Additionally, the strength of the Australian Dollar over the first half of the fiscal year also posed a headwind. Subsequently, the Australian Dollar weakened to A$0.76 against the US Dollar by the end of the period under review, having started at A$0.93. The housing market has, however, seen strength, with house prices rising 9.4% over 2014.

Having kept policy stable through almost the whole of the 2014/15 fiscal year the Reserve Bank of Australia cut the cash rate from 2.50% to a new record low of 2.25%, as the economy proceeded at a below trend pace and inflation hit its lowest level since Q2 2012.

 
United States

Our views

The US economy notched up growth of 2.3% in 2014 – the fastest rate since 2010.

The US labour market saw a more substantial improvement over the past financial year with the unemployment rate falling from 6.2% in April 2014 to 5.5% by March 2015 – the lowest level since May 2008

US growth slowed to a near standstill in Q1 2015, recorded at just a 0.2% annualised rate, albeit with several transitory factors, not least adverse weather being a particular drag.

Further, gains in non-farm payrolls averaged 260 000 over the 2014/15 year – the strongest run since the late 1990s.

Reflecting these improvements in the US labour market, the US Federal Reserve’s efforts through the first part of the 2014/15 year were focused on bringing its quantitative easing purchases to a close, with the last ‘taper’ taking place in October 2014 while the Federal funds target rate range was held at 0% – 0.25% throughout the period. From October 2014 onwards the Federal Open Market Committee’s (FOMC) communications were focused on adjusting communications to bring the prospect of a near-term rise in interest rates into sight, with the FOMC in its March 2015 communication going as far as removing reference to the committee being ‘patient’ in beginning its normalisation of monetary policy.

Eurozone

Amidst concerns that deflation was becoming a more serious threat in the Eurozone, the European Central Bank (ECB) eased policy further over the 2014/15 year. It opted to cut the ECB’s main lending rates twice, taking the main refinancing rate down to a new record low of 0.05% in September 2014 while the deposit rate reached a low of (0.20%); both rates remained at these levels as the financial year closed. However, ECB policy easing did not stop there as the collapse in oil prices heightened deflation concerns in winter 2014 and culminated in the ECB unveiling a full-scale quantitative easing programme in January 2015, including the purchase of Euro area sovereign bonds. The programme is set to amount to some €1 trillion with purchases of around €60 billion per month running until at least Q3 2016; purchases got underway in March 2015.

The economic background has been one of modest growth with a 0.9% expansion seen in calendar year 2014. Euro area growth has now been mildly positive since Q2 2013 but, with the exception of Q1 2014, has failed to surpass a +0.3% quarterly growth rate in any individual period. However, early indications are that we will see something of a pick-up in growth in 2015.

On the Euro crisis front, Greek troubles reared their head again late in 2014 as the failure of the government to see its presidential candidate elected paved the way for new elections in January 2015. They ushered in a new administration, a coalition between Syriza and the Independent Greeks which has since sought a full-out renegotiation of Greece’s existing arrangements with the IMF, ECB and the European Commission. Progress in putting the details to a reform plan which would see Greece granted disbursements of cash under a four-month extension to the existing bailout has stalled. Furthermore, its cash estimates indicate that a third bailout will be needed before the summer. Finally, note that the Euro area expanded geographically over the period as well, with Lithuania becoming the nineteenth member of the currency union.

 
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