ARBUTHNOT BANKING GROUP 1H’19 results: diversified, low-risk growth continues

The 17 July 1H’19 results showed the further progress made in profitably deploying the capital ABG generated from the partial sales of its stake in STB. Loans grew 16% to £1,275m, and deposits increased 18% to £1,829m, driving net interest income up 15%. Other new businesses continue to show strong growth. Commercial Banking generated profits of £3m (1H’18 loss: £0.8m). The group is well-funded (loans 70% of deposits) and has surplus group capital of ca.£70m (core equity Tier 1 surplus in excess of £30m). In July, ABG announced the acquisition of two mortgage portfolios for £258m; this shows the company’s flexibility to take value-added acquisition opportunities.

  • 1H’19 results: The key financial highlights were i) PBT of £2.9m (1H’18: £1.2m), underlying PBT of £3.4m (£2.7m), ii) operating income up 14% to £35.6m, iii) costs up 7%, and iv) impairments of £1.3m (2H’18: £2.5m, 1H’18: £0.2m). EPS fell to 16.6p from 21.7p, with the change in treatment of STB.
  • Outlook: Our 2019 PBT estimates are broadly unchanged, with the part-year benefit from the mortgage acquisition offsetting the higher cost of recently issued Tier 2 capital. Our 2020 estimates have been raised by over 10%, as the benefits are factored in for a greater part of the year and more than offset the Tier 2 cost.
  • Valuation: The average of our approaches is now £17.93 (previously £17.42), 1.4x 2020E NAV. The rise reflects higher dividends, equity and divisional profits with the 2020 earnings upgrade, and increases all our valuation approaches. Despite the 2019 YTD rally, the share price is still around the 1H’19 NAV (1,321p).
  • Risks: As with any bank, the key risk is credit. ABG’s existing business should see below-market volatility, and so the main risk lies in new lending. We believe management is cognizant of the risk, and has historically been very conservative. Other risks include reputation, regulation and compliance.
  • Investment summary: ABG offers strong-franchise and continuing-business (normalised) profit growth. Its balance sheet strength gives it wide-ranging options to develop organic and inorganic opportunities. The latter are likely to increase in uncertain times. Management has been innovative, but also very conservative, in managing risk. Having a profitable, well-funded, well-capitalised and strongly- growing bank priced close to book value is an anomaly.


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