In the past week Arbuthnot Banking Group Plc (LON:ARBB) has announced the acquisition of a private-bank loan portfolio and a specialist asset backed finance business (subject to regulatory approval). Prior to these deals we believed ABG had nearly £100m of surplus capital and these deals will utilise £15m of this. ABG is now evolving into a more diversified banking group with both deposit and targeted lending businesses. It is establishing clear momentum across the group. We had expected loan acquisitions and will build the asset-backed deal into our numbers and valuation once the completion of the deal is more certain.
► Loan book acquisition: On 19th December ABG announced it had completed the purchase of a £45m private banking loan portfolio (83 accounts), mainly secured against residential property, from Duncan Lawrie. The average loan to value of the portfolio is 43% and the client yield is 5.21%. The consideration was £42.7m.
► Asset backed acquisition: On 20th December ABG announced the intended acquisition of Renaissance Asset Finance (completion likely Q217). RAF finances a range of specialist assets. On 30 November 2016 RAF’s assets were £68m and net assets £1.6m. We believe the final PE multiple will be mid-single digit.
► Other momentum: In the recent trading statement, management advised that it was accelerating investment as “the disruption in the larger UK banks has led to a number of direct approaches from experienced bankers”. We expect the organic momentum to also be strong.
► Valuation: Our base case valuation is now 1629p (formerly 1920p) an upside of 13%. The fall is primarily due to a £3 special dividend paid since our last report. Our capital fully deployed models indicate £19.56, an upside of 35%. With momentum building in ABG, the latter scenario appears increasingly likely.
► Investment summary: Arbuthnot Banking Group Plc offers strong franchise and continuing-business profit growth. Its balance sheet strength means it has wide ranging strategic options to develop organic and inorganic opportunities. The latter are likely to increase in uncertain times. Management has been both innovative but also very conservative in managing risk. Our base case valuation has 13% upside, rising to 35% on the full deployment of capital.
