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

- Link: https://www.directorstalkinterviews.com/arbuthnot-banking-group-1h19-results-diversified-low-risk-growth-continues/412789376
- Published: 2019-07-29T10:14:54+01:00
- Author: Giles Arbor

The 17 July 1H’19 results showed the further progress made in profitably deploying
the capital **Arbuthnot Banking Group** (LON: ARBB) 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:**  Arbuthnot Banking Group 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.

[DOWNLOAD THE FULL REPORT](https://www.hardmanandco.com/wp-content/uploads/2019/07/Arbuthnot-Banking-Group-Results-July-2019.pdf)

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