The key message from the 2021 results is that Arbuthnot Banking Group plc (LON:ARBB) is back to profitable growth with an interest-rate-upside kicker. End-2021 assets were at the levels management had forecast for that date, prior to the pandemic. In contrast, today’s share price is 965p, against 1,350p in January 2020. The accounts were complicated by a number of exceptional items, but, adjusting for them on our basis, underlying profit was £3.4m. Giving credit for more normal interest rates and a one-off fraud, they were £17m. Looking forward, franchise growth is key: loans up 25% (underlying 29%), deposits 20%, and AUM 18%. The allocation of capital to high-margin, specialist SME finance continues.
- Sensitivity to rising rates: Arbuthnot Banking Group is a beneficiary of rising interest rates (£11.5m profit p.a. if base rate is 75bp not 10bp). The pain from impairments is not expected to become a material factor until base rates go above 2%, so, for the near future, accelerating expectations of rate increases provides a material upside.
- Results in more detail: Profit before tax was £4.6m (2020: loss £1.1m). Group operating income rose to £88.7m (2020: £72.5m). Earnings per share were 45.2p (2020: negative 8.9p). Final dividend declared 22p (2020: nil). Net assets p/share were 1,315p (2020: 1,270p). Total capital ratio was 14.9% (2020: 18.7%).
- Valuation: Our multiple approaches see a broad range of valuations: £11.51 Dividend Discount Model (DDM), £16.85 SOTP and £18.41 Gordon Growth Model (GGM). The average is £15.59 is, up from £13.83, reflecting earnings upgrades and the move to a new base year for a growth business. Trading at 74% of NAV appears anomalous.
- Risks: Going forward, the key risk is credit. Historically, ABG has been very conservative in lending criteria and security taken. Its financial strength means that ABG can take time to optimise recoveries. 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 a number of 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 below book value is an anomaly.