Arbuthnot Banking Group (LON:ARBB) has recently unveiled its Half Year (H1) FY25 results, showcasing a robust approach to capital allocation amidst a dynamic economic landscape. Despite a challenging comparative period, the group’s focus on strengthening its balance sheet and driving strategic growth in key divisions has been a highlight, as noted by Shore Capital. The results, for the period ending 30 June, reflect a concerted effort to maintain financial prudence while fostering expansion in promising areas of the business.
Shore Capital’s research analyst, Vivek Raja, provides an insightful perspective on these results. “Arbuthnot’s (ARBB) H1 FY25 results, for the period ended 30 June, reported pre-tax profit of £10.9m, roughly halving YoY against a tough comparative, whilst funding costs should fall further in H2F as deposits continue to reprice lower,” Raja stated. This candid assessment underscores the prevailing market conditions but also points towards positive trends for the latter half of the financial year.
The group’s capital allocation discipline has been particularly commendable. In the face of an uncertain macroeconomic environment, Arbuthnot Banking Group has prioritised balance sheet strength, evidenced by growth in both deposits and surplus liquidity. This strategic choice has also supported continued strong dividend progression, offering a positive signal to investors.
Furthermore, the research highlights significant strategic progress within several divisions. Growth in Wealth Management, Renaissance Asset Finance, and Asset Alliance are all cited as positive developments. While real estate lending within the Core Bank experienced some contraction due to increased market competition, the overall picture remains one of calculated growth and diversification. Shore Capital has modestly adjusted its pre-tax profit forecasts, reducing them by 9%. This adjustment factors in revised loan and deposit growth projections, leading to slightly lower Net Interest Margin (NIM) forecasts. Despite this, the investment case remains compelling.
H1 FY25 Financial and Operational Highlights:
- Pre-tax Profit: £10.9 million reported for H1 FY25.
- Loan Balances: Ended the period at £2.3 billion, a 3% decrease year-to-date (YTD), primarily due to contraction in the Core Bank, partially offset by growth in Specialist Subsidiaries.
- Deposit Balances: Increased by 7% YTD to £4.4 billion, demonstrating the strength of Arbuthnot’s funding franchise.
- Net Interest Margin (NIM): Stood at 5.0% in H1 FY25, compared to 5.3% in FY24A, impacted by the increase in surplus liquidity.
- Cost of Risk: Maintained at a prudent 0.12% in H1, reflecting significant collateralisation and robust underwriting practices.
- Interim Dividend Per Share (DPS): Increased by 10% year-on-year (YoY) to 22p, nearly twice covered.
- Net Asset Value (NAV) per Share: Grew by 1% YTD and 5% YoY to 1,649p.
- Total Capital Ratio: Ended the period at 14.8%, with the Common Equity Tier 1 (CET1) ratio at 12.7%.
- Loan to Deposit Ratio: Contracted to a very prudent 52% from 58% at end-FY24A.
Arbuthnot’s earnings are notably geared towards interest rates. Vivek Raja elaborates on this, stating, “ARBB’s earnings are significantly geared to interest rates, as the company has previously signposted, with every 25bp change in interest rates equivalent to c.£2.5m of revenue via NIM”. The prior year’s higher base rate created a tough comparative, but the group’s agile response to changes in funding costs, which take longer to work through than immediate repricing of liquidity and variable rate loans, is a key strength. Shore Capital continues to anticipate another 25 basis point reduction in the base rate this year, which will undoubtedly influence future performance.
A significant differentiator for Arbuthnot Banking Group is its funding strategy, enabling it to secure funding more cheaply than many of its smaller UK banking peers. This allows the Core Bank to generate a positive spread on surplus funding. The average cost of deposits in H1 FY25 was 2.80%, a reduction from 3.19% in H1 FY24A, further decreasing to 2.68% as of 30 June. This efficient funding mechanism remains a cornerstone of the group’s financial health.
Looking ahead, Shore Capital has revised its pre-tax profit estimates, anticipating £25.9 million for FY25F, £30.1 million for FY26F, and £35.4 million for FY27F. Despite these adjustments, the DPS estimates remain unchanged. The Return on Tangible Equity (ROTE) is projected to be in the high single digits across the forecast horizon, rising from 8% in FY25F to approximately 10% in FY27F.
Arbuthnot Banking Group’s valuation currently appears undemanding, trading on a trailing Price to Tangible Net Asset Value (P/TNAV) of 0.65x, with a FY25F dividend yield of 5.5% and a Price/Earnings (P/E) ratio of 8x. Shore Capital believes this valuation more than accounts for the impact of the interest rate cycle’s turn. Shore Capital’s fair value estimate has been adjusted to 1,525p from 1,600p. This revised estimate, derived using a Gordon Growth model on a multiple of TNAV, still indicates significant share price upside and an attractive investment case underpinned by income.
Divisional Performance Highlights:
- Core Bank: Pre-tax profit increased by 7% YoY to £14.5 million, despite a cautious approach to lending in a competitive real estate market, resulting in an 8% YTD contraction of the loan book.
- Wealth Management: Funds under Management & Administration (FuMA) saw an 8% YTD increase to £2.4 billion, with annualised net flows around 11%, outpacing UK peers. The division’s pre-tax loss narrowed to £1.9 million from £2.5 million in the prior year.
- Asset-Based Lending: Pre-tax profit rose by 9% YoY to £4.8 million, even with constrained loan growth. A positive pipeline is anticipated.
- Renaissance Asset Finance: Delivered an impressive 48% YoY increase in pre-tax profit to £3.3 million, with the loan book growing 12% YTD, driven by strong wholesale funding.
- Asset Alliance: Reported a pre-tax loss of £0.5 million. Assets available for lease and finance leases increased by 6% YTD to £385 million. Signs of improvement in new business lending, lease asset sales, and used commercial vehicle trading are noted.
On a Final Note, Arbuthnot Banking Group’s recent results paint a picture of resilience and strategic foresight. The group’s commitment to disciplined capital allocation, combined with the promising growth in its specialist subsidiaries and efficient funding model, positions it well for future opportunities. The cautious but optimistic outlook from Shore Capital, coupled with the attractive valuation metrics, suggests that Arbuthnot Banking Group continues to be a compelling proposition for investors seeking income-driven growth.
