Arbuthnot Banking Group Plc (LON:ARBB) is the topic of conversation when Hardman & Co’s Financial Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, as mentioned, you’ve called your recent note ‘First Half 2025 Results: Growing Where It Wants To’, could you just give us a short summary of your key findings?
A1: The key points from Arbuthnot Banking’s first half results were firstly, strong growth in low capital intensity businesses such as deposit gathering and wealth management and also in high risk-adjusted returns specialist lending, most notably in its SME divisions, RAF, and leasing. Arbuthnot is not competing for business that does not meet its target returns and some markets become very competitive and in those, the loan books are shrinking, for example, in some elements of its property lending.
The second key message is that the pre-tax profits halved on the first half of last year due to the very well-flagged, hopefully anticipated, impact of the falling rate environment. Additionally, there was less private equity activity driving lower asset-backed lending activity for Arbuthnot, and there were also lower than usual truck resale profits. Now, some of this is noise, and the effects of that noise will moderate.
Despite cutting our estimates, we forecast second half profits to be above the first half, and the full year of 2026 to be above the second half of 2025 run rate.
Q2: You said the profits fell, what drove that and was it expected?
A2: As I mentioned, profits nearly halved, falling to £10.9 million from £20.8 million in the first half last year. The key driver was a falling rate environment, which we’ve discussed in detail in several previous notes, and which was well-flagged and therefore hopefully well-expected.
There are lots of moving parts here, but the company’s multiple mitigation actions were insufficient to offset the lagging effect of the large fixed-rate deposit book, which only reprices to lower levels when the deposits mature. So, the group, on those deposits, is paying a higher rate. The share price reaction post-results, a modest rise, suggests this driver was expected.
Now, on top of this trend I mentioned, there was some noise in a couple of the specialist lending divisions. There was less private equity-generated asset-backed lending due to slower activity in the private equity market and well below normal profits on the sale of leased assets. The latter was the result of the hangover from COVID-19, the disruption to supply and demand seen at the time and the impact on the second-hand market, which feeds through.
We expect that noise to moderate over time, and so forecast, as I mentioned, higher profits in the second half of this year compared to the first half, and the full year to be above the second half of 2025 run rate.
Q3: Now, you highlight the growth areas that the company wants to grow in. What can you tell us about that?
A3: Customer deposits increased by 7% in the first half, 14% year on year to £4.4 billion, and this is despite outflows around the tax payment period and transfers to a gilt product, so very good deposit raising. Management has put a real effort into raising deposits, which in the current rate environment are a profitable product in their own right. Looking forward, we understand there are further plans to target sizable sub-sectors of the deposit market which are currently underserved by the big banks.
The second growth area was funds under management and administration in wealth management, which were up 8% in the first half, 22% year on year to £2.4 billion. Net flows for the period were £127 million. Again, this is a low capital intensity business with strong elements of recurring business.
Now, of the specialist lending areas were Renaissance Asset Finance (RAF), which finished the first half of 2025 with a loan book of £280 million, up 12% on the end of last year, so that’s in the six-month period. RAF’s main products are HP, finance, leasing, refinance facilities for a range of assets including motor vehicles, plant and machinery, engineering manufacturing equipment, and business-critical soft assets. So, an SME specialist lending. Alliance Asset Group, which provides truck and bus leases, continues to see strong volume growth with financing up 6% on the year end.
So, in summary, it’s growing in low capital-intensive businesses like deposits and wealth management and high risk-return areas such as specialist SME lending.
Q4: What can you tell me about the credit quality?
A4: The statistics for the most serious arrears have shown further strong improvement with minimal P&L charges taken in the specialist lending divisions.
The core bank has been tightening credit criteria and, as I mentioned, is very happy to preserve capital and walk away from propositions which do not meet its target return hurdles. With an active refinancing market, this has affected both the existing book refinancing away and also new proposals, but it also helps reduce problem loans which are able to get finance elsewhere.
All of this shows the probability of default remains low, as does the loss in the event of default.
Q5: Are there any notes of caution?
A5: Management action has mitigated some of the exposure to the falling rate environment, but it has not eliminated it altogether so further base rate cuts could adversely impact profits.
As always, there is macroeconomic uncertainty, and the political environment creates its own uncertainties too.
Credit deterioration is the obvious risk for any bank, but Arbuthnot Banking Group has been conservative in new lending criteria and taking security which should reduce the probability of default and any loss in the event of default.
It is not exposed to businesses where commissions were paid to retail lending such as the car finance market.
