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Arbuthnot Banking Group Plc Q&A with Hardman & Co (LON:ARBB)

Arbuthnot Banking Group Plc (LON:ARBB) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

Q1: Arbuthnot Banking Group recently had their interim results, what were your key takeaways?

A1: The 1H’19 results showed the further progress made in profitably deploying the capital ABG generated from the partial sales of its stake in STB. Loans grew 16% to £1.3bn, and deposits increased 18% to £1.8bn 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 are just 70% of deposits) and it 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 which shows the company’s flexibility to take value-added acquisition opportunities.

Q2: Did the results affect your outlook?

A2: 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. The results themselves had the usual areas with some outperformance largely matched by other areas with small underperformance.

Q3: The mortgage book acquisition is clearly significant, what can you tell us about that?

A3: On 3 July, ABG announced the acquisition of two mortgage portfolios for £258m (£8m discount to book value). The overall yield on the portfolios is 3.6%, before accounting for the negotiated purchase discount effect. The credit profile is excellent (average LTV is under 70%, and 75% of the loans were originated before 2008). 85% of the loans are owner-occupied, with the balance buy-to-let. The loans are of sufficient quality to be included in the pool of assets used by ABG as collateral for the Sterling Monetary Framework at the Bank of England, and so be included in its liquidity resources. ABG’s record on such acquisitions has been good.

Perhaps more importantly is what it tells us about ABG. Firstly, it has sufficient liquidity and capital to add such a deal easily and quickly.  There are not many purchasers of portfolios of this size – it is too small for many buyers – so the price is good. ABG’s long standing prudence in funding and capital mean it can make such material value added deals.

Q4: The private bank looked a bit weak. What can you tell us about that?

A4: Part of the story is illusory – ABG has done a sector allocation which reduces the private bank earnings. The loan book reflects competition in mortgages and ABG’s directing its private bankers to new client acquisition and deposit gathering (no doubt with the mortgage book acquisition in mind). Credit is always lumpy and although well down on 2H last year it was up on 1H.

Q5: Finally, the commercial bank went from a small loss to a £3m profit. What drove that?

A5: This is payback for historical investment. Lending balances increased 36% in 1H’19 compared with 1H’18 and deposits rose to £669m in 1H’19, compared with £471m in 1H’18. Arbuthnot Banking Group is getting the full period benefit of prior year lending as well as the partial benefit of new lending. From here we expect further strong profit growth.

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