Arbuthnot Banking Group (LON:ARBB) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You’ve recently published a report on Arbuthnot Banking Group, which you’ve called ‘1H’26: Accelerating Franchise Growth’. Could you just give us a short summary of your key findings?
A1: Arbuthnot Banking Group’s results, to us, should really be in two distinct timeframes.
Firstly, there’s the long-term value, which is created by franchise growth, and that’s accelerated in the first half of 2026. Key growth was well spread and seen in deposits, specialist lending, and wealth management. The group’s Future State target of £10 billion in client balances, which it set just three years ago, was actually achieved two years early, and the customer base continues to grow. So, good news in terms of long-term value creation from franchise growth.
Shorter term, there remains sensitivity to the interest rate environment, and average base rates were down 73 basis points in the first half of the year compared to the first half of last year, and that impacts profits. A higher-for-longer outlook for interest rates after the Iranian conflict would be positive for the second half of 2026 and 2027 estimates, and if it sustains, it would see us raise our forecasts.
Q2: Can you give me some colour on the first-half numbers?
A2: The profit before tax was stable at £11 million; it was £10.9 million in the first half of last year, and currently we forecast similar profits for the second half and a return to growth in 2027.
I have to say, I think our forecasts are conservative, with upside potential from both continued franchise growth and the interest rate environment. Group total operating income rose to £88.2 million; it was £84.9 million, with increases in both banking income, £76 million versus £73 million, and in leasing income, £11.9 million versus £11.6 million.
Q3: For you, the important thing is the long-term value creation from the franchise growth. What can you tell us about that?
A3: Now, as I said, it was very well spread. So, customer deposits increased 8% year on year to a record £4.8 billion, driven by strong commercial deposit growth. It would have been more like 13% growth, but for customers paying their tax bills in the period.
Funds under management and administration in the wealth management division were up 12% year on year to a record £3 billion. Net flows for the period were £189 million, against £127 million in the first half of last year. Now, customer loans across the group grew 9% in the first half of 2026, especially in the specialist lending divisions, where aggregate balances were a record, notice the third record, £1 billion and £49 million, up 17% year on year.
In RAF, its asset finance division, that funds vehicles, machinery, equipment, etc., profits grew in the first half of 2026 and were more than double just three years ago, so more than double the full year of 2023. The loan book was ahead of our previous full-year 2026 estimate.
ACABL, its asset-based lending division, saw strong closing-period growth, up 29% in the first half of 2026, well above our year-end estimate.
In AAG, the contract hire division that primarily funds lorries and coaches, the loan book was within a rounding error of our previous estimate.
So, across all three specialist lending divisions, you had record business being done and the growth has accelerated ahead of our expectations. As I mentioned, the group achieved its Future State target of £10 billion in client balances in three years against the targeted five.
Q4: What can you tell me about the credit quality? You said 2025 showed an improvement, but how much and why was that?
A4: The first half of 2026 saw a decline in the highest-risk loans and minimal loan-loss charge in the period. Arbuthnot, in previous reporting periods, had tightened its lending criteria, reducing the probability of default, and its continued long-term track record of taking good security reduces any losses in the event of default. With the Chair owning 60% of the shares, it’s no real surprise that Arbuthnot is conservatively managed.
Q5: How do you see the outlook for the rest of 2026 and 2027?
A5: Arbuthnot Banking management controls what it can, and that is reflected in the franchise growth. It optimised short-term returns when interest rates were rising and high and has taken significant mitigating action to reduce the impact when they were falling and lower.
It does, however, still have a sensitivity to interest rates, and a higher-for-longer interest rate environment would be very helpful to profits. We have tried to be conservative and have left room to upgrade our forecasts should this environment develop.
Q6: Are there any notes of caution, Mark?
A6: All investments carry risk. Management action has mitigated the exposure to the falling interest rates but not eliminated it altogether. So, if there were further cuts in base rates, that would impact profits.
As always, there was macroeconomic uncertainty and the political environment, both of which could impact on profits. Credit deterioration is the key obvious risk, but ABG has been conservative in new lending criteria and in taking security.
As I mentioned, that should reduce the probability of default, and any loss in the event of default should economic conditions deteriorate.
