# Arbuthnot Banking Group: The power ranger of relationship deposit banking

- Link: https://www.directorstalkinterviews.com/arbuthnot-banking-group-the-power-ranger-of-relationship-deposit-banking/4121074316
- Published: 2022-07-25T07:22:35+01:00
- Author: Amilia Stone

**[Arbuthnot Banking Group plc](https://www.directorstalkinterviews.com/company/arbuthnot-banking-group-plc/arbb.l)**(
LON:ARBB) smashed expectations with underlying 1H’22 profits of £10.7m, which is
more than we had forecast for the full year. This was driven by widening margins
in a rising rate environment, and, in particular, being a bank with relationship
deposits rather than rate-sensitive best-buy accounts. Before getting too excited,
we note 1H’21 was exceptional, and margins will normalise over time, but we have
materially increased both FY’22 and FY’23 estimates, despite cost pressures. Current
credit cost metrics continue to improve, and management indicates its forward-looking
metrics show no signs of stress. Growth and new capital requirements are absorbing
the previously large capital surplus.

 * **Margin management:** We had expected Arbuthnot Banking Group to show good growth
   in interest income but for interest costs to rise with higher market interest
   rates. The current cost of funds (37bp) is still below the 2021 average (39bp)
   as its relationship and term accounts have not yet re-priced, and it has not 
   competed for deposits.
 * **Results in more detail (1H’21 numbers in brackets):** PBT £3.4m (£3.0m). Underlying
   PBT £10.7m (£6.5m). Group operating income £60.9m (£41.3m). Earnings per share
   17.8p (27.2p). Loans £2.1bn (£1.9bn). Deposits £2.8bn (£2.6bn). AUM £1.3bn (£
   1.22bn). NAV £13.00 (£12.92). Dividend 17p (16p).
 * **Valuation:** Our multiple approaches see a broad range of valuations: £11.51
   Dividend Discount Model (DDM), £19.53 SOTP and £18.97 Gordon Growth Model (GGM).
   The average is £16.67, up from £15.59, reflecting earnings upgrades. Trading 
   at 64% of NAV appears anomalous with a franchise earning above cost of capital
   returns.
 * **Risks:** Going forward, the key risk is credit where all the metrics remain
   positive. 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.

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