2020 interim results: credit robust, rate sensitivity

To be resilient, a bank needs three things – low risk assets, strong capital and surplus deposits. ABG has all three. The low-risk assets are reflected by the small percentage (and falling) Stage 2 and Stage 3 loans in the private bank as well as low loan to values. Surplus capital is now £66m and deposits exceed loans by £0.6bn. Profits before tax, though, fell from £2.9m to £0.2m as the decline in base rate squeezed margins (£2.7m cost) and with a £1m incremental COVID-19-related impairment. Our 2020 base-case scenario is now for a small loss (previously breakeven). The shares trade at 64% of NAV, implying value destruction to perpetuity.

• 1H’20 results: Gross interest income rose from £35.2m in 1H’19 to £39.0m while interest expense rose from £6.5m to £9.3m. Fee income was flat. Costs rose from £33.8m to £35.1m; net impairments increased from £1.3m to £1.7m, including £1m incremental COVID-19-related effects. As expected, there was no dividend.
• Outlook: There are too many moving parts to rely on single projections. We have introduced a range of scenarios. Our central case is a £1.5m pre-tax loss in 2020. Given news flow, we have narrowed our expectations, so the upside scenario profit is now £3m (was £6m) and the downturn scenario is a £10m (was £15m) loss.
• Valuation: Our forecast scenarios, and multiple valuation approaches, see a broad range of valuations. Our base-case range is 871p to 1,658p, the higher end down with the fall in STB value. Our upside scenario is 1,044p to 1,918p, and our downside 783p to 1,412p. The share price is 64% of the 1H’20 NAV (1,248p).
• Risks: Short term, the impact of lower base rates is critical. Going forward, the key risk is credit. 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: ABG 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.