2018 results: growth and diversity

The 28 March results showed the great progress made in profitably deploying the capital ABG generated from the partial sale of its stake in Secure Trust Bank (STB). Underlying EPS rose from 17.6p in 2017 to 40.3p, loans grew 17% to £1,225m, and deposits increased 23% to £1,714m. New businesses are diversifying income and credit risk. Commercial Banking reported a £2.5m profit (2017: £2.1m loss), Asset-Based Lending facilities totalled £43m at end-December, Specialist Finance got its first loan sanctioned in 2019, and Arbuthnot Direct is live. The group is well funded (loans 71% of deposits) and capital ratios are strong (Core Tier 1: 15.9%).

• 2018 results: The key financial highlights were i) PBT of £6.8m (2017: £2.5m), underlying PBT of £7.4m (£3.2m), ii) operating income up 24% to £67.9m, iii) costs up 19%, and iv) impairments of £2.7m (2017: £3.0m on IFRS9 basis). The statutory numbers reflect the change in accounting of the STB stake (£26m loss).
• Outlook: While there were many moving parts in these results, including the loss of £0.8m STB dividend income post the sale of shares, the net effect has been a 10% reduction to our 2019 PBT estimates, which still show 8% growth on 2018. Our 2020 forecasts show further payback for the investment in new businesses.
• Valuation: The average of our approaches is now £17.52 (previously £19.69), 1.3x 2020E NAV. The business development and new divisional disclosure see a lower proportion of profits from the highly-rated private bank. Despite the 2019 year-to- date rally, the current share price is still around the 2018 NAV (1,283p).
• Risks: As with any bank, the key risk is credit. ABG’s existing business should see below-market volatility, and so the main risk lies in new lending. We believe management is cognizant of the risk, and has historically been very conservative. 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 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 close to book value is an anomaly.