3Q’22 trading statement – yet another upgrade

ABG’s 3Q’22 trading statement has led to a further upgrade to consensus, and we have also raised our estimates. The key takeaways were i) Bank of England base rate rises contribute to increased revenue, ii) good progress being made across all divisions, iii) deposit balances exceeding £3bn in the quarter, iv) completion of the sale of King Street property progressing, and v) full-year results expected to be ahead of market expectations. In September, the underlying monthly profit before tax was approaching £4m (excluding the one-off cost-of-living bonus payment made to all employees, which was signalled in the group’s interim results), which compared with our previous 2023E adjusted PBT of £24m.

• Notes of caution: ABG is experiencing net interest margins that are higher than it expected over the longer term, as the repricing of deposits generally has a delay of up to 12 months as time deposits reach maturity. Also, the group is yet to see the full impact of the inflationary pressures on its cost base.
• Credit: The non-performing loan book has been reduced to its lowest level for over two years, and there are no signs of material stress in the credit metrics. The average LTV against the loan book is 51%, giving significant levels of security to withstand the effect of any potential falls in property markets.
• Valuation: Our multiple approaches see a broad range of valuations: £11.51 DDM, £23.10 SOTP and £19.68 GGM. The average is £18.10, up from £16.67, reflecting earnings upgrades. Trading at 65% 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 it 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.