2025 lower margins, 2026 profit stability

ABG’s 2025 results noted i) strong growth in low-capital-intensity businesses (deposits, wealth management) and high risk-adjusted-return specialist lending ‒ ABG continues to walk away from business that does not meet its target returns, and ii) pre-tax profits fell 31% on 2024 due to the well-flagged impact of the falling rate environment, lower PE-related ACABL activity and low truck resale profits, partially offset by a one-off £3.25m gain. Some of this is short-term noise. A higher-for-longer interest rate environment, due to the Iran war, will aid deposit margins in 2026. We forecast a near-7% yield for 2026, with cover of over 2x.

• Key financials: i) PBT £24.2m (2024: £35.1m); ii) op income £169.5m (2024: £179.5m); iii) NIM 4.7% (2024: 5.1%); iv) EPS 109.1p (2024: 152.3p); v) final div. +2p to 31p (2024: 29p), total ord. DPS +4p; vi) NAV p/sh 1,694p (2024: 1,636p); vii) CET1 ratio 13.3% (2024: 13.2%); and viii) £1.4bn surplus liquidity.
• Key operating metrices: i) deposits £4.57bn, +11% (2024: £4.13bn); ii) customer loans £2.25bn (2024: £2.38bn); iii) FUMA +21% to £2.68bn (2024: £2.21bn), driven by very strong inflows, which represented 23% of FUMA at the start of the year; and iv) new clients: 1,200 banking, 200+ investment mgt.
• Valuation: Our broad range of valuations is: £9.83 DDM, £18.12 SOTP and £24.58 GGM. The average is £17.51, nearly double the share price. Trading at 51% of NAV is anomalous, in our view, given returns above the cost of capital and ABG’s growth potential. ABG’s 2026E yield is 6.7% with over 2x cover.
• Risks: Margins are falling, with the trend and level of interest rates a key driver to future earnings. A higher-for-longer outlook would be beneficial. Credit is a risk, but ABG is conservative in lending and takes good security; thus, its loss given default is low. Other risks: reputation, regulation and compliance.
• Investment summary: ABG offers strong-franchise growth building embedded profits for the future. Its balance sheet strength gives it options especially in uncertain times. Management has been innovative but also very conservative in managing risk. A profitable, well-funded, well-capitalised and strongly growing bank priced below book value is an anomaly, in our view.