Arbuthnot Banking Group Plc

2023: delivering strategy with strong profit growth

08 Apr 2024 / Corporate research

The saying goes, the proof of the pudding is in the eating. ABG’s 2023 results proved that the strategic positioning of the group, as a relationship bank, has created enormous value. Key highlights were i) PBT £47.1m (2022: £20.0m), ii) operating income £178.9m (2022: £137.4m), iii) average net margin 5.7% (2022: 5.1%), iv) EPS +103% to 222.8p, v) total dividend for the year of 46p (2022: 42p), vi) net assets of £252.4m (2022: £212.0m), NAV per share of 1,547p (2022: 1,411p), vii) CET1 ratio of 13.0% (2022: 11.6%), and total capital ratio of 15.2% (2022: 14.0%). Customer deposits grew 21% to £3.8bn, loans by 6% to £2.3bn and FUM by 29% to £1.71bn.

  • Relationship banking value-added: The key driver to the wider margin and profit growth is ABG’s ability to raise customer relationships deposits. The huge volume raised has been deployed profitably with the Bank of England, and ABG benefited in a rising rate environment as term accounts took time to reprice.
  • Managing for rate outlook: Many of the benefits of a rising rate environment will reverse when rates fall. ABG has been taking proactive steps to cushion these effects. This includes buying short-term, high-quality securities as well as the strong growth in fixed-rate lending in the SME financing businesses.
  • Valuation: Our multiple approaches see a broad range of valuations: £13.56 DDM, £24.41 SOTP and £23.53 GGM. The average is £20.58, nearly double the current share price. Trading at 68% of NAV is anomalous, in our view, with above the cost of capital returns (target mid-teens pre-tax ROCE), and given ABG’s growth potential.
  • Risks: Margins may have peaked now, with the trend, and level, of interest rates a key driver to earnings. Credit is a risk, but ABG is conservative in lending, taking good security. Short-duration assets and a conservative culture mean there is no OSB read-across. Other risks: 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, in our view.

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