Delivering loan growth across group
Arbuthnot Banking Group Plc (LONDON:ARBB) (ABG) is delivering growth across the group. Its business model of fostering a range of financial services has worked most successfully with the retail bank (Secure Trust) but the private bank is also delivering substantial underlying profit and franchise growth (loans up 57% but still has a divisional loan to deposits ratio of 92%). Group pre-tax profits of £22.5m were ahead of our forecast of £21.8m. We have accelerated loan growth and costs following these results.
2014 results
Both the retail and private banks delivered excellent franchise and profit growth. ABG owns 52% of Secure Trust Bank which saw lending up 59% (from £391m to £622m), driven by increases in business lending (from £2m to £143m) and across the personal books. These drove a 24% growth in revenue with operational improvements (costs growth of 22%). Impairments were better than expected despite the above forecast loan growth. Statutory profit before tax increased by 53% to £26.1m (2013: £17.1m) while our underlying profit before tax increased from £24.7m to £34.5m. STB remains well capitalised (core tier 1 capital ratio 23% (2013: 20%)) and funded (loan to deposit ratio 102% (2013: 90%)).
The private bank is also well capitalised and despite 57% loan growth in 2014, (organic growth was 26%, an acceleration on the 18% seen in 2013), had a loan to deposit ratio of 92% (2013 66%). It saw reported profits drop to £3.6m from £7.7m. However 2013 included a £6.5m one off property gain and underlying (Edison basis), profits trebled.
2015 Outlook
We have materially increased loan forecasts for the group (2015e up £0.2bn to £1.6bn), of which half was due to higher real estate lending. We have assumed vigorous deposit gathering, keeping the group loan to deposit ratio below 100%. Fees were a little disappointing and costs above forecast. We have further accelerated investment spend with the net effect of a small trim to pre-tax profit and EPS estimates (but still 20%+ growth in pre-tax profits).
Valuation: Upside over 30%
The average of our valuation approaches is £19.3 which is equivalent to an undemanding 14.3x 2016e earnings. This has increased from our previous valuation (£16.6), primarily because we have rolled forward our valuation base year and the near term forecast growth is materially above our long term assumptions.
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