Franchise growth across group
Arbuthnot Banking Group (LONDON:ARBB) has seen good growth across all its businesses. Its retail bank, Secure Trust Bank (LONDON:STBS), has again delivered franchise growth ahead of expectations. We have upgraded STB’s 2015 revenue, but offset this with further accelerated investment in the business. The private bank will benefit from the mid-December 2014 acquisition of a mortgage portfolio (we estimate it will add £1.5m to 2015 pre-tax profits), although this is offset by higher assumed central investment spend.
Retail bank
With the exercise of management IPO options, ABG’s stake in STB has fallen to 51.9%. STB has again delivered franchise growth ahead of expectations (loan book end-2014 in excess of £600m against our forecast of £580m) with strong growth in the historic core personal markets (management highlights excellent growth on “Black Friday”), as well as a faster-than-expected drawdown of SME finance, especially in property. Management has been active in the best buy deposit tablesand raised funding to finance this growth. It also expanded its capital base in July 2014 in anticipation of this lending. We have upgraded 2015 estimated revenue by 4%, but offset this with higher costs reflecting further accelerated investment in the business. There is the potential in the SME space for STB to grow well ahead of these levels, and we suggest that any such further growth could lead to increased investor returns in the near term rather than over time.
Private bank including mortgage portfolio acquisition
On 18 December 2014, ABG announced Arbuthnot Latham (AL) had completed the purchase of a residential mortgage portfolio, which we believe will add c £1.5m to the division's 2015 profits (taking them from £5.5m to £7m). AL has generated deposits well in excess of its lending and to date has been investing the surplus (H114 nearly £200m) at very low returns. This acquisition allows some of the excess funding to earn c 4%. We believe that further investments in a range of financial services are likely (although at present we assume that the investment is in the central division rather than the private bank).
Valuation: Up significantly with rising value of STB
The average of our valuation approaches is now £16.6 (previously £15.4) reflecting the strong rise in the value of the Secure Trust stake increasing the sum-of-theparts model.
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