Shares in Arbuthnot Banking Group (ARBB:1,315p) have edged up slightly since I rated them a buy at 1,252p during the summer, placing a target price of 1,533p on the equity at the time ('Value opportunities', 19 Jul 2017). The company paid an interim dividend of 14p a share at the end of last month to take the running total to 397p since I included the shares, at 1,459p, in my 2015 Bargain Shares portfolio. A third-quarter trading statement is certainly supportive of my 1,533p target price.
The companys private banking arm, Arbuthnot Latham, increased its underlying pre-tax profit by 75 per cent to £4.9m in the first half with loans rising by a third to £880m. In a third-quarter trading statement, the bank confirmed that the loan portfolio is maintaining that heady growth rate, and the lending pipeline remains robust. Reassuringly, the bank refuses to chase volume at the expense of relaxing its lending criteria, a point highlighted by a low level of impairments and a comfortable loan-to-value ratio on its residential and commercial property loan book.
Importantly, Arbuthnot is well funded with customer deposits covering the loan book almost 1.4 times over and providing ample funding for further lending. Also, net interest margins are benefiting from lower funding costs with the blended cost of funds falling by almost a third to 0.49 per cent on the same period in 2016, underlining the positive impact on profits of recycling customer deposits into lending at an economic net interest margin.
This helps explain why analysts at Hardman & Co expect Arbuthnot's pre-tax profits to more than double this year from £4m to £8.3m based on a 29 per cent rise in operating income to £53.6m, increasing to £14.3m and £67.5m, respectively, in 2018. On this basis, expect adjusted EPS to treble to 52.2p this year, rising sharply again to 86.7p in 2018. The point being that if Arbuthnot delivers anything like the growth predicted, and maintain credit quality, then a share price in-line with book value of 1,533p is in order.
There is rock solid asset backing as 30 per cent of Arbuthnots market value of £200m is backed up by a 18.6 per cent retained stake in challenger bank Secure Trust Bank (STB:1,895p); the company used £53m of the cash windfall from selling down that stake to acquire a prime property in London thats bringing in £1.8m rent; and purchased a private banking loan portfolio, worth £44.9m, from banking group Duncan Lawrie that is secured on property of £104m, and yields 5.2 per cent. Buy.
Topped up my holding with 400 shares which indicates as two sell trades today. Motivated by the Hardman report suggesting base case valuation is over £18- and by the comparative peer group ratings although I do accept it's hard to value banks. What clinched it for me is the forecast PEG=0.2 for 2018.
It was difficult not to be impressed by the first-half results from Arbuthnot Banking Group (ARBB:1,459p). The bank's net asset value per share rose by 23 per cent to 1,534p last year and that's after paying out special dividends of 325p in 2016. The bumper dividend was funded from some of the £148m proceeds from last summer's sell down of the bank's stake in challenger bank Secure Trust Bank (STB:2,149p). Arbuthnot still retains an 18.6 per cent shareholding worth £72.5m, a sum equating to a third of its own market capitalisation, and is using the remainder of the cash realised to bulk up its banking operations.
The 51 per cent increase in full-year profits to £9.1m from Arbuthnot Latham, its private banking arm, was eye-catching too, and that's before factoring in upside from a number of recent acquisitions. These include the purchase of a private banking loan portfolio worth £44.9m from banking group Duncan Lawrie. The loans are secured on property worth £104m, so have a low loan-to-value ratio, and offer an attractive yield of 5.2 per cent. Arbuthnot also managed to negotiate a £2.2m discount on the deal.
In the coming weeks, the company will complete the acquisition of Renaissance Asset Finance (RAF), a provider of finance for a range of specialist assets including vintage cars, which adds £55m of customer loans to the portfolio. Arbuthnot has also used £53m of its cash windfall to acquire a prime property in the West End of London, comprising 22,500 sq ft of office space and 7,000 sq ft of retail space. The property generates an annual rental income of around £1.8m and will be used by Arbuthnot Latham to develop a presence in the West End in the future.
Importantly, Arbuthnot is very well funded as £1bn of its customer deposits cover the loan book about 1.3 times over which is highly supportive of the ongoing growth in loan balances. Moreover, assuming Arbuthnot Latham continues to recycle customer deposits into lending at an economic net interest margin, it will be value accretive to shareholders which is why analysts at Hardman & Co expect Arbuthnot's adjusted EPS to more than double to 55.4p in 2017, rising again to 93p in 2018.
If these targets are hit then it should generate further upside on the shares which I included in my 2015 Bargain Shares portfolio at 1,459p, since when the board has paid out total dividends of 383p excluding the recently declared final dividend of 18p which goes ex-dividend on 13 April. So, having last advised running profits around the current price ('A quartet of small-cap value plays', 28 December 2016), I feel a price target closer to book value of 1,534p is in order. Run profits.
Last week, Arbuthnot Banking Group (ARBB:1,459p) acquired a private banking loan portfolio worth £44.9m from banking group Duncan Lawrie. The loans are secured on property worth £104.4m, so have a low loan-to-value ratio, but still offer a decent yield of 5.21 per cent and thats before taking into account the £2.2m discount Arbuthnot negotiated on the acquisition price.
The company also announced the acquisition of Renaissance Asset Finance (RAF), a provider of finance for a range of specialist assets including vintage and expensive cars and SME business assets. RAF has customer assets of £68m. Arbuthnot is funding both deals from its own cash resources which got a £148m boost earlier this year after it sold down its stake in Secure Trust Bank (STB:2,249p). Its remaining holding is still worth £77m, a significant sum in relation to its own market capitalisation of £220m. Arbuthnot used £53m of the cash windfall to acquire a prime property in the West End of London, comprising 22,500 sq ft of office space and 7,000 sq ft of retail space. The premises will in time enable its private banking arm Arbuthnot Latham to develop a presence in the West End, but in the meantime its generating annual rental income of over £1.8m.
The plan is to use the balance of the cash from the Secure Trust share sale to develop Arbuthnot Latham. The unit posted half year pre-tax profits of £4.5m on a 15 per cent hike in operating income to £19.4m. Its well funded as customer deposits cover loans and advances more than 1.4 times over and this significant liquidity and balance sheet strength supports the bank's ongoing growth in loan balances. Moreover, assuming Arbuthnot Latham can continue to recycle its £1bn of customer deposits into high quality lending - impairments represent a tiny 0.12 per cent of loans on an annualised basis - and at an economic net interest margin, then it will be value accretive to shareholders. This anticipated ramp up in lending explains why analysts at Hardman & Co expect Arbuthnots adjusted EPS to increase from 24.4p in 2016, to 55.4p in 2017, rising again to 93p in 2018.
Its proved a rewarding holding since I included the shares in my 2015 Bargain share portfolio at 1,459p as the company has so far paid out total dividends of 383p. So, having last advised running profits around the current price ('Riding small-cap bumper gains', 24 Oct 2016), I still feel that Arbuthnots shares should be trading closer to book value of 1,552p. Run profits.
Investors have been cottoning onto the value on offer in the shares of Arbuthnot Banking Group (ARBB:1,449p). Arbuthnot realised £148m of cash proceeds at the end of May by selling down its stake in Secure Trust Bank (STB:2,380p), but its remaining holding is still worth £82m, a significant amount in relation to its own market capitalisation of £220m.
Arbuthnot used £53m of the cash windfall to acquire a prime property in the West End of London, comprising 22,500 sq ft of office space and 7,000 sq ft of retail space. The premises will in time enable its private banking arm Arbuthnot Latham to develop a presence in the West End, occupying part of the property for client purposes, but in the meantime its generating a useful annual rental income of over £1.8m
Shareholders are seeing some of the cash too. Having paid out cumulative dividends of 83p since I included the shares in my 2015 Bargain share portfolio at 1,459p, the board have declared a special dividend of 300p a share, payable on 18 November and at a cost of £45m. Please note that the shares have gone ex-dividend which is why the price adjusted at the end of last week. The directors can afford to make the bumper payout without impacting the banks financial position given that Arbuthnot has a core Tier 1 ratio of 40.5 per cent and a modest equity to assets ratio of 22.4 per cent.
The plan is to use the balance of the cash raised from the Secure Trust share sale to develop its private and commercial banking business, Arbuthnot Latham. The unit posted half year pre-tax profits of £4.5m on a 15 per cent hike in operating income to £19.4m. Its well funded as customer deposits cover loans and advances to customers more than 1.4 times over and this liquid funding and balance sheet strength is highly supportive of the ongoing growth in loan balances. Deposits increased by 23 per cent in the 12 months to end June 2016 as the bank continues to attract new clients and at a lower deposit rate of 0.87 per cent.
As long as Arbuthnot Latham can recycle its £1bn of customer deposits into high quality lending and at an economic net interest margin, then it will be value accretive to shareholders. This ramp up in lending explains why analysts at Hardman & Co expect Arbuthnots adjusted EPS to increase from 24.4p in 2016, to 55.4p in 2017, rising again to 93p in 2018. Maintaining credit quality will be critical, so its reassuring that impairments represent a tiny 0.12 per cent of loans on an annualised basis, highlighting the quality of the book.
The bottom line is that if you followed my advice to buy in February 2015 you will have now banked 383p a share of dividends and still own shares worth around your buy in price of 1,459p. I still feel that Arbuthnots shares should be trading closer to book value of 1,552p. Run profits.
I don't think that Sir Henry is going to start doing anything "silly" after all these years!He has put about a third of the surplus capital into a prime property which should more than hold its value & provide a useful income stream.
Opening up in Manchester is an interesting move.Manchester based private client wealth manager W H Ireland has got itself in a very bad place with deserved fines from FCA for improper conduct.Should be a good opportunity for a reputable business like Arbuthnot.....
Shares trade below book value
Lots of capital
Growing loan book
Capital may be used unwisely
UK recession won't help
With the proceeds of the sale of most of its stake in Secure Trust
(STB) at its disposal, Arbuthnot
(ARBB) is on a mission to ratchet-up the progress of its mini merchant bank, Arbuthnot Latham. With plenty of capital to play with, Arbuthnot's bosses also plan acquisitions in the longer term. Despite this, its shares are trading at almost 10 per cent below net asset value (see table), which leaves plenty of room for a re-rating once management starts to deploy its sizeable windfall.
Private bank Arbuthnot Latham looked in fine fettle even before the sale of the majority of its parent's stake in Secure Trust in June. Management has been ramping up its investment in the business during the past 18 months. Within that time the private bank has opened up an office in Manchester and expanded its premises in London and Exeter. Its Dubai office turned a small profit last year, ahead of plan and just two years after opening. This has helped propel Arbuthnot Latham's solid loan book growth. During the 18 months to the end of June, customer loans have grown by almost a third to £657m. And in the first half of 2016 pre-tax profits rose 22 per cent to £4.5m, even though expansion meant some one-off spending upfront.
Arbuthnot has a balance sheet sturdy enough to take its private and commercial banking businesses to the next level - research house Hardman & Co believes it has about £150m of surplus capital. In relation to its size, that's almost certainly more than any other bank in the UK. This arises from, first, the sale of Everyday Loans to sub-prime lender Non-Standard Finance (NSF), which generated a book profit of £117m; then, in May, it sold about two-thirds of its stake in Secure Trust, cutting its holding to 18.9 per cent.
Management is concentrating on growing its commercial banking operations in the near term. This has meant hiring more commercial bankers in London, with plans to set up teams in the north and the south west, too. Starting with its clients within the media industry, commercial lending has extended to real estate and professional services sectors. This should boost Arbuthnot's asset base and propel earnings even further. Its wealth management business is also growing nicely - assets under management rose 14 per cent to £797m in the year to end-June. As Arbuthnot already has the customer base, there should be cross-selling opportunities to increase fee income.
The timing and pace of the bank's profits growth will ultimately depend on when management can deploy its extra capital. Analysts at broker Numis estimate that with a 40.5 per cent core tier-one ratio, there is plenty of room for acquisitions. True, that brings risks as well as potential. Even the best-led businesses make mistakes when they have oodles of cash to spend, though Arbuthnot's chief executive, Sir Henry Angest, has been running Secure Trust since the early 1990s.
True, if the UK dips into recession then Arbuthnot's lending business will be hit both by rising bad loans and slowing demand. Yet with the shares trading below book value, arguably that risk is fully taken into account. Buy.
Its not often that a company reports a profit as high as its own market capitalisation, but thats exactly what Arbuthnot Banking Group
Arbuthnot Banking Group PLC (ARBB:LSE) (ARBB:1,530p), a company I included in my 2015 Bargain share portfolio, announced a fortnight ago while I was on annual leave.
Just before the half year end the company sold off 6m shares of its holding in fast growing unsecured lender Secure Trust Bank (STB:2,130p). The shares were sold at 2,500p each and realised £148m of cash proceeds after expenses, representing a net gain of £100m. The share sale has reduced the company's stake in Secure Trust from 51.9 per cent to 18.9 per cent and means its remaining holding of 3.43m shares is worth £73m at current prices.
In addition, Secure Trusts disposal of its Every Day loans business at the end of 2015 generated a gain of £117m which, together with Arbuthnots £9.1m share of Secure Trusts ongoing profits up to mid-June 2016, meant that the banks profits from discontinued operations of £228m exactly match Arbuthnots own market capitalisation. A consequence of the hefty gains made was to deliver EPS of 1,111p and boost net asset value by over £100m to £282m, a sum worth 1,852p per Arbuthnot share or 21 per cent more than the current share price.
Shareholders have been rewarded with a special dividend of 25p a share which was paid at the end of last month, and a raised interim payout of 13p a share (ex-dividend date of 1 September). This means that the bank has also paid out total dividends of 70p a share since I included the shares in my 2015 Bargain shares portfolio at 1,459p. I last updated the investment case in early June at the time of the Secure Trust disposal when the price was 1,597p (Banking on solid gains, 1 June 2016), since when it has paid out that 25p a share special dividend. The fact that the shares are only down fractionally since then tells a story in itself given the far heftier falls post Brexit in the share prices of the UK's challenger banking sector.
Scaling up operations
The plan now is to use the cash raised to develop its private and commercial banking business, Arbuthnot Latham. Bearing this in mind, the division posted half year pre-tax profits of £4.5m on a 15 per cent hike in operating income to £19.4m. Its well funded as customer deposits of £939m cover loans and advances to customers more than 1.4 times over and this liquid funding and balance sheet strength is highly supportive of the ongoing double digit growth in loan balances. Deposits have increased by 23 per cent in the past 12 months as the bank continues to attract new clients and at a lower deposit rate of 0.87 per cent in the first half this year, down from 1.04 per cent in the same period in 2015, reflecting the desperate search for yield on deposits by customers in the current low interest rate environment. As long as Arbuthnot Latham can recycle these deposits into high quality lending and commercial and private banking activities at an economic net interest margin then this it will be value accretive to the banks shareholders. Impairments were a miniscule 0.12 per cent of loans in the first half on an annualised basis, highlighting the quality of the book.
Also, assets under management have risen by 14 per cent to just under £800m in the past 12 months, and increasing penetration of wealth management products is a target area for the bank to boost related fees. Arbuthnot Latham already has the customer base, so expanding the product range and cross selling to them should be good source of incremental growth.
Investment in additional private bankers, and the establishment of a presence in Manchester and Exeter to augment the teams in London, means that headcount will hit 30 by the end of the third quarter including 17 relationship managers with more than 20 years commercial banking experience.
"Following the recent sale of Everyday Loans Group, Arbuthnot Banking Group (ARBB) has provided further strategic flexibility to Secure Trust Bank through the proposed sell down of its majority stake to 18.9%. The move also opens a new chapter for ARBB simplifying its corporate structure and generating substantial capital for redeployment, including the development of its commercial banking business. For the moment, the market appears particularly conservative in its valuation of the group and we see the book value of over £1 ..." Edison's note from this morning, pulled from Research Tree
Arbuthnot Banking Group PLC (ARBB:LSE) (ARBB:1,597p), a company I included in my 2015 Bargain share portfolio, has announced the conditional sale of 6m shares in fast growing unsecured lender Secure Trust Bank (STB:2,650p) to realise £148m of cash proceeds after expenses.
The share sale will reduce the company's stake in Secure Trust from 51.9 per cent to 18.9 per cent and means the bank's remaining holding of 3.43m shares is worth £88m at current prices. The disposal was made at 2,500p a share, representing a 10.7 per cent discount to Secure Trust's share price, and the purchasers of the stake will be entitled to the 165p a share special dividend previously announced, but not yet declared by Secure Trust, following the company's £235m disposal of its Everyday Loans business which completed on 13 April 2016.
Having spun off Secure Trust on the Alternative Investment Market (Aim) in 2011 and retained a 75.5 per cent equity interest at the time, Arbuthnot subsequently sold 580,000 shares at a net price of 2,483p in December 2013 to raise £14.4m, and a further 1.041m shares at 2,400p in July 2014 to raise £25m. The latest share sale means that the company has realised £187m of net cash proceeds from the investment and still retains an equity stake worth £88m.
The rational for the disposal is to reduce the holding to a non-controlling interest and recycle the cash proceeds in order to grow Arbuthnot's commercial and private banking operations. Seven weeks ago Arbuthnot appointed a new chief executive to its private banking arm and plans to develop services for clients in commercial real estate and professional services as part of an initiative to build a wider commercial banking business.
However, the 3.43m shares retained by Arbuthnot will still receive Secure Trust's proposed special dividend of 165p a share, a sum worth £565,000. The company also banked a £519,000 final dividend of 55p a share from Secure Trust in early May and will continue to benefit from the company's progressive dividend policy. Secure Trust will now seek a listing on the premium segment of the London Stock Exchange which, given its market capitalisation of £480m, should put the company on the radar of more small cap funds including trackers.
Arbuthnot shares undervalued
To put the transaction into some perspective, it will lead to a consolidated net profit on disposal of £110m, or 719p a share, a hefty sum in relation to Arbuthnot Banking's last reported net asset value of 1,253p a share at the end of 2015.
In other words, by my calculations Arbuthnot's pro-forma net asset value is now around 1,972p a share, or £300m, which means the shares are priced on a discount of 19 per cent to book value. That seems a harsh valuation considering that Arbuthnot still retains a £88m stake in Secure Trust and one that is hardly overvalued on a price-to-book value ratio of 2.1 times given that the company increased underlying EPS by 9 per cent to 170p in 2015 and analyst James Ash at Canaccord Genuity is expecting earnings growth in excess of 30 per cent in the current financial year. On this basis, Secure Trust's shares are rated on a modest forward PE ratio of 11.9 and offer a healthy 2.7 per cent dividend yield.
Furthermore, Arbuthnot is generating decent growth of its own. For instance, private bank Arbuthnot Latham increased profits by two thirds to £6.1m in 2015, a performance that reflects a substantial increase in new clients opening accounts, an improved outcome from its Dubai office, a contribution from the Dunfermline Building Society residential mortgage book, acquired from its administrators in December 2014, and the benefits of hiring more private bankers. Arbuthnot Latham was also well funded for future growth even before the Secure Trust share sell-down: customer deposits of £897m at the end of 2015 supported customer loans totalling £619m, implying a loans-to-deposit ratio of 69 per cent, and suggesting a
Read Edison's note on ARBUTHNOT BANKING GROUP PLC (ARBB), out this morning, by visiting https://www.research-tree.com/company/GB0007922338
"With its long-term track record, Arbuthnot Banking Group (ARBB) places great emphasis on stability and experience and has also been adroit in taking opportunities that emerged in the post-financial crisis environment. The acquisition and recent sale of Everyday Loans Group has provided scope for additional organic loan growth at both Arbuthnot Latham and 51.9%-owned Secure Trust Bank (STB). While near-term returns on equity will be diluted by excess capital, successful development of loan books should underpin a stronger val..."
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