The company owns a 51.8 per cent stake in fast growing unsecured lender Secure Trust Bank (STB: 2,850p) and the performance of that company was a major contributing factor in Arbuthnot reporting record pre-tax profits of £32.4m, a rise of over 50 per cent year-on-year. Secure Trust reported a 42 per cent hike in its own profits in the same period, reflecting robust growth in its motor, retail and business finance lending. In fact, total lending by Secure Trust shot up by over 70 per cent to £1,075m, funded almost entirely by retail fixed term deposits and bonds of £1,033bn. These deposits have fixed terms and Secure Trust has been able to offer best buy rates to income seekers, so has had no problem matching its loan growth with deposit funding in a low interest rate environment where investors struggle to make worthwhile returns without putting their capital at risk.
Importantly, the surge in lending has not been at the expense of credit quality as Secure Trust’s impairments of £16.8m, albeit up from £8.6m in 2014, were not out of line with the sharp rise in loan balances and a customer base of 570,000. Secure Trust remains well capitalised, boasting a core tier one ratio of 13.6 per cent. Moreover, having agreed to sell its Everyday Loans business to sub-prime lender Non-Standard Finance (NSF: 75p) for £232m, its core tier one ratio is set to increase to 24 per cent. A price-to-book value ratio of 2.3 times doesn’t seem harsh for a company that grew underlying EPS by 9 per cent to 170p last year and is expected to increase EPS by almost a third to 223p in the current financial year, according to analyst James Ash at Canaccord Genuity. On this basis, the shares are rated on a forward PE ratio of 12.8 and offer a 2.5 per cent dividend yield.