While many lenders will be ruing the withdrawal of cheap Funding-for-Lending financing of personal loans, such as mortgages, the move, and any further tightening, should play distinctly to the advantage of Arbuthnot Banking (ARBB) thanks to its very strong retail deposit base. As well as offering wealth management services, Arbuthnot has a 70.7 per cent stake in Secure Trust Bank (STB), which means it also has a retail deposit operation, and provides loans and car financing. The group has been picking up a lot of work as high street banks pull up the drawbridge on making loans and operating income in the first half up 67 per cent at £43.2m.
- Strong profits growth
- Big increase in customer numbers
- Access to cheaper funding
- Strong deposit inflows
- Shares tightly held
- Modest dividend
Like other lenders the group has benefited from drawing on the cheap funds available through the government's Funding for Lending scheme. Prior to this, the loan book was financed solely through more-costly retail deposits. However, having a retail deposit base is starting to look very useful once again because it means that the group has no reliance on wholesale funding. When interest rates start to rise - as they inevitably will, especially in the personal loan market where Funding-for-Lending is being withdrawn - not having to rely on the unpredictable and potentially costly wholesale market will be a big asset. Indeed, steps are already being taken to encourage more customers to place funds in fixed five-year deposits, thereby giving a greater degree of visibility. Retail deposits at STB in the first half grew by 30 per cent to £387m, while the loan book was up from £260m to £366m.
Achieving customer satisfaction is an area where the big banks have often been found wanting, but Secure Trust Bank is the first UK bank to be awarded a Customer Services Excellence Award. Customer numbers grew by 64 per cent in the year to the end of June to 325,052, and this number is likely to grow even more following recent completion of a loan referral agreement with a major retail bank.
| ARBUTHNOT BANKING (ARBB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,170p | MARKET VALUE: | £174m | |
| TOUCH: | 1,150-1,190p | 12-MONTH HIGH: | 1,290p | LOW: 637p |
| FORWARD DIVIDEND YIELD: | 2.4% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 337p | |||
| Year to 31 Dec | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|
| 2011 | 3.30 | 21.6 | 24.0 |
| 2012 | 12.5 | 52.6 | 25.0 |
| 2013* | 15.8 | 62.9 | 44.0 |
| 2014* | 17.6 | 56.8 | 27.0 |
| 2015* | 28.0 | 96.6 | 28.0 |
| % change | +59 | +70 | +4 |
Normal market size: 300 Market makers: 3 Beta: 0.26 *Numis estimates, underlying PTP and EPS figures | |||
The smaller private banking operation, which as well as providing loans also offers a personalised wealth management service for its customers, saw profits dip at the half-way stage from £1.4m to £1m. However, the trend is already being reversed as a number of higher yielding retail deposits schemes have matured to be replaced with less expensive deposits. Moreover, the advisory side of the business managed to increase discretionary assets under management by 28 per cent in the first half to £430m. And Gilliat Financial Solutions, which provides structured investment products, managed to increased first-half sales by a quarter to £74m.
The dividend is well covered but fairly modest and the shares are tightly held - chairman and chief executive Henry Angest holds 53.6 per cent. Profits are expected to be a little lower next year, but only because of the start-up costs relating to setting up a new operation as STB expands into SME lending and invoice financing.
