Secure a piece of Arbuthnot

Let's address the initial puzzle of the discount. Analysts at Edison model a 10 per cent discount to the market price of Secure Trust to reflect the illiquidity of such a large stake. That still puts a value of £248m on the stake, which is above Arbuthnot's own market capitalisation. And it's worth noting that the 10 per cent haircut is well above the 3.8 per cent discount to market price that Arbuthnot accepted when selling its last major chunk of shares in June 2014, which reduced its holding from 67 per cent to 53 per cent. This may be academic for the time being as Arbuthnot is not thought to be in any rush to give up having a controlling stake.

A further and arguably more significant explanation for the discount lies in the fact that profits from the Secure Trust subsidiary represent more than the total for the group. Indeed, strip out the Secure Trust contribution from last year's accounts and investors are left with a £3.6m pre-tax profit from the group's private banking business, Arbuthnot Latham, which was more than overshadowed by the separately reported £7.5m post-tax loss from central group costs, which includes some spending related to Secure Trust.

However, Arbuthnot has funnelled the proceeds from the 2014 Secure Trust share sale back into the private bank, and the business is now achieving rapid growth. Indeed, first-half profit at Arbuthnot Latham more than doubled to £3.7m, which came close to matching group-centre losses of £4m. The share sale has helped fund the hiring of new bankers and an expansion of the private banking business both in the north of England, including opening a new Manchester office, and overseas. A recently opened Dubai office broke even in July, which should boost second-half performance. Furthermore, a three-year transformation plan should deliver a bigger, digital bank, while an expansion into commercial banking promises another revenue stream from entrepreneurial private clients.

That means forecasts by research house Edison that private banking profits will outstrip central costs in 2016 (£8.4m versus £6.1m) look very achievable. Meanwhile, Secure Trust continues to go from strength to strength with first-half pre-tax profit growing 40 per cent to £16m, which we think justifies its shares' rating of 18-times forecast earnings. True, the announcement in the Budget of a corporation tax surcharge for lenders was not welcome, nor was news of an increase in the tax take from buy-to-let given Secure Trust's investigation of whether to enter that market. Nevertheless, overall there remains plenty to be optimistic about.