Arbuthnot Banking Group PLC (LON:ARBB) published its Annual Report and Accounts for the year to 31 December 2023.
Chairman’s statement
Arbuthnot Banking Group (“ABG” or “The Group”) is pleased to report a profit before tax of £47.1m. This represents a continued trend of improved financial performance compared to the prior years and an increase of 135% over 2022 which was £20.0m.
While the Group has been developing its business in accordance with the “Future State 2” strategic plan, the financial results have also benefited from the continued upward movement in the Bank of England (“BOE”) base rate which increased from 3.5% to 5.25% in 2023. The impact of this has been two-fold.
Firstly, the significant surplus liquidity balances that the Bank holds at the BOE have earned more income in line with the higher rates. Secondly, the lending balances that are linked to the base rate have repriced immediately, while the cost of deposits has naturally lagged behind, despite the Bank quickly adjusting its rates in favour of depositors. This is due to the fact that fixed rate deposits have to reach their maturity in order to be able to take advantage of the higher rates. Typically, it takes 12 months for the lag to completely catch up with current pricing levels. Clearly, the reverse will be the case in a falling rate environment.
We have begun a strategy of locking in higher rates by offering more fixed rate lending products and also switching some of our surplus liquidity into high quality fixed income assets such as Gilts with a short maturity date. This, we hope, will soften the impact of any rate reductions in the near future.
Highlights
My long-held belief that has been borne out in the strategy of the Group over the years is that of diversification and I was pleased to see this evidenced during the year.
The Bank continued its strong growth, especially in its ability to attract new deposits. This has been particularly apparent within the Commercial Banking division, where the fact that customers enjoy private banking levels of service seems to resonate well in this market, where the larger banks have left companies underserved.
Deposit balances ended the year at £3.8bn, an increase of 21%. During the year we opened up relationships in new sectors such as the construction and computer gaming industries. This gave us the ability to allow non-relationship deposits to mature, without us needing to compete on price to retain the balances.
Elsewhere in the Group, our asset finance business, Renaissance Asset Finance (“RAF”), delivered a strong increase in its customer balances which grew from £134m to close the year at £199m, an increase of 49% with both of its business sectors, “flow” and “block discounting”, seeing good levels of new loan originations. Continuing the theme of diversification RAF has added “wholesale financing” to its product set and this will come online in 2024.
Asset Alliance, our vehicle leasing business, also delivered outstanding growth with its assets available for lease growing to £327m from £189m in the prior year, an increase of 73%. This growth was enabled not only by the improvements in the supply chain for new trucks, but also the fact that it now has access to the Group’s funding resources. This allowed it to complete the purchase of a £50m portfolio of buses used in the Transport for London network. Asset Alliance now has an 8% market share of buses used in London.
Finally, I would like to highlight the performance of our Wealth Management division that grew its Funds Under Management and Administration by 29% to close at £1.7bn, exhibiting strong investment performance against peers, despite uncertain markets across the globe.
20 Finsbury Circus
As previously announced, we are all looking forward to the next phase of the Group’s future; in 2023 we celebrated our 190th anniversary given that Arbuthnot Latham was founded in 1833. Our confidence in the future is demonstrated by the fact that we have secured an impressive new head office located at 20 Finsbury Circus, situated in the heart of the city not far from our current location.
The new building offers us 45% more space to grow and will allow us to bring our London operations together under one roof. This should provide more collaboration and allow the next generation of Arbuthnot Bankers to develop and perhaps even set an example for more workers in the City to return to working more frequently in such a vibrant global financial centre, that is the City of London.
Capital Raise
The continuing theme for regulators of the increasing requirement for banks to hold more capital, coupled with the current market opportunities that are presenting themselves to the Group, led us to decide to push ahead with a capital raise via a conditional placing.
Initially we intended to raise £10m but we were pleasantly surprised to find that demand for the publicly available allocation was heavily oversubscribed, so the issue was increased to £12m to satisfy some of this excess demand. This capital raise was completed on 5 May.
Later in the year we were also pleased to agree the early refinancing of the Tier 2 debt instrument that we had previously issued to P Capital Partners, a Swedish debt fund, in 2019. We appreciate their confidence in both our business and management team, which resulted in the extension of this loan for another 10 years at a lower margin than before. We hope this relationship can continue into the future beyond even this new issue.
Regulation
As we have become accustomed in recent years, the pace of regulatory change has not slowed and there are a number of significant issues in consultation for which we need to be prepared.
Basel 3.1 is likely to become applicable to the Group in 2026. This is later than the generally applicable date as we will be a late adopter, given that we have applied to become part of the new Small Domestic Deposit Takers (“SDDT”) regime which is the evolution of “Strong and Simple”.
We are waiting for the capital rules for such to be revealed in the second quarter of this year. While many of the rules have been sign-posted, we continue to hold out hope that the capital buffer regime will be altered to address the unintended consequences of the counter cyclical buffer. It is clear from evidence during COVID that no bank will utilise this buffer in its current form in down turns for fear of the speed at which it is brought back. This means about 20% of the industry’s capital has been sterilised and is unproductive. A change in status of this buffer could provide economic growth without creating undue risk in the banking sector.
I never doubted the need for strong regulation to promote safety and soundness of the banking industry and I believe confidence in the sector continues to grow. It is my hope that this confidence will empower regulators to permit the development of a diverse set of banks with different business models, which is likely to create less inherent risk in the industry.
Board Changes and Personnel
During the year I was pleased to welcome Jayne Almond, Angela Knight, and Lord Sassoon to the Board. We are delighted to attract such notable directors to our company. They bring with them a wealth of knowledge and experience gained through their respective careers. I look forward to receiving their advice and counsel on how we can further develop the Group.
As always, the continued success of the Group reflects the hard work and commitment of our members of staff, who are our greatest asset. On behalf of the Board, I extend our thanks to all of them for their contribution in 2023. Finally, I would like to thank my fellow directors on both Boards for their help and advice during the year.
Dividend
In 2022 we increased the trajectory of growth in the dividend, and given the continued positive outlook for the Group, this is maintained.
The Board therefore are recommending a final dividend of 27p per share. This is an increase of 2p compared to the final dividend of 2022. The final dividend, if approved at the 2024 AGM, will be paid on 31 May 2024 to shareholders on the register at the close of business on 19 April 2024.
Together with the interim dividend of 19p per share, this gives a total dividend for the year of 46p per share, which compares to the total dividend of 42p per share paid in 2022.
Outlook
The interest rate environment appears to have reached the top of the current cycle and many analysts are now predicting reductions in the future. Whilst this will have an impact on the profitability of the Group; in the long run, the opportunities for Arbuthnot to grow and prosper continue to be undiminished. Therefore, we remain focused on delivering on our strategic plan.
Arbuthnot Banking Group PLC (LON:ARBB), trading as Arbuthnot Latham, provides private and commercial banking products and services in the United Kingdom.
